AMENDMENT OF THE LAW

HC Deb 20 March 1990 vol 169 cc1030-57

Motion made, and Question proposed, That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but this Resolution does not extend to the making of any amendment with respect to value added tax so as to provide—

1. (a) for zero-rating or exempting any supply;
2. (b) for refunding any amount of tax;
3. (c) for varying the rate of that tax otherwise than in relation to all supplies and importations; or
4. (d) for relief other than relief applying to goods of whatever description or services of whatever description—[Mr. Major.]

[Relevant documents: European Community Document No. 9487/89 on the Annual Economic Report 1989–90 and the un-numbered Explanatory Memorandum submitted by Her Majesty's Treasury on 31st January 1990 on the final version of the Report as adopted by the Council.]

Mr. Harry Ewing (Falkirk, East)

On a point of order. Mr. Deputy Speaker. I apologise to my hon. Friends and to the House for the delay to the proceedings, but we are constantly told by the occupants of the Chair, including yourself with respect Sir, that this is a United Kingdom Parliament. However, what should we do when, as hon. Members representing Scottish constituencies, we find ourselves in the position we have been put in today by the Chancellor—we have been betrayed by the Secretary of State and by Scottish Tory MPs—

Mr. Deputy Speaker (Mr. Harold Walker)

Order. the hon. Gentleman knows that that is not a matter for the Chair; it is a matter for debate.

Mr. Malcolm Bruce (Gordon)

On a point of order, Mr. Deputy Speaker. Scotland is governed under the terms of the Act of Union, passed by this House of the United Kingdom Parliament. Under the terms of that Act, taxation and benefits should be applied equally. Will the Secretary of State for Scotland make a statement—

Mr. Deputy Speaker

Order. I am not responsible for interpreting the Act of Union.

4.56 pm

Mr. Neil Kinnock (Islwyn)

I shall begin by following two customs of the House. The first is an ancient custom which requires me to congratulate the Chancellor of the Exchequer on the way in which he delivered his Budget statement. I shall do that gladly, although I shall say at this early juncture, that—and I am sure he will share my feeling—at the earliest possible opportunity he should make it clear to my hon. Friends, and in particular my hon. Friends from Scotland, whether the change that he announced towards the end of his speech will be extended retrospectively to elderly people in Scotland with retirement incomes of more than £16,000. I am certain that he will want to give thought to that, and I hope that he will make a positive response, because it would be a terrible shame if that was to mar an otherwise excellent maiden Budget performance.

I think that everyone will have enjoyed the way in which the Chancellor said what he had to say, even if there will be disagreement over fairly extensive parts of it.

The second custom is quite recent and was established only 12 years ago by the right hon. Lady the Prime Minister, when she was Leader of the Opposition. In 1978, when the first Budget to be broadcast live on radio was debated, the right hon. Lady pointed out that she, like everyone else outside the Cabinet, had had neither sight nor sound of the Budget before the Chancellor made his speech to the House. That system has some disadvantages, but at least it means that Parliament and nation share the same sense of unspoiled expectation—that is not without its virtues in this democracy.

In the Budget statement, the Chancellor announced much that the Opposition welcome and support. Naturally we shall want to scrutinise it in detail, but there is a fair spectrum of agreement on many of the measures and changes that the Chancellor announced. For instance, we welcome the value added tax reliefs for bad debts, especially as they affect small businesses. We welcome the differential—which I believe has increased slightly—between the duty payable on leaded and unleaded petrol. The Chancellor will enjoy support in all parts of the House for that move, as he will for the increased tax allowance for blind people.

There are many other changes which I shall not deal with now, but three merit attention. The first is the Chancellor's proposal that help should be given to users of workplace nurseries. He will remember that the Opposition were extremely hostile to the imposition of what we thought of as penalties on users of workplace nurseries. We are glad that he has responded to our pleas over a number of years to reverse that change.

Secondly, I am grateful, as are my right hon. and hon. Friends, for the additional help that is to be given to the Football Trust. I am sure that, in return, the Chancellor will want to acknowledge the significant contribution that was made to the negotiations with the football authorities and the Pools Promoters Association by my right hon. Friend the Member for Birmingham, Small Heath (Mr. Howell). A development of this kind was announced during an Opposition day debate a few weeks ago, but it is good to have it solidly confirmed by the Chancellor of the Exchequer.

Thirdly, we are very glad—this is a slight repetition, but it does not suffer from being repeated—that the Chancellor has raised the limits on the savings of retired people, thus enabling them to qualify for a poll tax reduction. I hope that he will be forthcoming concerning my request that he should review the position of elderly Scottish people.

Those three changes are ones for which we have called recently. Equally, they are all changes that in recent times the Government have turned down. Who knows, despite the Prime Minister's preferences, just a tiny corner of the Government may be starting to listen. Unfortunately, however, it is just too late to save them.

Other interesting changes have been made. The Chancellor told us, not to our surprise, that interest rates will remain high for some time to come. However, he then said, interestingly, that when they are brought down they will stay down. That is a major change of policy. Throughout the last 11 years, interest rates have come down only just before a general election. Their reduction had nothing to do with the wider economic considerations.

The Chancellor has made it clear in his first Budget speech that he will re-examine several areas. Knowing him as we do, we believe the complete authenticity of his intention to re-examine credit controls, the measurement of money supply and funding policies so that they are not too rigid—perhaps another little preparation for a future election. He gave a further commitment to participate in the exchange rate mechanism of the European monetary system. He truly showed himself in all these respects to have approached them with a new broom. The problem is that that will not be terribly convincing so long as the broomstick is ridden by the Prime Minister. Consequently, I plead with the House not to devalue the Chancellor's contribution.

We understand the circumstances that produced a Budget of this kind. It is something of a bits and pieces Budget. It is something of a stop-gap Budget. It could not be otherwise, given the policies, and the policy failures, of the Government. There was not much else that the Chancellor could do. He could not announce, for instance, that interest rates would be cut, because that would send credit up and the pound down. He could not announce that interest rates would go up, because that would have plunged the economy into recession and the Tory party into oblivion. About the only thing that he could do was to maintain the position. He certainly could not cut taxes, despite the pleadings of some in the City and some in his party. That would have been evidence of complete irresponsibility and would have sent the market into a spin.

There is a real irony in that. It will be within the memory of right hon. and hon. Members in all parts of the House, and of the much wider public outside, that for years the Conservatives have preached that large income tax reductions, especially on higher incomes, were the energiser of the economy and the spur to enterprise and dynamism. However, when all the difficulties associated with a huge balance of payments deficit mean that the Government most need energy, dynamism and a spur to enterprise, they do not even think of cutting income tax because of the devastating effect that that would have on their fortunes in the markets.

How very different from the giveaway Budget of two years ago, when the current Chancellor of the Exchequer was Chief Secretary to the Treasury. I well remember that on the day after the Budget he denounced Opposition Members for their temerity in warning, as he put it, that cutting taxes will damage the balance of payments. He declared boldly in the same passage: It is hardly surprising that we should have a current account deficit when growth in the United Kingdom economy is far stronger than that of most of our trading partners."—[Official Report, 16 March 1988; Vol. 129, c. 1129.] It was during that same month that the Prime Minister described a £1 billion balance of payments deficit in one month as a "freak". That was £40 billion-worth of deficits ago.

The right hon. Gentleman told us then that it was growth that was generating the balance of payments difficulties. It made some sense. If there is high growth, it is not surprising that the country should experience some balance of payments difficulties. But what sense does it make now, when our current account deficit is at record levels and when our growth rate is the slowest among all the major industrial countries? For us to go into deficit and debt with high growth is perhaps defensible, but to go into deficit and debt with low growth is a shambles, especially when it is the direct consequence of the policies of Her Majesty's Government.

We have not got a huge deficit just on current account. In 1989, £28 billion-worth of long-term capital came into Britain. In the same year, £57 billion-worth of long-term capital went out of Britain. That represents a long-term capital outflow of £29 billion. The deficits—which are of some significance to this economy, which must compete and make its way out of the current problems—total more than £45 billion, compared with the remainder of the world. What a mess. What a way to meet the challenges of the 1990s, as the Chancellor put it in his speech.

He could say, "It is not really my fault. I have been in the job for less than half the financial year." That is true. Midway through the financial year, the last Chancellor of the Exchequer, the right hon. Member for Blaby (Mr. Lawson), who I am glad to see is in his place, left the field. He went off at half time, having been tackled from behind by his own captain. It is a tribute to the resourcefulness of the right hon. Member for Blaby that, after he left the Government team, he still managed to get a six-figure transfer fee, even as a part-time player. Come to think of it, perhaps that is what he meant all the time when he said that he was going to achieve an economic miracle.

There is not much in the way of miracles elsewhere, unless we consider it miraculous to make £65 billion-worth of oil revenues disappear, leaving hardly any trace. That is supernatural indeed. The imposition of interest rates that are higher for longer than ever before in British history is the stuff of which legends are made.

