Finance Bill

HC Deb 01 May 1990 vol 171 cc934-1001

[Relevant document: Fourth Report of the Treasury and Civil Service Committee of Session 1989–90 on the 1990 Budget (HC314)]

Order for Second Reading read.

5.42 pm

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

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

The Bill implements the measures introduced by my right hon. Friend the Chancellor of the Exchequer in his Budget. As a background to today's debate, the House has the benefit of the report of the Treasury Select Committee on the Budget. The report is thoughtful and thorough. As my right hon. Friend said in his Budget speech, this year we have provided a longer and more comprehensive account in the Red Book of the operation of monetary policy. I hope that, as we intended, it has been useful to the Select Committee in its inquiry. This is not the time for me to comment on the report in detail. The Committee has made several recommendations, which we are studying carefully and to which we shall respond fully in due course. However, I shall refer to one or two points in the report.

I note with interest the Select Committee's view that reserve asset ratios are not, as is sometimes suggested, an alternative monetary instrument to interest rates. The Committee report suggests that reserve asset ratios do not serve as direct credit controls.

I also note with interest the Select Committee's anxiety about the retail prices index as a reliable, or unreliable, indicator of inflationary pressures. To some extent, the Committee's comments echo remarks and observations made by the Government on other occasions.

The Select Committee's remarks about statistics are also interesting. It is always tempting, although on the whole it is a temptation to be avoided, to blame any problem of economic management on misleading statistics. Harold Macmillan referred to the difficulty of trying to steer the economy on the basis of statistics. He compared it with looking up train times in last year's Bradshaw. More recently, the right hon. Member for Leeds, East (Mr. Healey), in his highly entertaining memoirs which I read at Christmas, said of economic forecasts: Like long-term weather forecasts they are better than nothing … But their origin lies in the extrapolation from a partially known past, through an unknown present, to an unknowable future according to theories about the causal relationships between certain economic variables which are hotly disputed by academic economists, and may in fact change from country to country or from decade to decade. At the time of the 1988 Budget, we believed—on the basis of provisional estimates—that domestic demand had risen by 4 per cent. in 1987. The latest estimate is that demand increased by 5½per cent. In a situation where we think that the sustainable long-term growth rate may be a little under 3 per cent. a year, this makes the crucial difference between an economy growing at close to its sustainable rate and one growing well in excess of it. That was precisely the point that the Committee made.

The state of economic statistics has been a concern of the Select Committee for some time now, and there has been some interchange between the Committee and the Treasury on this. I am glad to see that the Committee believes that that has been fruitful. As the Chancellor told the Committee in his evidence on 3 April, it is both desirable and necessary to improve the general quality of economic statistics, and this is being pursued with the Central Statistical Office. We shall return to the Committee and reply fully to those points.

The debate on the Finance Bill usually becomes a debate on the tax measures and on the economy more generally. No doubt we are about to hear from the hon. Member for Derby, South (Mrs. Beckett) a long catalogue of gloomy prognostications, as we heard from the right hon. and learned Member for Monklands, East (Mr. Smith) the other day. The understandable anxiety about inflation, and the current account, should not be allowed to disguise the real gains and improvements that the British economy has made in the past decade.

I am not sure whether the Opposition really believe it when they claim that nothing has gone right and that there have been no improvements whatever in the past decade, but in my opinion they do no service to their party—let alone any wider interest—with that distorted view.

The Opposition seem content to point selectively to the fact, which is not disputed by the Government, that the British economy will grow more slowly than Germany or the EC average this year, without even so much as acknowledging that, on average, over the 1980s the United Kingdom growth rate has been significantly above that of Germany and the EC average. And even with the slower growth forecast for 1990, the United Kingdom will have grown faster since 1980 than Germany or France. The Opposition concentrate on one year at the expense of a decade. The fact that I mentioned is remarkable, but it is never mentioned. I wonder why.

The Opposition are also prepared to point out that our relative inflation rate this year will be considerably worse than the European Community average, without so much as mentioning that for the past 10 years our inflation rate has been broadly the same as—in fact, only 0.1 percentage point above—the European Community average since May 1979. That is a considerable improvement on the previous two years.

The Opposition are again content to point out that investment will fall this year, without acknowledging for one moment that business investment growth since 1980 has been faster here than in all the major seven countries except Japan.

Although it is much mentioned by independent commentators, the Opposition have never in my hearing mentioned the fact that United Kingdom manufacturing productivity growth was faster in the 1980s than all the other G7 countries. It will probably not be long before they mention that this year productivity will slow down as the economy slows down. Again, that is a statistic for one year which needs to be set against the progress of a decade.

Most remarkably, we never hear the Opposition mention that on a standardised basis United Kingdom unemployment is below that for the European Community as a whole. When have we ever heard from the Opposition about the remarkable transformation in profitability of British industry or about the remarkable improvement in industrial relations compared with those a decade ago? If the Opposition are as concerned about manufacturing industry as they profess to be, they should acknowledge those two factors because both are essential for the survival and growth of manufacturing industry.

These are solid achievements in the past decade. The Opposition may dispute them, but other less partisan observers are prepared to be more realistic. An article in The Independent yesterday by the director of the Institute of Fiscal Studies is a case in point. In that article, Mr. Bill Robinson drew the connection between the lasting supply-side improvements and the performance of our exports. He wrote: UK exporters have broadly managed to hold their share of world markets with no help from the exchange rate. This is an important change, for as long as we were losing market share, we were condemned to a slower rate of growth than our competitors. It is no coincidence that in the 1980s we moved from near the bottom of the world growth league to near the top. The structural improvements in the economy which wrought that transformation are still in place. There is no reason why the 1990s should not be another decade of steadily improving economic performance.

Mr. John Battle (Leeds, West)

The Chief Secretary may be aware that the Engineering Employers Federation published its economic trends survey only last week. It pointed out that there are fundamental structural problems facing the engineering industry because the demand for engineering products outside the United Kingdom is falling rapidly and that will mean the loss of 19,000 jobs in the coming year. It does not paint such a rosy picture as the right hon. Gentleman does. That does not suggest that the Opposition have a partisan view.

Mr. Lamont

There has been a remarkable increase in engineering output in recent years and a remarkable increase in investment in the engineering industry. It has never been disputed that there will be a slow-down, but our point is that people should not look at that slow-down in isolation. They should look not at the statistics for one year, but at the dramatic progress that has been made over a decade.

The hon. Member for Leeds, West (Mr. Battle) might like to look at the annual survey of the United Kingdom economy last autumn by the Organisation for Economic Co-operation and Development, which again pointed to our improved supply-side performance and compared it both with past performance and with the progress of our competitors. It compared the improvement in the balance between output growth and inflation in the 1980s with that from 1973 to 1979: suggesting that there have been policy induced improvements in supply performance … the deterioration in performance in the 1970s has been reversed and compared with other Member countries, there has been a relative improvement.

Mr. John Townend (Bridlington)

Does my right hon. Friend agree that as the engineering industry is facing problems, its answer is to look abroad? It is essential that it keeps down unit labour costs. Does he agree that the unions were very unwise this year to press for a shorter working week, which increases unit labour costs and reduces competitiveness?

Mr. Lamont

I am sure that that is the last thing we can afford at the moment. My hon. Friend is right. Fortunately, exports of manufactured goods, including exports of engineering goods, have been doing extremely well.

Sir Peter Hordern (Horsham)

Conservative Members must concur with all that my right hon. Friend has said about the excellent record of British industry and of the economy in general over the past 10 years. Is it not the case that engineering companies are now complaining about difficulties ahead? Is it not also the case that wage increases are now rising fast? Is it not important for my right hon. Friend and the Government to make it absolutely clear that the Government will not bail out companies which award large wage increases by depreciating the currency against other major currencies? It would be most helpful for my right hon. Friend to say that.

Mr. Lamont

We will make that clear. We have repeatedly made it clear that excessive wage claims will not be accommodated by a relaxation of monetary policy and that if wage negotiators on either side insist on inflationary wage settlements, the main effects will be felt in the labour market.