Despite interest rates being higher for longer than ever before, demand has still increased, retail sales have still risen, indebtedness has still soared and, as the Chancellor acknowledged, prices have continued going up. The high interest rate policy that was supposed to cure inflation is now a major cause of inflation. It adds to production costs, it adds to living costs, it provokes higher wage demands and, as the Chancellor acknowledged, high interest rates make lenders more willing to lend. The Chancellor tells us that he is striving to reduce demand in order to combat inflation, yet with every mail delivery, in every newspaper and in every car showroom there are offers of interest-free finance and easy credit.

It is a paradox, and it has perplexed people. It has certainly confused the Prime Minister. On Tuesday, the Chancellor told us that he was determined to be firm in pressing down on demand and spending. On Sunday, in the Sunday Express, the Prime Minister was dismissing talk of a squeeze and rejoicing in the amount of retail sales, the amount of spending and the amount of overseas holidays. The Prime Minister was boasting about high consumer spending without appearing to realise that that is what is causing the Chancellor of the Exchequer to lose sleep at night. It is so bad that it even makes the deputy Prime Minister lose sleep in the day.

It also makes a lot of other people lose sleep. People running businesses, especially medium-sized and small businesses, know that high interest rates are hitting their costs, their custom and their investment plans. The high interest rate policy with the resulting mortgage rate burden devastates family budgets.

On the Friday after the mortgage rate went up to 15.4 per cent., I met a young family man in my constituency whose mortgage had gone up from £185 to £290 a month in 18 months—and that was before the latest increase. He saw me in the street in Blackwood and said, "15.4 per cent.! I wanted to buy my house but I didn't want to buy the building society." That is the reaction of many people. They can make no connection between their desire to buy a house and the way in which the cost of trying to fulfil a natural and normal ambition, for which they are prepared to pay, is being made prohibitive by Government policies.

Millions of people are struggling with punishing mortgage bills. Such people greet the Conservative claim to be the party of the family with bitter derision. They bear the burden of huge mortgage repayments, they see what the Government have done to the pensions and housing benefits of elderly people in their families, they know that their child benefit is frozen, and now, on top of everything else comes the poll tax.

That tax is despised and detested across the country, not only because of its cost but because of its fundamental injustice. There is not a single Member on either side of the House who does not understand that, yet yesterday the Secretary of State for the Environment was saying that the principles of the tax were going to stay.

What principle is there in a tax that makes the shop assistant pay the same as the stockbroker? What principle is there in a tax that makes the nurse pay the same as the consultant? What principle demands that a single person aged between 25 and 60 on £64 a week pay the same as someone on £6,000 a week? What principle makes someone with retirement savings of £16,000 pay the same as someone with retirement assets of £16 million?

Although we are grateful for the concession that the Chancellor has made this afternoon, £16,000 in retirement savings is not exactly a prince's ransom. It is certainly not a level of savings put together after a lifetime of work that should in any way disqualify people from assistance in their retirement years. I hope that those thresholds will be further examined, because among the greatest and the most justifiable resentments that are voiced is that people think that they have been conned, betrayed and had, because thrifty people who have set money aside and have lived frugal or simply careful lives carry the same liability as people who have fared much more fortunately. I plead, as I am sure will certain Conservative Members, for a further examination of those levels.

Of course a flat rate tax that affects people regardless of their ability to pay can represent no principle that we recognise as acceptable in a democracy. However, to hear some Conservative Members, one would think that the poll tax and all that it implies was an aberration, a sudden surprise inflicted on the Tory party out of the blue by some malign act of fate. I suppose that is one way of looking at the Prime Minister. I particularly enjoyed the television performance which many of my hon. Friends will have seen by the hon. Member for Shipley (Sir M. Fox) a couple of weeks ago, when he told an interviewer on BBC television: Had we known that the charge would be the level that it is, then I don't think the Bill would have had the same sort of passage through Parliament. As I watched him, I wondered whether I was witnessing the first historic instance of a fox leaving a sinking ship.

The poll tax is not a Conservative aberration; it is not an accident to modern Toryism, it is the epitome of modern Toryism. Because it is a flat rate, like other Tory charges it is regressive; it is an inflationary and centralising tax. In short, the poll tax is not the exception to Tory policy, it is the rule and now the British people know it.

Against that background, is it any wonder that the majority of British people believe that the country is heading in the wrong direction and that major changes are needed? Of course that is not strange. People know too that there are practical and progressive alternatives to what the Government are doing. We put those alternatives, the CBI and the TUC almost identically put those alternatives as did the Engineering Employers Federation.

The right hon. Member for Henley (Mr. Heseltine) put alternatives to Government policy. [HON. MEMBERS: "Where is he?"] I think that he was here earlier this afternoon. I see the hon. Member for Leominster (Mr. Temple-Morris) pointing skywards. I did not expect such an elevation to be awarded to the right hon. Member for Henley, but I understand he is in a place where I or any other right hon. or hon. Member should not be able to see him. Doubtless he is putting forward his alternatives. Equally doubtless, the Treasury is probably costing his programme at this very moment. Then they will send it to No. 10 Downing street to have the noughts added on to the end of it.

I know that the Prime Minister hates the concept of contemplating the idea of a spectrum of alternatives and agreement about alternatives, but she has to face the fact that there is a broadening consensus among the British people for those alternatives. It is a consensus that favours incentives for investment, including the greatest incentive of stability in the currency and interest rate regime.

There is a consensus that Britain should now be negotiating entry of the exchange rate mechanism of the European monetary system. There is a consensus that there has to be increased investment in education, which the Government have cut in real terms, in training, which the Government are cutting by £300 milliion, in research and development, which is still underfunded, and in the rail and road systems. All those are recognised as essentials as the completion of the single market approaches.

Of course nobody who is part of that consensus believes that such policies would be a panacea or would offer an instant cure for inflation or for the balance of payments deficit. Everyone who is part of the consensus knows that the only dependable way to reduce inflation, to combat endemic inflation and to close those payments gaps is to produce more, to produce better and to sell more competitively. They know that, if that is to happen, long-term investment must take precedence over short-term consumption and that a modern Government have responsibility for actively promoting the objective of a commitment to long-termism.

The Budget yet again completely fails to address that necessity, yet we know that it is the course that must be followed, not only because it makes such sense for our under-invested and debt-ridden economy but because commitment to the long term so obviously works in practice for competitor countries.

Even the Prime Minister stumbles into recognising that sometimes. Three weeks ago, she told the Sunday Times that her ambition is that we catch up with France and then we catch up with Germany. There is a fair bit of catching up to do. When the right hon. Lady came Prime Minister in 1979, our trade deficit with France was just over £900 million, but now it is over £1,300 million; with Germany, it was just over £1,500 million, but now it is nearly £10 billion. Even without oil, those countries are known to have better systems of investing in research and development, in training and in transport by road and rail than Britain.

Germany has a Conservative Government and France has a Socialist Government, but they have in common a willingness to work in partnership with industry. They do not have the prejudices of the British Government. They do not think that the dogma of withdrawal and non-intervention is practical, any more than they think that the dogma of domination and perpetual interference is desirable.

After 11 years in power, the Prime Minister says that she wants to catch up with those countries. We all want and need that, but to do so will take a partnership in work, planning and investment. That is necessary and unavoidable in a modern economy. None of it will come from this Government; certainly none of it will come from this Budget; but it will come from us, and for the sake of our country, the sooner the better.

5.22 pm

Sir Neil Macfarlane (Sutton and Cheam)

I shall not follow too closely the comments of the Leader of the Opposition. I want to congratulate my right hon. Friend the Chancellor most warmly not only on the quality of his presentation but on the competence that he displayed in confounding the critics who said that this would be a dull Budget. It was resourceful and it certainly carries on the work of the past decade in reforming our taxation system. Overall, I am quite certain that this is a fair Budget that is equitable for everybody, and there is something in it for growth over the next few years.

I welcome the removal of 2.5 per cent. from the pools betting duty, which I am certain will be widely supported by all hon. Members because it has concentrated the minds of many hon. Members for a considerable time. I certainly applaud my right hon. Friend's decision to revert the rate to its 1980 level of 40 per cent.

I ask my hon. Friend the Economic Secretary to the Treasury to make a note of one or two points that I shall make, because the Chancellor's speech touched on taxation in sport and how it might affect sports other than association football. The excellent Taylor report has thrown into sharp focus the problems not only of soccer but of major spectator sports facilities. Many people associated with sport would say that excessive taxation in the post-war years is a prime cause of poor facilities, poor stadiums and a poor expectation among those who attend spectator sports. There is much truth in that, and it is precisely what the governing bodies of sport have been saying for a long time.

West Germany, the United States, France, Italy and Spain have made enormous progress since the war in developing first-class facilities. Almost all, with the exception of the United States, have been helped by their Governments with capital spend, and generous tax exemptions have been offered in the United States. We, alas, have forgotten just how important for national and civic pride are modern and safe facilities for all sports. Most stadiums have been partly modernised over the past five or 10 years, but most of our stadium stock is the better part of 70 to 75 years old.