My hon. Friend the Member for Horsham (Sir P. Hordern) referred to industry. It was interesting that yesterday the director general of the Confederation of British Industry in a speech again referred to the progress that has been made in manufacturing industry in the past decade. He referred to the period before 1979 as one of relative decline and social disintegration and then said: That era ended thank goodness in 1979. The new era could perhaps best be labelled 'the era of free market competition'. That is the considered view of the director general of the CBI. He went on: We enter the 1990s with the supply side of the British economy in incomparably better shape than at any time in our history. The view that there has been a fundamental transformation of our underlying competitiveness is the view taken by the director of the Institute of Fiscal Studies, by the OECD in its survey of the British economy, and by the director general of the CBI. Apparently everybody is out of step except the Labour party. Who should we believe—the OECD, the CBI, the Institute of Fiscal Studies or the Labour party? Which is the dispassionate observer and which has a vested interest?

Perhaps the director general of the CBI had the Labour party in mind when he said: We must believe in ourselves. Too many damaging myths have gained currency—myths which if unchallenged will prejudice our ability to build on what has already been achieved. I believe that a constructive Opposition would recognise that there have been tremendous improvements in the past decade and that that is an opportunity on which they should be seeking to build, and to suggest a way ahead and improvements rather than attempting to make us believe that there has been no progress.

Mr. Alex Salmond (Banff and Buchan)

I hope that the Chief Secretary will tell the House what implications he feels that the coming changes in the poll tax will have for the Budget projections. When the changes are introduced, will they be backdated for Scotland to cover the year in which the Scottish people have borne the full brunt of the poll tax unamended? Will the retrospective changes, if introduced, be funded from the Treasury or merely recycled from Scottish Office funding?

Mr. Lamont

The hon. Gentleman gets 10 out of 10 for ingenuity, but that has nothing to do with the Finance Bill and he will not tempt me.

Our present concerns stem from the excessive growth of 1987 and 1988. That lies behind current concerns about inflation and the current account. That period was one when, incidentally, the Labour party continually claimed that we were not growing fast enough, continually described the economy as being in recession and called continuously for even larger stimuli to be given to the economy.

The fact is that, precisely when the Labour party was calling for further expansion, we had a period of too rapid growth when demand for goods both from companies and from consumers outstripped even a much improved supply-side performance. This has produced an inevitable reappearance of inflationary pressure although the underlying rate is still below the best achieved by the Labour Government and the percentage rise in underlying inflation since 1986 is not out of line with the increase in the United States, Japan or Germany.

We have tightened policy considerably. A tight monetary policy—high interest rates—has been backed by a tight fiscal stance with large budget surpluses. There is clear evidence that the economy has slowed considerably. The evidence can be seen in the housing market, in retail sales and in motor car registrations. Real domestic demand is forecast to fall slightly this year following growth averaging 5 per cent. over the previous three years. Although the monthly trade figures for March were disappointing, the underlying trend suggests that exports are growing far faster than imports.

In the past six months, exports have been up by 11 per cent. compared with a year earlier, whereas imports have risen by only 1½per cent. in the same period. The CBI quarterly trends survey provides further evidence that the decline in domestic demand has been broadly offset by continued expansion in export orders. The evidence is there to suggest that firms are switching from the home market into export orders on a considerable scale.

The Budget was designed to maintain our tight policy stance. Some have complained that it was not tough enough and some have suggested that taxes should have been raised. To have had any real impact, we should have needed a substantial increase of, say, £5 billion, which in our judgment would have risked pushing the economy into an unnecessary recession and damaging our improved supply-side performance. The Government's expectation is that the current policy will prove tight enough to bring down inflation.

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

The Chief Secretary is fond of referring to a consensus of commentators. Does he accept that a consensus of commentators—even the same ones as he has been quoting—would not agree that the Government's policies enable them to get inflation down to their forecast level of 31 per cent. by 1992?

Mr. Lamont

I do not accept that. The hon. Gentleman may have noticed in the Financial Times last week that a range of outside forecasts were placed alongside Government forecasts and published in tabular form. There were about 30 in all. The difference between those outside forecasts and the Government's forecast was not all that great. Indeed, some of the outsiders were even more optimistic.