My right hon. Friend the Chancellor and the Treasury must consider the merits of sports governing bodies and representative bodies, including the British Olympic Association and the Central Council of Physical Recreation, which are non-profit-making distributing public benefit bodies. Ministers must assist more with the growth, viewing of and participation in sport in the United Kingdom. Surely it should be a Treasury objective to consider total tax exemption of the internal profits and gains of governing bodies. Such a move would command considerable political success, as well as falling in line with most other western industrialised nations.

Sadly, in recent weeks it has become clear that a number of sports clubs will suffer an additional burden as a result of the community charge. Although several sports and recreation clubs will benefit from some reductions, alas, others will experience a considerable percentage increase, and I commend to Treasury Ministers the CCPR national survey on present and future rates. The burdens are considerable, and as a result of our policies many sports clubs will have to pay increases in excess of 30 to 40 per cent., and many may go to the wall.

My right hon. Friend the Chancellor knows only too well the problems facing sports governing bodies. He has taken a close interest in sport over the years and knows in detail how the Test and County Cricket Board, the Rugby Football Union and the Football Association operate. I know from correspondence with him when he was a Back Bencher that he takes a close interest in sport. For the first time since Rab Butler, we have a Conservative Chancellor who understands the importance of sport and its politics. I was interested when he said that there was undoubtedly a need for the Inland Revenue closely to consider how capital allowances apply to the development of new stadiums.

There have been many increases over the years, not just in value added tax and in the burdens of the community charge and the rating system. We return time and again to the problems of gains and taxation within the financial systems of non-profit-making distributing bodies. Most of those involved in the running of sport believe that the Government do not always understand the impact of taxation on sport, leisure and recreation, which is the focal point of the life of the nation.

In recent weeks, I have had one or two letters from old friends. I want to quote from them because I want to send them on to my hon. Friend the Economic Secretary. I hope that my right hon. Friend the Chancellor himself will take a personal interest in the matter because my correspondents cover a wide electoral college. Mr. Dudley Wood of the Rugby Football Union says: we made a provision for £530,000 for Corporation Tax"— that is, in 1988–89. We also paid some £450,000 in VAT during the year … We take no exception to the relatively low level of the Sports Council grant since it is our aim to be self-financing but, as an amateur, non profit distributing body"— again, we come back to that— it is disheartening to find ourselves penalised by this heavy burden of tax. The harder we work to produce money to finance our game and our facilities, the more tax we pay. Well before Hillsborough and the Taylor Reports, we took a decision to modernise our national ground to bring it over a period of years to a capacity of 75,000, all seated in a well equipped stadium and the rebuilding of the North Stand at a cost of £15 million is well advanced. This will be ready in time for the 1991 World Cup which will be one of the most prestigious and largest world sporting events ever held in this country … no tax relief is granted in respect of capital expenditure on ground improvements, although some allowance is made where safety factors are involved. Having said that, the present taxation arrangements are a positive disincentive to our efforts to be self-supporting I hope that my hon. Friend the Economic Secretary will take close note of that because it echoes the generous comments that, I think, my right hon. Friend the Chancellor made earlier.

The chief executive of the Football Association writes on similar lines. He says: Tax allowances on capital spending and in particular, on seating and on any cover or roof are not eligible for any form of tax relief in the form of capital allowances. It is not available unless the expenditure is on plant and machinery … or is in relation to work which is necessary under the Safety of Sports Grounds Act 1975. That point requires close examination. The association also urges an exemption from corporation tax and suggests that we grant the governing bodies of sport a special status similar to charitable status. This would enable sports organisations to enjoy the same benefits as arts bodies organised as charities. That point is worth considering, but I shall not detain the House much longer on this issue.

The Test and County Cricket Board writes along similar lines. It says: Our First-Class County Cricket Clubs and Test Match Grounds depend very much on a successful Australian Tour once every four years to keep them afloat financially during the intervening period. The salaries we are able to pay to cricketers and the money we are able to invest in youth development and the recreational game reflect that the income derived from International cricket has to be spread over a very wide base. The writer of the letter goes on to talk about the "context of cricket finances". He says: VAT is the area where the greatest taxation burden is borne by cricket. The VAT burden on gate receipts, sponsorship, broadcasting income and box hire involves cricket in a net cost somewhere in the region of £3m a year. I could highlight many other points. The chairman of the TCCB echoes the problems that the RFU, the Football Association and the Lawn Tennis Association have pointed out to me before about the rebuilding of major stadiums and the incentives that are needed. The TCCB talks about unearned income, but time and again, it comes back to the element of disincentive.

I hope very much that my hon. Friend the Economic Secretary will urge those points on our right hon. Friend the Chancellor, who made a most commendable and brave speech today—his first of what I hope will be many to follow. There are many points at which we could justifiably look closely in Committee and when the Finance Bill returns to the Floor of the House in the next few months. Those are important issues. It comes down to one thing. It is a matter of national and civic pride that we should upgrade and improve our stadiums which are such a vital part of many regions of the United Kingdom.

5.34 pm

Dr. David Owen (Plymouth, Devonport)

The Budget will, I suspect, take a few weeks to settle in before a fair judgment can be made on whether the Chancellor has grappled successfully with the deeper problems of the British economy. In many ways, it was a characteristic Budget. We all agree that the Chancellor is a likeable Member of the House. He does not have much flamboyance, but he is a kindly person and, within the limits of his brief, he has tried to act fairly. Many people will welcome some of the details of the Budget.

First, however, I must pose the core question, which will be asked not only in this country but in many countries. For all the words and all the rhetoric, has the Chancellor grappled with the basic problem of the British economy, which is the underlying rate of inflation? There is no question but that if, when the dust has settled and the glitter subsided, the judgment is that inflation is still riding through the system and will not be curbed, there will be continued pressure on the pound sterling and continued uncertainty about the Government's resolve to raise interest rates. In all, there will be four or five months of considerable uncertainty.

The Chancellor has chosen—or, more likely, has been told by the Prime Minister—not to say what the markets wanted to hear, and what many hon. Members wanted to hear, about a firm date and intention to enter the exchange rate mechanism of the European monetary system. I do not believe that that automatically provides an instant cure for our inflation problem, but I believe that it sets a disciplined framework within which British economic policy must go ahead. The Chancellor has used no new words and has expressed no new sentiments about the exchange rate mechanism of the EMS. In that sense, he made a deeply disappointing speech.

The Chancellor says that the question is "when", not whether, but in view of the emphasis that he laid on inflation, many people will ponder if it is to be postponed until 1991. We know of the Prime Minister's anxiety about a run-up to the general election with the issue of the exchange rate mechanism still not resolved and of the fear that the prospect of a Labour return might give rise to speculation and that the Government might have to put up interest rates in the run-up. The suspicion must remain that the Prime Minister will insist that we do not enter the exchange rate mechanism this side of the general election.

If that suspicion becomes a fear, I worry about exchange rates in the next few weeks and months. I believe that present exchange rates will firm up slightly. Most Budgets, especially one with new ideas and with a welcome emphasis on savings, have a reasonable reaction in the exchange markets for the first couple of days. I assume that the strategy behind the Budget is to encourage more private saving and giving so as to dampen consumer spending, and I strongly support that. Our savings ratio is disgraceful and the Social Democratic party has long urged the Chancellor, and previous Chancellors, to have a savings Budget. In almost every particular, the measures that the Chancellor has introduced to encourage more saving and more giving are welcome, but—and it is a big "but"—it takes some time for such schemes to have an impact on current consumer spending.

I can only believe that the Chancellor's advisers think that there is already sufficient dampening within the system because of existing interest rate policy. However, they have got that prediction wrong before and many of us now wanted a firmer and clearer fiscal tightening. In January, when the SDP produced its Budget proposals, we warned against overkill on a fiscal stance. We thought that it was possible to have a neutral Budget, but as the statistics began to show increased consumer demand over and above expectations and as the date of a throttling back of the economy seemed to be consistently postponed, we grew more anxious. Added to that was the anxiety about the retail price index.

In the absence of a firm and clear statement on the exchange rate mechanism of the European monetary system, and with no obvious wish on the Government's part to increase interest rates—and understandably so—much of the world's attention will focus on Britain's underlying inflation rate and in particular on the retail price index. That will also be the case on the purely technical ground that, although the Chancellor was rightly sceptical about monetary aggregates, he announced a somewhat looser monetary target of 1 per cent. to 5 per cent. instead of the 0 per cent. to 4 per cent. in the previous Budget. He also implied that he thought that, for most of the period, the figure was likely to be in the higher ranges. The Chancellor also indicated a public sector debt repayment level half the size of that projected in the pevious Budget. That means that in the short term certain questions arise.