The years leading up to 1988 and 1989 saw a remarkable increase in confidence and profitability, combined with the freeing of financial markets. These factors provided both the incentive and the means for a huge boom in business investment—perhaps the biggest since the war. Between 1986 and 1989, companies and public corporations increased their fixed investment by more than 40 per cent. in real terms. Over the eight years to 1989, investment has grown twice as fast as consumption. But although investment has grown rapidly, personal saving has been falling. Individuals, enjoying steadily rising real incomes, have had the confidence to borrow more and save less. As a result, private saving overall has been insufficient to match the high level of investment; indeed, the excess of private investment over private saving has been quite unprecedented in the post-war period.

The need to restore the balance between savings and investment is especially important for the current account. Just as a company which invests more than it saves via retained earnings has to borrow from elsewhere, so a nation which invests more than it saves must borrow the balance from abroad. In other words, the current account will be in deficit. The public sector has been in substantial surplus, but this has been more than offset by the private sector's borrowing from abroad to finance the investment boom. Higher interest rates are already boosting saving, but the Budget and the Finance Bill also contain further measures to bring saving and investment back into balance, which is important for the current account.

The Budget was a Budget for savers, and the Bill contains a whole range of tax incentives which will help to improve the climate for saving. Conservative Governments have always made it their business to support the saver. Anyone who put his money in a building society in 1979 will have seen the value of his savings rise by a half in real terms before tax. Savers are getting a much better return, and rightly so. Under the last Labour Government, a punitive tax system made saving a worthless activity. Inflation was high and interest rates low in comparison. The real return on savings was negative and the post-tax return was fiercely negative.

Nor was the investment income surcharge, as Labour Members often imply, confined to the so-called super-rich. When Labour left office in 1979, the surcharge was payable on savings income above £1,700 a year. Investment income surcharge was payable on sums as small as that.

Mr. Eric Martlew (Carlisle)

Does the Chief Secretary agree that, when the Conservative party took office, inflation was running at 10.3 per cent. and that it is likely to have been running at more than 10 per cent. this April? Does not that mean that we have had 11 wasted years of Conservative Government?

Mr. Lamont

I thought that the statistics were so well known that it was hardly necessary to rehearse the average rates of inflation under this Government and under the Labour Administration respectively. Even now, at the high point of the cycle, the underlying rate of inflation is below the lowest level ever achieved by the Labour Government. But that is a slight digression from my main point about savings. Given the situation that we inherited, it is small wonder that one of our first priorities was to reduce marginal rates, and this we have done. Successive cuts in income tax and the abolition of the investment income surcharge mean that for many savers—not just higher rate taxpayers but basic rate taxpayers, too—marginal rates have been halved.

We have made saving worth while. One of the welcome results has been the rise in pensioners' average net incomes, which between 1979 and 1986 went up by more than 30 per cent. in real terms.

Mr. Giles Radice (Durham, North)

If the Government's policy on saving is so good, how come the saving ratio is at an all-time low whereas when the Labour Government were in power the savings ratio was about double what it is today?

Mr. Lamont

Perhaps I did not make myself sufficiently clear. As I tried to explain, the problem has not been hat people have not been saving in the sense of putting money aside from their earnings. The problem has been that net savings, measured after borrowing, have fallen. The trouble is that people have had confidence and have been borrowing more than ever before. That applies not just to individuals but to companies, and companies do not borrow unless they have great confidence in the future.

Our next priority has been to ensure that the choice in different savings instruments is less distorted by the tax system. For example, if one transfers money from a bank to a building society, no tax charge is incurred, whereas if one transfers it from a bank into equities one has to pay a surcharge in the form of stamp duty. In 1979, the surcharge was as high as 2 per cent. It was hardly surprising that direct share ownership was going out of fashion.

My right hon. Friend the Member for Blaby (Mr. Lawson) halved the rate in 1984 and again in 1986. This year we have gone one step further. Clauses 91 to 95 will finally put an end to a duty which was introduced in 1714, the year of Queen Anne's death. I regret to say that the tax was introduced by a Tory Chancellor of the Exchequer, so this change represents something of a delayed U-turn, although my hon. Friends will welcome it none the less.

Abolition will coincide as far as is possible with the introduction of paperless share transactions by the stock exchange, probably at the beginning of 1992. It will ensure that the City of London enters the European single market in as competitive a position as possible. It will also ensure that share ownership continues to widen and deepen. One in four adults in Britain now owns shares; in 1979, the proportion was just one in 14. That has been a remarkable change. But the benefit of abolition will not just be confined to direct shareholders. Most of the full year cost of £800 million will go to benefit the tens of millions of people who save indirectly through the institutions—in life assurance, pensions and unit trusts.

As well as removing distortions, we have in recent years created new savings media which allow people to accumulate capital, unencumbered by demands for income and capital gains tax. Nearly 4 million people have now taken out personal pensions; 2 million employees have been given shares or options to shares through employee share schemes, again showing that the benefits are not confined to a few rich people; and 700,000 savers have taken out personal equity plans. The number is likely to grow further in the year ahead as savers take advantage of the 25 per cent. increase in the PEP limit announced in my right hon. Friend's Budget.

The success of the schemes has surpassed expectation. And the Government have decided that it is time to extend similar tax treatment to saving through banks and building societies. That is how most people—34 million of them—save. That is why we are introducing tax exempt special savings accounts under clause 23.

The attraction of the tax exempt special savings account is essentially its simplicity. It is necessary only to deposit money and leave it there for the full five years of the account and the saver gets his or her return tax free. Savers can withdraw interest as it accrues, albeit on a net of tax basis, or they can leave it to roll up. In either event, they will be entitled to the tax paid at the end of the five-year period. I believe that that is a considerable break-through and much to be welcomed.

The tax exempt special savings account will suit a wide variety of savers. The pensioner with a small capital sum will be able to put up to £3,000 in his account in the first year and £1,800 in subsequent years up to a total limit of £9,000. The younger person, perhaps saving for a deposit on a flat, will be able to put an annual bonus into a TESSA or, if it is more convenient, enter a contractual arrangement saving up to £150 a month.

Of course there have been contractual savings schemes in the past, but they were largely designed to raise money for the Government. The TESSA scheme is completely different. The banks and building societies will be free to offer competitive interest rates. I have no doubt that the scheme will prove immensely popular when it begins in January 1991. As the marketing manager of one of the clearing banks said: This is what the banks and building societies have wanted for years. It will do a lot to encourage the small saver and we will be aiming to introduce the TESSA account as soon as possible. Complementing those measures will be the abolition of the composite rate tax which will be the seventh major tax to be abolished by the Government. When composite rate tax was first put on the statute book in 1951, it affected fewer than 3 million building society depositors. It could be justified on the grounds that it was simple, easy to administer and that there were alternative savings media which attracted interest gross of tax.

The composite rate tax system may have had its administrative attractions for the Government, and for the Treasury in particular, but the advent of independent taxation weakened the case for it considerably. As a result, the number of non-taxpayers paying composite rate tax rose to 14 million and the Government decided that it was time to change the system. From April 1991, non-taxpayers will be able to receive their building society or bank interest free of tax. Five million married women, 4 million pensioners, 2.5 million children and 2.5 million other depositors with low incomes will benefit by an average of £1.40 a week. The relevant clauses will be introduced in Committee.

Mr. Michael Stern (Bristol, North-West)

Does my right hon. Friend agree that one of the most admirable aspects of that abolition is the element of self-certification for tax-free status, which shows a greater—and justifiable—trust in the taxpayer than many Governments have dared to show in the past?

Mr. Lamont

I am grateful for my hon. Friend's observations. Obviously abolition also has administrative advantages. I believe that it is better to put the compliance obligation on the taxpayer. I wholly concur with my hon. Friend's point.

Mr. Denzil Davies (Llanelli)

Will the right hon. Gentleman confirm that of those paying CRT, although a minority will not pay tax, most depositors will pay more because they will pay at the standard rate? The Government will raise quite a substantial sum of money next year as a result of that change.

Mr. Lamont

We cannot abolish the CRT and expect people who ought to pay the basic rate of income tax not to pay it. That was the whole theory of CRT. There was a weighting between the non-taxpayer and the taxpayer. It was a subsidy to the better off and enormously unfair on the less well off. I am surprised that the right hon. Member for Llanelli (Mr. Davies) intervened on behalf of the better off.