The House would do well to ponder the statement on page 44 of the Red Book that the RPI is due to rise quite sharply in the next few months. It is noteworthy that the Chancellor gave a figure of more than 7 per cent. only for the last quarter of 1990. It is incumbent on the Government to come forward immediately with their estimate of the peak that the RPI is likely to reach in the next few months because that will be one of the key factors in wage bargaining. We are already witnessing underlying pressure for wage settlements higher than can possibly be justified in present circumstances.

In addition, by placing so much stress on excise duties, the Chancellor has added a full 0.53 per cent. to the RPI. Moreover, he has readily acknowledged that the poll tax will add a further I per cent. to the RPI. That means that, on present levels, there will be a considerable surge in the RPI.

The Economic Secretary to the Treasury (Mr. Richard Ryder)

Will the right hon. Gentleman give way?

Dr. Owen

I shall happily give way if the Minister wishes to give us the RPI figures for the second and third quarters, as that would help us in our discussion.

Mr. Ryder

The right hon. Gentleman asserted that the target M0 figures for next year were different from those that we have followed in the past 12 months. He quoted from the Red Book, but paragraph 2.34 on page 15 of the Red Book states: The Government will continue to set a target for M0 as a yard stick for its monetary policy. A target range of 1–5 per cent. is being set for MO in 1990–91, the same as in 1989–90.

Dr. Owen

I accept the correction. I may have been wrongly advised on that. In that case we shall not have a looser target, although we must still remember the warning that the figures will be bumping up off the upper limit.

I know that the former Chancellor did not use excise duties to their full extent last year but left them largely as they were. My own judgment this year, given my anxiety about the retail price index, would have been to favour the adoption of a tighter fiscal stance—by adding 1 p to the standard rate of income tax or by increasing the national insurance contribution—rather than placing the full weight on excise duties. By doing that, the Chancellor has taken a considerable risk with the major statistic and a statistic which causes the greatest concern at present. It is on that principle that I fear that his whole Budget strategy is likely to come unstuck.

The Treasury forecasts admit a margin of error of 1.25per cent. If, in the last quarter of this year, we found the RPI approaching 9 per cent. or more than 8 per cent., there would be considerable cause for anxiety about the exchange rate. I keep coming back to that question. The Chancellor has let the exchange rate slide in the past few months—an open invitation to manufacturers to pass on high wage demands. One of our anxieties must be that, if we have a weak exchange rate at a time of high interest rates, we may undermine the capacity of the British economy and, in particular, our anti-inflationary stance.

In view of the economic figures of the past couple of months and also because of world instability—the rise in the deutschmark following the East German elections and the fragility of the Japanese stock market—the Chancellor should have gone for a tighter fiscal stance or, failing that, he should have shown a greater readiness to enter the exchange rate mechanism earlier and accept the discipline of a firm exchange rate. Time will tell what the result will be, but the only justification for the present strategy would be a readiness on the Chancellor's part, given pressure in the next couple of months, to increase interest rates again. Regrettable though that would be, it would be far better to do that than to allow a further slow erosion of the exchange rate.

The Prime Minister's reluctance to enter the exchange rate mechanism of the European monetary system is no longer even a joke or a subject for badinage between the political parties. If there were a free vote at the end of the Budget debate, there is no question but that the overwhelming majority of hon. Members would vote in favour of a clear decision to enter no later than the autumn. Indeed, there would probably be a majority in favour of going in immediately.

People have grown increasingly anxious about the Prime Minister's so-called Madrid conditions. After all, only a few weeks ago we were being told that the reason why we could not enter the exchange rate mechanism was that the Federal Republic of Germany had a low inflation rate. Yet in the background briefing over the past few days we have heard that one of the reasons for not entering is the danger of a high inflation rate in the Federal Republic arising from its commitments in relation to unification. The ground rules are constantly being changed.

There is also a personal reason why the Chancellor should make a clearer statement. A former Chancellor has resigned on this very issue and it is essential that we should have the feeling that the present Chancellor is master at No. 11 rather than his mistress at No. 10—figuratively speaking, of course. When he winds up the Budget debate, the Chancellor would be wise to find a form of words that is far more generous in recognising the virtues of the exchange rate mechanism of the European monetary system, far clearer about his intentions concerning the exchange rate mechanism of the European monetary system and far more revealing of his personal wishes concerning the exchange rate mechanism of the European monetary system. Without such a commitment, all the fine provisions in the Budget will be seen to be no more than useful fine tuning. We readily acknowledge that they will be useful; many of them have been advocated by the SDP for many years.

I do not wish to delay the proceedings, but I shall leave this Budget debate with a gnawing sense of anxiety. We have listened to the speech of a bank manager—that is not a term of abuse, as there are many enlightened and capable bank managers—who has recognised the specific problems and produced a large number of useful and sensible measures but who has brought to the question no overall vision and no firmness of purpose.

I am left without the feeling that the Chancellor's hand is on the tiller of the economy and with the nagging fear that the Prime Minister's hand is still on the tiller—and that it is the Prime Minister rather than the Chancellor who is the dominant member of the Government in matters of economic strategy. If that is the true interpretation, the chances of achieving by 1992 the recovery on which the Government's political fortunes rest will not have been increased by the Budget.

5.49 pm

Mr. John Lee (Pendle)

I am grateful for this opportunity to congratulate my right hon. Friend the Chancellor of the Exchequer on his maiden Budget, and, I should like to thank the leader of the Social Democratic party, the right hon. Member for Plymouth, Devonport (Dr. Owen) for his generous and kind tributes to my right hon. Friend.

My right hon. Friend the Chancellor has maintained the family tradition of successfully performing on the high wire. This was a cautious Budget but, as we all appreciate, this is only the first act; act 2 comes this time next year. He rightly concentrated on controlling inflation and on savings.

I was interested that my right hon. Friend acknowledged that he had given considerable thought to and had had a hard look at the possibility of controlling credit and consumer borrowing other than through high interest rates. I am not wholly convinced that there is no alternative to high interest rates. They are a blunt weapon that hurts borrowers and businesses, especially small businesses.

Although I freely acknowledge that the financial community these days is much more international and, unquestionably, some would get round any imposed new credit controls, I cannot believe that the clearing banks, the major lenders and the credit card companies would riot respond to requests from the Bank of England or to Government directives, with consequent reductions in credit. Interest rates are now at painful levels, and I sincerely hope that they will not rise any further. They are already causing real hardship to mortgage payers and to businesses.

I welcome a number of the specific measures on savings. The abolition of stamp duty on share transactions is welcome, as is the abolition of the composite tax rate in 1991. The new tax-exempt special savings accounts—or TESSAs—for personal savings are an interesting concept that I am sure will be built on.

The doubling of the capital limits from £8.000 to £16,000 for benefit eligibility will considerably help those who face substantial community charge payments, especially in areas that traditionally have been low-rated, such as in my own area of Pendle and north-east Lancashire, and beyond. I hope that my hon. Friend the Member for Mid-Norfolk (Mr. Ryder) is listening. He may well have to deal with that specific problem shortly, but we shall have to see what happens with future ministerial changes.

I very much welcome the Chancellor's determination to allow a £5,000 limit on capital gains tax to both husband and wife, with separate assessments coming through. However, the 40 per cent. top rate of capital gains tax, which still applies, is unacceptably high. I believe that I am right in saying that that is the one tax on savings that our Government have increased. I believe that it causes inactivity in portfolios and often subordinates investment decisions to tax considerations. I hope that that 40 per cent. rate will be reconsidered in our Budget next year.

In conclusion, I should like to welcome a few individual measures. The abolition of the benefits-in-kind taxation on nurseries will be appreciated. Charity giving should be given a substantial boost by the help announced by my right hon. Friend. Tax relief on donations to local enterprise agencies is welcome. Such agencies do excellent work. I have seen that locally in the work of the Pendle Enterprise Trust. My right hon. Friend's anouncement can only give their work a boost. The VAT reliefs and the lowering of the ceiling for corporation tax will substantially help the liquidity of many of our small firms, which, as I said earlier, are suffering because of high interest rates.

Overall, I commend my right hon. Friend's Budget to the House and wish him well.

5.54 pm

Mr. Stuart Bell (Middlesbrough)

I am grateful for this early opportunity to speak in the debate and to make some brief comments on the Budget. Like my right hon. Friend the Leader of the Opposition and like the right hon. Member for Plymouth, Devonport (Dr. Owen), I add my congratulations to the Chancellor of the Exchequer on the manner in which he made his speech. It was a friendly speech, well put across, and it gained the sympathy and commended the general support of the House.

If we look at the wider issues of the Budget and its context, however, we see that this is not and could not be a consensus Budget. As has been said, the Budget had a 1950s edge. We can agree to a lot of it, but it does not go far enough. The Chancellor did not go far enough in reversing some of the giveaways introduced by his predecessor, the right hon. Member for Blaby (Mr. Lawson) two years ago.

The Chancellor has taken £0.5 billion out of the system—not enough in the context of the Budget—and there is to be a further £1 billion next year, but that will not necessarily be satisfactory to the markets. Since the resignation of the former Chancellor, the markets have been testing the Government and the Chancellor and pushing the exchange rate down. The exchange rate has fallen gradually. Although it has risen from time to time, it is still falling, but we have not seen the application of a further rise in interest rates. One can well understand that, and I am not suggesting that increasing interest rates would be a positive policy.

Clearly, the Government's policy of using interest rates as the only mechanism to determine the exchange rate and to combat inflation leaves a great deal to be desired. It has left the Chancellor unable to raise too much money for fear of reversing the policies of his predecessor, while not satisfying the markets either. My great dread and worry about this Budget is that a further rise in interest rates may be inevitable in the coming months. The Government may even have reconciled themselves to that fate. The business men of Cleveland and my constituents in Middlesbrough would be horrified if that were the ultimate consequence of the Budget, however well it may be disguised today.

The Chancellor declined to use the words "consumer credit". He went to great lengths to talk about the banks sending out unsolicited loan offers and documents to various people. He referred to a warning given to the banks and to a code of conduct both for banks and for building societies, warning them that they should not continue their unsolicited offers of credit. I hope that the banks will take that salutary warning. Perhaps it is the Government's way of introducing credit control in another form.

The great trouble with our economy is burgeoning credit. We give twice as much credit as the French and Germans. As a nation, we are living far beyond our means. It is for the Government to bring that under control, to bring the economy back into kilter and to reverse the trends of the past 10 years.

The Economic Secretary to the Treasury intervened to correct the right hon. Member for Plymouth, Devonport on the target range of M0 in the last Red Book, which was from 0 to 5 per cent., but he did not say whether that target had been met. My assumption and understanding is that it has not been met and that the Government have not controlled our country's money supply.

The Chancellor said that there was no lodestar of monetarism. After 10 years, we have seen the consequences of the medium-term financial strategy. One of the interesting aspects of the Chancellor's speech was that he mentioned the medium-term financial strategy only once, when referring to his predecessor. I have a feeling that, as we turn the corner into the 1990s, we shall hear less and less about the medium-term financial strategy.

Small business men in Cleveland and particularly in my constituency of Middlesbrough will welcome the changes in value added tax write-offs on bad debts and the bringing of what the Chancellor describes as certainty and simplicity to the VAT rules.

I welcome also the Chancellor's statement about the Football Trust and the fact that there will be an extra £100 million for the improvement of football grounds. My football club—Middlesborough, which on Sunday will be playing at Wembley for the first time in 114 years—has worked well with the Football Trust over the past few years and we look forward to working with it in relation to ground improvements.

It was rather churlish of the Chancellor—again, no doubt, in deference to the Prime Minister—actually to fine the major banks some £200 million for writing off their sovereign debt. When the write-off took place, we heard that the Prime Minister was incandescent with fury. Making the banks pay £200 million is perhaps some kind of revenge.

I end by repeating that I enjoyed the Chancellor's speech very much. However, I fear that this Budget will not advance our economy in any way. There may be many penalties yet to pay for his being a little on the modest side for the age in which we live.

6.1 pm

Mr. David Knox (Staffordshire, Moorlands)

It is always a pleasure to follow the hon. Member for Middlesborough (Mr. Bell). I think that in last year's Budget debate he followed me, so perhaps it is right that we should be speaking in reverse order today.

I join all hon. Members who have congratulated my right hon. Friend the Chancellor of the Exchequer on the delivery of his first Budget speech. His predecessor set very high standards with his Budget speeches over the years. They were always well constructed, to the point, and commendably brief. My right hon. Friend has maintained those very high standards. He has produced a very skilful Budget in what I consider to be extraordinarily difficult and tight circumstances. Although I may have one or two critical remarks to make, I think that overall it is a balanced, cautious Budget and a great credit to my right hon. Friend.

There are four items that I welcome especially. The first is the change in the capital rules affecting income support and family credit, and particularly housing benefit and community charge benefit. The £16,000 upper limit in the case of the latter is obviously more sensible. In the past few weeks especially, all Members of Parliament—apart from those who represent constituencies north of the border—have come across pathetic stories of people, not terribly wealthy but whose savings exceed £8,000, who have not been able to obtain community charge benefit. It is to be hoped that the arrangements announced today will provide some relief for those people as they face what in many cases is a very substantial increase in the amount that they have to contribute to local authority revenue. I welcome the change very much indeed.

I welcome also the tax relief for people using workplace nurseries. This will be increasingly important in the years ahead, with the decline in the birth rate, fewer young people coming on to the labour market and therefore more women having to return to work. I hope that this measure will encourage women with families to return to work. It is to be welcomed very warmly.

As a football fan, I also strongly welcome the reduction in the pool betting duty. It is something for which those of us connected with the all-party football committee have been pressing the Government for some years. It would be churlish not to welcome the proposal. The money thus made available will help the football clubs to implement the recommendations of the Taylor report by improving their grounds. I was very pleased that my right hon. Friend's conceded that most football clubs are losing money and that very few are making large profits.

Mr. Geoffrey Lofthouse (Pontefract and Castleford)

I agree with the hon. Gentleman's point about football clubs. Does he agree that, in the context of the Taylor report, bodies such as Rugby League clubs are being given no consideration at all, and that they really ought to be considered?

Mr. Knox

Obviously, I do not know as much about Rugby League clubs as the hon. Gentleman knows. As I have explained, I am an association football fan. However, if what he has said is correct, there is obviously a case for having something done about Rugby League clubs also.

The fourth aspect of my right hon. Friend's Budget that I commend is the incentives to savings. That is very important indeed. One of the very worrying features of developments in the British economy in the past few years has been the fall in personal savings. It is true that in the last 12 months there has been a slight rise, but overall the level of personal savings is still much too low. I hope that the measures that my right hon. Friend announced today will encourage the rise that has started to take place and that we can look forward to a much higher proportion of the gross domestic product being devoted to personal savings in the years ahead. My right hon. Friend said that his purpose was to encourage the culture of thrift—I particularly liked that phrase—and no doubt Members in all parts of the House would wish to encourage thrift.

This Budget will be judged not on its detailed proposals but on its effect on the British economy over the next 18 months. At present, this country faces two very serious economic problems—a massive balance of payments deficit and over-high inflation. Those two problems, like all economic problems, are related. I have no doubt that the balance of payments deficit is the more serious of he two, and that failure to correct it soon will do irreparable long-term damage, as it will transform us from being a creditor country into a debtor country. The fundamental cause of our balance of payments problem and of our inflation problem is excessive demand in the British domestic economy. The high level of home demand has resulted in increased imports and reduced exports. It has resulted in too much money chasing too few goods and, as a consequence, an unacceptably high rate of inflation.

Clearly, the level of domestic demand must be reduced if those two problems are to be overcome. This can be done in three ways—by increasing taxes, by increasing savings, and by high interest rates. All those measures reduce consumption, although probably the most sensible course is to have a combination of all three. So far, Government policy has tended to concentrate on high interest rates. Unfortunately this has not been terribly successful and it has had serious adverse side effects. High interest rates attract money into London and force sterling up to an artificially high level. As a consequence, British exports are dearer than they should be and therefore more difficult to sell in world markets, while imports are cheaper than they should be and therefore easier to sell. In such circumstances it is extremely difficult to reduce, let alone eliminate, the balance of payments deficit.

For those reasons, I am sorry that my right hon. Friend the Chancellor did not indicate that he intended to place less emphasis on interest rates as a means of resolving our economic problems, which suggests that interest rates are likely to remain at too high a level for too long. That is regrettable not only because of the effect on the balance of payments but also because of the effect on house purchasers, who are being hit particularly hard by the present level of mortgage interest rates. There should be less emphasis on interest rates and much more emphasis on taxation and saving if we are to achieve a balanced approach to the solution of our economic problems.

I welcome my right hon. Friend's recognition of the fact that higher taxation and higher saving have a part to play in dealing with our current problems. At least he is moving in the right direction, although I wish that he had gone much further in both respects. No one likes higher taxes—I am no exception, and I wish that they were not necessary but in my view they are necessary at present as a contribution to the reduction of demand, and I am pleased that my right hon. Friend has moved at least a little in that direction in the Budget. I wonder, however, whether he was right to concentrate the increases on excise duties, which in effect are a form of indirect taxation. The disadvantage of increasing indirect taxes is the effect on inflation. There is an advantage in increasing direct taxes because there is no inflationary effect. Given our present inflationary problem, it would have been much better to leave indirect taxes alone and to increase direct taxes only.

I wonder also whether my right hon. Friend has gone far enough with tax increases. As they are, in effect, a substitute for high interest rates, it seems that a bigger rise in taxes would permit an earlier fall in interest rates. After all, direct and indirect taxes are a fairer means of reducing demand than interest rates, the impact of which tends to be felt disproportionately by those who are purchasing their houses by means of a mortgage. Nor do direct or indirect taxes have as great an adverse effect on investment as interest rates, and investment is, of course, in the medium and long-term interests of the country.