Mr. Jeremy Hanley (Richmond and Barnes)

With the standard rate of taxation, personal allowances can be taken into account, which reduces the rate very much lower than the rate to which the right hon. Member for Llanelli (Mr. Davies) referred.

Mr. Lamont

My hon. Friend is absolutely right and I am grateful to him.

I have said that the relevant clauses on CRT will be introduced in Committee. I must state, as I have indicated to the Opposition, that that is not the only measure announced in the Budget which will be tabled in Committee. That reflects pressure on parliamentary counsel, the need to consult interested parties and, of course, the need to get complex and far-reaching measures absolutely right.

An improved environment for savers will in time also feed though to an improved environment for investors. That is the recipe for balanced growth. However, the Bill contains a number of measures designed to have a more immediate effect on businesses. For example, clause 19 will increase the small companies' tax thresholds to £200,000 and to £1 million and will reduce the tax burden for 20,000 companies. That means that no company with profits of less than £1 million will pay the full rate of corporation tax.

Since the Government took office, the lower threshold has increased by more than 60 per cent. in real terms and the higher threshold almost fivefold—and that is on top of a reduction in the small companies corporation tax rate from 42 per cent. to 25 per cent. As a result, we can now fairly claim to have one of the most favourable tax regimes for small firms anywhere in the world. Even though the economy has been slowing down, new businesses are still being created at the rate of about 1,500 a week after netting off failures. That is a dramatic change from the time when the Labour party was in office and there was a net fall in new business creation.

Small firms will also benefit particularly from the VAT changes. The VAT changes in clauses 9 and 10 will reduce burdens on business and they represent a major package of deregulation. By allowing VAT relief on all bad debts, those clauses end an anomaly whereby companies in effect pay tax on money that they did not receive. Registration for VAT will also be easier. The vast majority of firms will no longer be subjected to three complicated turnover tests. Instead, there will be just one simple test based on turnover in the previous year. That should be of particular benefit to new businesses.

Employee share ownership trusts were given a statutory basis in last year's Budget with support from hon. Members on both sides of the House. My hon. Friend the Member for Esher (Mr. Taylor) has been a veteran campaigner on that issue and the hon. Members for Newcastle-upon-Tyne, East (Mr. Brown) and for Pontypridd (Dr. Howells) have also strongly supported that principle. I believe that support for ESOPs is strong among Conservative and Opposition Members.

If ESOPs are to become widespread, they need further encouragement. At present, if a proprietor sells shares in his company to his work force he incurs an immediate capital gains tax charge. If, on the other hand, he sells them to a quoted company—a point that was brought to my attention last year by my hon. Friend the Member for Esher—in exchange for shares, he qualifies for roll-over relief. That is an enormous disincentive to creating an ESOP and clauses 25 to 32 will ensure that that position is changed. The owner who sells shares in his company to an ESOP will now qualify for roll-over relief.

The Bill also contains a small but useful measure to help training. Training and enterprise councils will give the private sector new opportunities to determine its own needs and to help meet them. The Government believe that employers are best placed to decide the training needs of their businesses and to organise appropriate training. Clause 68 will ensure that contributions by businesses to support. TECs are tax deductible. That new relief will give a further incentive to businesses to make donations to TECs.

Clause 20 will ensure that nurseries provided by employers will no longer be treated as a benefit in kind for income tax purposes, as has been the case since 1948. We have always taken the view—and previous Governments have also taken the view—that it is not for the Government to encourage or discourage women with children to work through the provision of artificial tax incentives or disincentives. We remain of the view that, in general, benefits in kind should be subject to income tax. However, it was becoming increasingly apparent that the tax treatment of workplace nurseries was difficult to collect and functioned as something of a disincentive both to people wanting to return to the labour force and to employers.

The measure has been criticised by some as not going far enough, but general child care relief would cost hundreds of millions of pounds and would run counter to the dominant thrust of tax reform in recent years—that is, to achieve a wider tax base with much lower marginal rates.

We have instead opted for a limited relief, which in my view represents a sensible balance between the needs of the tax system and widespread demands for change. The new exemption will involve only a small deadweight cost and, with its focus on the place of work, is consistent with the tax treatment of other benefits in kind such as canteens provided at the employment location.