In current conditions, an increase in savings can have only beneficial economic results. There are no adverse side effects. The decline in savings in recent years, to which I have referred already, has been a worrying feature of our economic performance. It has aggravated both the balance of payments deficit and inflation. This afternoon, my right hon. Friend the Chancellor has introduced several measures to encourage higher savings, and we must all hope that they will have the desired effect. I only wish that he had gone a little further. Saving is the least painful way of righting the balance of payments and fighting inflation. A dramatic rise in saving—involving, as it would, lower consumption—would lessen the necessity for high interest rates and high taxes.

A persistent and alarming feature of the British economy is the rise in earnings above the increase in output, with its consequent inflationary effect. Despite the comparatively high level of unemployment and the freeing of the labour market which has resulted from the Government's trade union legislation, we have an overheated labour market. As unemployment has fallen—it has fallen sharply over the past three years—the overheating has intensified. It is alarming that this has happened with more than 1.5 million people out of work.

Obviously, we need better training and more measures to improve the mobility of labour. Irrespective of what action is taken, it seems inevitable that the labour market will continue to suffer from overheating even in times of high unemployment. I am afraid that we are no nearer solving the great unsolved economic problem of the past 45 years, which is how to control wage and salary cost inflation.

I know that incomes policies have their weaknesses and deficiencies, but we seem not to get on very well without such policies. Is it not time that the Government took a less doctrinaire view of incomes policies? Might not an incomes policy make at least some contribution to reducing wage and salary cost inflation?

6.15 pm

Mr. Roy Hughes (Newport, East)

It is always a pleasure to be able to take up the remarks of the hon. Member for Staffordshire, Moorlands (Mr. Knox).

One of the claims to fame of the Chancellor of the Exchequer is his family's connection with the circus. I am reminded of the words of the late President Harry Truman, who said, "If you can't ride two horses at the same time, you shouldn't be in the b—circus." By common consent, the Chancellor of the Exchequer has had a difficult ride today, and in preparing his Budget after being handed the poisoned chalice by the right hon. Member for Blaby (Mr. Lawson). The City does not appear to be happy. Its attitude was summed up on the front page of The Daily Telegraph on Saturday. It appears that Mr. Peter Warburton of Robert Fleming and Co. Ltd. said that we have a grim picture of stagnant output, rising labour costs, destocking and falling profits. It is in that context that we can consider the proposals of the Chancellor of the Exchequer.

Most significant, perhaps, was the concession for the poll tax. As my right hon. Friend the Leader of the Opposition said, £16,000 in savings is not exactly a king's ransom. I feel certain that the tax will need to be greatly refined before it becomes acceptable to the British people. I welcome the concession on lead-free petrol, for environmental reasons alone. The continued differential is imperative. Likewise, I welcome the tax concessions for workplace nurseries. Married women who go out to work are now an established part of our system, and the trend is likely to continue in the years ahead.

Financial assistance is to be given to the Football Trust. Such action was vital after the Hillsborough tragedy. The additional revenue of £100 million will be most welcome. It will encourage provision to be made for more comfortable sports grounds.

The Chancellor of the Exchequer was restrained this afternoon. To return to my circus reference, he was restrained because he has three, not two, difficult horses to ride. First, there are the trade figures; secondly, there is inflation; thirdly, there are exceptionally high interest rates. In 1989, Britain had its largest ever balance of payments deficit, of over £20.4 billion. Compare that with the £50 billion surplus of West Germany.

As my right hon. Friend the Leader of the Opposition reminded the Prime Minister, there is a great deal of catching up to be done. There seems to be little improvement in 1990. The January figures show that imports were flooding in. We had the highest ever level—£10,569 million—in one month alone. Concern has been caused, too, by invisible trade, which for the last quarter of 1989 showed a deficit.

There are the joys also of Common Market membership. In 1989, we had a trade deficit with the EEC of £14.4 billion. This year, we shall contribute £4.6 billion to that organisation. That is 15 per cent. of its total revenue. There must be a moral there somewhere.

To tackle the terrible dilemma that the Chancellor of the Exchequer faces, he, like his predecessor, has relied exclusively on interest rates. That is what the right hon. Member for Old Bexley and Sidcup (Mr. Heath) has described as the one-club approach. By contrast, the shadow Chancellor, my right hon. and learned Friend the Member for Monklands, East (Mr. Smith), has consistently urged temporary credit controls and a limit on bank lending. That would be a means of curbing excess domestic demand.

The solution, nevertheless, to the trade deficit is essentially a long-term one. Investment in manufacturing industry is vital if Britain is to prosper in the decade ahead. Even the right hon. and learned Member for Surrey, East (Sir G. Howe) now recognises this fact. It is a pity that he did not realise the error of his ways way back in 1981, when he was Chancellor and so much of British industry was razed to the ground. This Government, like no Government before them, have enjoyed the untold bounty of North sea oil revenues, but the opportunity for investment has been wasted. In fact, manufacturing investment has only just returned to the level achieved by the last Labour Government.

We have had a tight Budget today, but of course it remains the Chancellor's ambition to create an economic upsurge next year to try to save the Conservative party from defeat at the polls. His announcement today certainly points in that direction. It is not difficult to realise, though, that such a short-term strategy is not in the long-term interests of this country. What the Chancellor has tried to do today is simply paper over the cracks. I repeat that the Government, and the Chancellor in particular, should directly encourage investment in manufacturing industry, new technology and the undoubted skills of our people.

Then there is inflation, which the Chancellor's predecessor called the judge and jury. It now stands at 7.7 per cent.—higher than that of any of our major competitors. For example, in Germany it is 3 per cent. and in France 3.6 per cent., while the EEC average is 5.4 per cent. This is not a happy picture, but the Government are not helping. I will give some examples.

Prescription charges have gone up again. Do hon. Members remember that, in 1979, they were 20p? On 1 April this year they will be £3.05. What a contrast that is. Then there are domestic water supplies. In 1990–91, there will be a 16 per cent. increase on the previous year's figure. Bus, tube and rail fares have all been raised above the inflation rate. Rents will rise substantially in the next months. Many Conservative-controlled authorities are imposing increases above the Government's maximum guideline of £4.50 a week. Electricity charges, on average, are up by 7.7 per cent. but in South Wales, an economically weak region, the charges are up by no less than 12.9 per cent. The poll tax is expected to raise the retail price index by 1 per cent.

I notice, too, that wages are up 9.25 per cent. for the fourth consecutive month. Last Friday, the Secretary of State for Employment was warning that big pay rises could cost jobs. Even the Prime Minister is now urging wage restraint. Yet what do we find? The bosses—by that, I mean top chairmen and chief executives—have awarded themselves salary increases of nearly 28 per cent. in the past year. That is nearly four times the rate of inflation. Some would consider that leadership is best shown by example, but here again it would appear that there is one law for the rich and another for the rest of us.

After his appointment less than five months ago, speaking of his economic medicine, the Chancellor said: "If it isn't hurting, it isn't working." There is now a more up-to-date version of those words it is hurting but it is not working. For industry, a 15 per cent. interest rate is simply calamitous, as the Confederation of British Industry readily admits. Mortgagors are facing a terrible dilemma. They just cannot meet the rocketing repayments demanded.

There are two major side effects of this situation. First, there is debt. A recent study by the Policy Studies Institute showed Britain to be drowning in a sea of debt. Nearly 2.5 million households had difficulty paying their bills last year. Wales has been particularly badly hit by mortgage misery. Cardiff city council has had to set up a special advice centre to deal with the situation.

Secondly, according to Shelter, which knows about these things, homelessness has been increasing for some time, and when the poll tax is introduced in a few weeks' time, there could be an explosion. Poll tax is a story in itself. To me it was best summed up in the words of the right hon. Member for Henley (Mr. Heseltine), the Prime Minister's likely successor, who said: I cannot remember a discussion of the option of the poll tax in which it was not rejected as expensive, ineffective and unfair. It is for those reasons, of course, that we have had this very limited concession in the Chancellor's statement this afternoon.

But it is not only poll tax; the whole range of this Government's policies are now being rejected by the electorate. The Mid-Staffordshire by-election on Thursday will be an indication of this.

I repeat that all that the Chancellor has tried to do today is paper over the cracks, in the short-term interests of the Conservative party. The Prime Minister is now under constant threat from inside her own party. There has been no economic miracle. A £20 billion trade deficit, inflation at 7.7 per cent. and interest rates at over 15 per cent.—these figures, together with the opinion polls, spell a story of disaster for the Government. The ship is sinking fast. The faster the process is completed, the better it will be for the people of this country.

6.27 pm

Sir Alan Glyn (Windsor and Maidenhead)

This is a sensible Budget and one that has been produced against a very difficult background. Nobody knew which way the deutschmark would go and and that is one of the factors that have made it extremely difficult to prepare the Budget. Nevertheless, my right hon. Friend the Chancellor has concentrated on the important things—first, the reduction of inflation and, secondly, the building up of a strong economy in this country. To do that he needed to encourage savings, and many of the measures that he has produced will do that.

I am particularly pleased that he has raised the threshold to £16,000 for poll tax. It always seems to me to be quite incredible that we should encourage people to save and then, at the end of their lives, tell them that they cannot have any benefit because they have saved. That is a positive disincentive to saving. Savings are of the utmost importance to the country. Before the war we were always dependent on our invisibles—in other words, our investments abroad—and the same principle of savings applies today.

I am also pleased to see that my right hon. Friend has at last provided for taxing husband and wife separately and that he is encouraging the small investor and encouraging people to put more money into charities. The VAT changes will help small firms, but they will not match the increase in value that will be placed on the properties and the increase in other taxation.

My right hon. Friend the Chancellor has not been able to repay quite so much national debt as was repaid last year. People do not attach much importance to the repayment of national debt, but it saves about £150 million in interest. Reducing the debt means paying less interest, and my right hon. Friend explained how that money could be better spent. I have always believed that restrictions on credit cards and credit generally would be helpful, but I have been told that that would make only a small difference. The loans by big banks to South American countries are of far greater importance and should be carefully considered. My right hon. Friend has paid attention to that point.

The right hon. Member for Plymouth, Devonport (Dr. Owen) mentioned the exchange rate mechanism. I do not believe that we should move from the position that we took in Madrid, which was that we should enter the mechanism only when it suited us to do so and not when it suited others. It is for us to judge the moment when we should join.

I especially welcome the increased allowance for the blind to about £1,000. We all know the difficulties that they face and the increased allowance will make a great difference to them.

I am rather divided on the question of workplace nurseries. There are two ways to view the question—first, family life, and secondly, working women. Whether we like it or not, because there is a smaller work force we must accept that there will be more women in employment, so I have no alternative but to welcome my right hon. Friend's proposal.

I say to the House, never mind the petrol, the wine or the beer: what is most important is that the Budget will lay the foundations for a nation which believes in saving, encourages people to work and at the end of their days allows them to enjoy their savings. The taxation system that we have been promised is an encouragement for the future. I am grateful to hon. Members for listening to my speech.

6.32 pm

Mr. David Alton (Liverpool, Mossley Hill)

I join other right hon. and hon. Members who have thanked the Chancellor for the way in which he presented his Budget, and I congratulate him on his manner in doing so.

The right hon. Member for Plymouth, Devonport (Dr. Owen) said that he regretted the fact that the Budget contained no commitment to join the exchange rate mechanism immediately. I agree that it is a matter for regret and I hope that it will be rectified before too long. Unlike the hon. Member for Windsor and Maidenhead (Sir A. Glyn), I have an enthusiasm for the ERM as I believe it to be the correct structure and discipline within which to order our economy. However, I agree with the hon. Gentleman about the necessity to encourage saving and shall focus most of my remarks on that.

It is a curate's egg of a Budget—we all welcome parts of it, but there are other parts which will not help our constituents. The House will not be surprised to learn that I am especially pleased about the decision on pool betting duties. I represent part of the city of Liverpool, where the two major pools promoters—Littlewoods and Vernons—are based, and it will be good news for them, not least because they have supported the Football Trust for many years. I am sure that they will use their good offices to ensure that much-needed improvements are undertaken to grounds—something that Liverpool, having experienced the Hillsborough disaster, will want to see carried out with great expedition.

I also welcome the proposals for charitable giving. It is the right approach to encourage personal generosity. Many people want to give more and it is right that the state should match that giving.

As I have said, the Budget is a curate's egg. It is scandalous that the Secretary of State for Scotland was not at the Dispatch Box this afternoon to explain what the poll tax exemption would mean to those who have been paying the community charge in Scotland for the past year. The exemption is also of little use to those who do not have any savings. Many of my constituents face poll tax charges of almost £500. For them, the community charge is a regressive form of taxation. Exemptions alone will not ease their minds—they want the community charge replaced by a more equitable form of taxation based on local income tax. The absence in the Chancellor's speech of anything about collecting this tax on the basis of a person's ability to pay is an unfavourable judgment on the Budget which will be made throughout the country.

I welcome what the Chancellor said about reviving the culture of thrift. That is desperately needed. The right hon. Gentleman said that this was a Budget for savers, but it must be said that many of the problems of insidious debt which he says have to be met have been created by the very people now offering solutions.

The Chancellor said that he hoped to pay off £7 billion of public debt in the next 12 months. No hon. Member would oppose meeting some of our debt payments, and it will certainly save on interest charges, but we must contrast this with the position of local authorities. Their rate support grant—and now the community charge grant—has been reduced year by year. As a result, local authorities are encumbered by massive corporate debts. In Liverpool, a 1 per cent. increase in the interest rate means a staggering £500,000 increase in corporate debt, which now stands at more than £700 million.

The Chancellor mentioned that banks had been paying off some of the debts of Third world countries unable to meet debt charges. Again, I welcome that, but the fact is that we have been drawing more from Third world countries than we have been giving them in aid as they struggle to pay off the debt charges with which they have been saddled for so many years. Small movements in interest rates cripple those countries. The one way to stabilise our interest rates is to move rapidly into the exchange rate mechanism, and the sooner the better.

Debt is insidious and destructive—in the Third world, in many of our local communities, and nowhere more so than in its effect on family life, which in many parts of the country is collapsing. One in three marriages now ends in divorce. Marriage breakdown is 600 per cent. higher than it was in 1961, with 150,000 couples divorcing each year. It is clear that many families have great difficulty making ends meet while preserving their marriages. A major contributory factor in the corrosion of family life has been the strain imposed by crippling debt. Last November, in answer to a parliamentary question that I tabled, the Chief Secretary to the Treasury confirmed that Britain's debt now stands at a staggering £378 billion. The fact is that, the poorer the person, the more debt he faces.

Last year, more than 2 million households in England, Scotland and Wales fell behind payments and found themselves in debt. Together, their arrears amounted to £2.9 billion. Our nation of savers, as the Chancellor described it, has become a nation of debtors. What has that meant for families? Last year, more than 23,000 gas supplies and 73,000 electricity supplies were disconnected, 13,780 homes were repossessed and 70,480 households were in mortgage arrears by six months or more. A recent survey showed that debt led to emotional and physical problems, ranging from feelings of isolation to marital break-up and suicidal tendencies—according to the National Society for the Prevention of Cruelty to Children it is even one of the stress factors involved in child abuse.

The Office of Fair Trading says that 3.6 million people feel over-committed with credit, 4.5 million have had difficulty in the past five years with repayments and 8.2 million have taken on commitments that they now regret. Millions of families are living in the hope that something will turn up, pressurised as they are by loan sharks and greedy money-lenders charging usurious rates of interest. A court case under way in Birmingham involves an extortionate annual percentage rate of interest of 1,192 per cent.

What of the household names? Big high street stores offer their own credit arrangements. This month the annual percentage rates of credit at a sample of stores reveals that John Lewis is charging 23.8 per cent., Habitat 34.4 per cent., Marks and Spencer 34.5 per cent. and Next 39.9 per cent. Credit cards range from 22.4 per cent. on Lloyds Gold Card, plus a £30 annual fee, to 31.3 per cent. on the TSB Trustcard/Visa. Advertising continues to stimulate the demand for more credit which in turn will lead to even more indebtedness.

If, along with his Budget today, the Chancellor were forced to present to Parliament an impact statement, detailing how his policies would affect families and communities, he would have to address those fundamental questions. It is families and neighbourhoods who are the foundation and cornerstone of society, not the Dow Jones index or sterling's relative strength against the deutschmark. It would stop this high street daylight robbery and help to curtail spending if we set an interest rate limit on retail sales.

I am also sorry that there was no mention in the Budget speech of credit unions, which I passionately believe should be supported. They establish saving and financial disciplines, promote saving and strengthen communities.

The Government should also consider making provision in the national curriculum for money management education. The younger people are, the more likely they are to be in debt. We should also impose a levy on institutions such as banks and building societies, forcing them to contribute to the cost of setting up proper financial counselling services. Young people especially are simply not given adequate advice. They run up massive debts which, like an albatross round their necks, encumber them for years.

Perhaps politicians should also consider how much worse matters are going to be made by the imposition of the community charge and by student loans. Taken together, these also create a situation in which people simply have to borrow—always borrowing in order to fend off the worst. That in turn puts pressure on communities and families.

The Chancellor sat down at the end of his Budget oration having presented yet another Budget largely geared to the needs of money markets and financial institutions. Economics should be made to serve the people, not the other way round. Success or failure should be measured and judged in relationist terms, not merely materialistic ones. They should be judged by the impact that policies will have on families, communities and ordinary people. By that measure, today's Budget has not addressed any of the fundamental problems in Britain today—it has merely tinkered with the numbers.

6.43 pm

Sir Anthony Grant (Cambridgeshire, South-West)

The hon. Member for Liverpool, Mossley Hill (Mr. Alton) referred to the Chancellor's speech as being like the curate's egg, good in parts. I should like to apply the same description to the hon. Gentleman's speech because I agree with some of the things that he said and disagree with others. I wholly disagree with him on local income tax, which I happen to think a nonsense, but I have a lot of sympathy for what he said on the exchange rate mechanism.

Because banking and insurance were mentioned in the Budget, I should at once declare an interest in Barclays Bank and Bowring UK Ltd. I shall be making no direct references to those companies although they may well be affected by the Budget, as will many others, I have no doubt.

I should like to pick up a point raised by the hon. Member for Mossley Hill and by my hon. Friend the Member for Windsor and Maindenhead (Sir A. Glyn) on credit card indebtedness. As has been well acknowledged by the present Chancellor and his predecessor, it represents only 2 per cent. of total borrowing, the overwhelming majority of borrowing being represented by loans to businesses and loans for house purchase. It is as well to understand that and keep things in perspective.

The Budget is both responsible and sensitive. It was brilliantly and lucidly presented by my right hon. Friend the Chancellor. As a neighbour of his in Cambridgeshire, I was particularly proud of the way in which he undertook this daunting task, his first Budget, under the glare of the television lights and in extremely difficult times. He resisted the temptation to take the easy option; on the other hand, he refrained from indulging in what I call the British disease.

Our press and media and, if I may say so, our Opposition—it does not matter which party is in Opposition; we did the same when we were in Opposition—have a unique knack of denigrating and running down our country. That is immensely damaging, because it is always misunderstood overseas. The Chancellor was right to stress in his opening remarks the important factors about our economy, which is basically much stronger than some jittery folk would have one believe. He did us a great service in putting it in perspective. Nevertheless, in view of the international situation, he had to tiptoe delicately along a tightrope.

The Government have used the crude interest rate policy as their main weapon in the battle against inflation. No one in the House or outside it with any sense of responsibility would deny that our major battle is with inflation—it is a curse and a cancer, affecting everybody, from the greatest firms to the humblest citizen in the land—but when it comes to the method used to deal with it, I myself have been publicly critical of the excessive use of the interest rate policy. I dislike high interest rates, even though I recognise the necessity for them, because too great a burden is placed upon three groups of people who have borne the brunt of the battle against inflation. In other words, the have-nots have suffered more than the haves.

Those who suffer particularly from a high interest rate policy are the small firms, which, unlike big firms, have been unable to build up large profits and which work on very tight margins; the small farmers, as I know from my experience in East Anglia, who depend very much upon credit and borrowing from banks; and the new home owners, the people who bought their houses quite recently. Those are the people who have to bear a very heavy burden. So I was glad that to some extent the Chancellor recognised, with great sensitivity and sympathy, the problems suffered by those groups.

I was pleased that the Chancellor recognised the problems because, after all, inflation is the responsibility of Government. I recall very well the economic gurus of the 1970s, always telling us that inflation was Government's responsibility, that it was Government who caused it, not ordinary individuals. That being so, it is right that Government should accept a fair share of responsibility in that respect. The Chancellor himself recognised that in what he did for small firms. I was pleased with the value added tax measures, which are particularly welcome. The other tax exemptions will give great encouragement to that immensely important sector of our economy.

My right hon. Friend the Chancellor gave encouraging news. After all, this is the first time in history that I can recall when 1,500 net new firms have been starting up each week. That is not the sign of an economy in depression and decay, but a sign of buoyancy and enthusiasm. It has happened under no previous Government. I was the first Minister responsible for small firms. We were David against Goliath; we were the Cinderellas. We had little support—none at all from the Opposition or the Confederation of British Industry. In those days, nothing approaching that number of people were starting up and successfully pursuing small businesses. The Chancellor has recognised that, and I welcome what he has done to support small firms.

I am also delighted that my right hon. Friend has abolished stamp duty on share transfers. If I have a regret, it is that he could not make a reduction in stamp duty for house purchase, as that might have given a little fillip to the housing market. Stamp duty is a ridiculous tax, and I have not the faintest idea why it was ever introduced. I know that it raises considerable revenue for my hon. Friends in the Treasury, but the sooner it finally goes the happier I shall be.

Let me touch on the macro-economic position. I accept that interest rates must stay, and I appreciate the Chancellor's point that he did not want to suddenly bring them down and then have to put them up again; that would create instability. Likewise, I hope that he has got the position right in believing that his fiscal measures are sufficient to sustain interest rate monetary policy as it is. I respect his judgment that there was no need for any stronger taxation measures than he imposed to avoid putting up interest rates in the future. I profoundly hope that that is right, but it is a tightrope along which he tiptoed with great elegance and skill, as one would expect of someone with his family background.

For two reasons, I did not agree with my hon. Friend the Member for Staffordshire, Moorlands (Mr. Knox) when he said that it would be better not to have increased indirect taxation, but that we should have increased direct taxation. First, that would have put the basis of direct and indirect taxation out of balance, which is the last thing that we want to do.

Secondly, ever since the Government came to power, our policy has been to switch from direct to indirect taxation. Direct taxation is a tax on effort, enterprise and work, whereas indirect taxation is a tax on spending. At this time it was necessary to curb spending, but not necessary to impose a burden upon work and enterprise. Therefore, I support the Chancellor's increase in excise duties—quite apart from the alleged effects on health of smoking and drinking.

The Chancellor described this as a savings Budget, and it was right and proper for him to do so. At a time such as this—when there was room for manoeuvre, and when taxation was constrained and had to be neutral—the onething that we had to do was encourage savings. He has done that splendidly, with some novel ideas. I am especially attracted by the tax-exempt special savings account, known as TESSA—I know that that will appeal to my hon. Friend the Member for Billericay (Mrs. Gorman)—which will be especially attractive to small or first-time savers. It will appeal to a wide range of people who perhaps had not thought of saving hitherto.

I was especially pleased with what the Chancellor did for unit trusts and employee share ownership, as I was a founder member of the wider share ownership movement before I entered the House. With the late Maurice Macmillan—the son of Viscount Stockton—I formed the movement, and we had a great deal of help from Lord Lever and Richard Wainwright. It was an all-party movement. We struggled desperately to get it going, as successive Governments put more burdens in the path of those who would like to invest in shares. We bumped along against a lack of Government enthusiasm, but our philosophy always remained the same: a desire to spread the wealth of the nation throughout the people.

Many Opposition Members do not understand the need to spread wealth, wanting to collect it into the hands of the state. My desire is always to distribute it, and that is why I support the privatisation programme and home ownership. I hope that that continues and has not been damaged too much by high interest rates. When people acquire savings and earners are turned into owners, they acquire a degree of independence and a stake in their country that they could never have if everything were vested in the central hands of the state. I congratulate the Chancellor on doing what he did.

One of the most creditable features of the Government is that, for the first time in living history, there are more individual shareholders than trade union members. That is a most healthy development, as it has given independence to people, enabling them to stand tall and to own a bit of our economy. That should be encouraged. I wonder whether the Chancellor had a chance to study—if not for this Budget, then perhaps for a future one—the work of the Invest in Britain Campaign. A phrase from the memorandum that it sent him said: They sought tax relief on U.K. equity investments up to an agreed ceiling held for a minimum of 12 months and the rollover of capital gains tax liability while the funds remain in U.K. equities. Perhaps the Chancellor did not go as far as the organisation would like, but his thinking was along those lines. I hope that that will be the theme for the future: the spread of ownership is essential if we are to remain a free society.

I agree with the hon. Member for Mossley Hill on the exchange rate mechanism. We are already in the European monetary system, I understand, but the exchange rate mechanism is the question mark. I understand that a decision was made at the Madrid summit to which the Chancellor, the Government and the Prime Minister are committed. Nevertheless, the sooner we can join the exchange rate mechanism the better it will be for Britain, for our economy and for business generally.

When I talk to business men, I find above all that they want stability of currency. As our erstwhile colleague Sir Leon Brittan—now a European Commissioner—said in a remarkable speech, it is heartbreaking for businesses to work out their activities, to produce things at the right cost, to allow for a sensible profit, to have people working on a scheme and to arrange exports, and then suddenly to find that they are blown off course by a weird movement of currency over which they have no control. As the CBI says, they would welcome an early entry into the exchange rate mechanism. They would accept that there is a discipline attached, and that it is not an easy, soft option.

When the late Lord Stockton urged entry of the Common Market, he said that it was not a warm Turkish bath, but a cold bracing shower. However, for the sake of stability, a degree of discipline is acceptable. So we should look again at the Madrid summit conditions and, if they seem excessively rigid, reconsider the situation, if that means a chance of us getting early into the exchange rate mechanism and securing stability for the future.

I believe that this will prove to be a remarkably successful Budget in difficult circumstances and that the Chancellor will prove to be one of the great Chancellors of our age.

Debate adjourned.—[Mr. Sackville.]

Debate to be resumed tomorrow.