The final business measure that I should like to mention relates to banks' sovereign debt. Tax relief is, as it should be, available to banks, as to other lenders, for bad and doubtful debts. That includes debts owed to banks by foreign Governments. Clause 66 tackles the thorny problem of the tax treatment of the writing off by some banks of substantial proportions of such debt. The present law is uncertain. To allow banks to claim relief on the full amount written off in any one year could have a significant adverse impact on tax revenues. The proposed clause will allow banks to continue to offset their losses fully against tax, but the losses will have to be phased over a period of some years. The exact phasing permissible will be broadly based on the Bank of England's matrix. If a debt is sold to a third party, the tax relief will be similarly phased. If the debt is sold back to the debtor, however, relief will be immediately available.

Mr. Peter Viggers (Gosport)

An important point of principle is involved here. The directors of a company arid its auditors should be responsible for assessing the profits of a company, and that company should be taxed accordingly. Clause 66 will, in effect, deprive a company of sovereign debt write-offs to which it would otherwise be entitled. Does my right hon. Friend agree that this is a windfall profits tax and that it would be quite right for the Committee to look carefully at it?

Mr. Lamont

That issue can be debated further, but the present system is extremely uncertain. As I said, the effect of the measure is to phase relief. Relief is obtained in the end, but enormous sums of money are at stake. The measure smoothes out the sudden increases in cost to the Exchequer. In the end, no one is denied relief. To that extent, I do not entirely go along with my hon. Friend's intervention, but the issue can be returned to in Committee.

Sir William Clark (Croydon, South)

Surely, although relief will be given eventually, the cash flow of a business is affected. If the relief is confined to banks, why should it not be extended to international companies which also have overseas debts?

Mr. Lamont

We are dealing with sovereign debt. That is the key difference. The existing law provides relief for debt to the extent that the principal is estimated to be irrecoverable. It is very hard to make an estimate for sovereign debt, and it seems reasonable to prescribe the detailed method and to provide a smoother profile. The principles on which tax relief is given remain the same, but the legislation is not restricted only to banks. I do not accept that this measure will have any adverse or significant effect on the standing or position of banks.

Sir Peter Hordern

Will my right hon. Friend give an assurance that no bank will be unable to reduce its liability to sovereign debt to keep up its capital adequacy ratios simply to conform with the best position that it should have to get the maximum tax advantage?

Mr. Lamont

I cannot give that assurance. I shall look at what my hon. Friend has said. If the situation is otherwise, I shall certainly indicate it to him.

If the House will allow me, I now move from sovereign debt and the banks to the slightly more popular subject of football. Few of the measures in the Bill have met with such unqualified approval on both sides of the House as the reduction in pools betting duty, made under the condition that the pools promoters pass on the full amount to the Football Trust, to be used to implement the recommendations made by Lord Justice Taylor. A new clause will be introduced to implement that reduction, which will result in an increase of about 100 million in the amount that the Football Trust will be able to make available towards improving comfort and safety at football grounds. I am sure that this measure will go a long way towards making football more attractive and restore its image and its rightful place as our national game and a safe game.

One of the results of lower tax rates and higher take home pay is that people have more disposable income to give to charity. The Government have consistently encouraged that, and since 1979 charitable giving has more than doubled in real terms. This year's Budget continues that approach. In 1987, my right hon. Friend the Member for Blaby introduced the payroll giving scheme. [Interruption.] More than 175,000 people are now participating, and donations are now running at more than £7 million a year. Clause 22 will encourage the further expansion of such schemes by raising the annual limit by 25 per cent., from £480 to £600. Opposition Members are obviously unimpressed by that progress but, of course, charities are much more enthusiastic than Opposition Members. I sometimes suspect that the real reason for Opposition Members' scepticism is their basic hostility to private giving rather than any doubts about the mechanics of the scheme.

For the first time, we intend also to allow relief on one-off donations. The gift aid scheme, which was announced in the Budget, will give relief on gifts of between £600—the annual upper limit for the payroll giving scheme so it dovetails well with the payroll giving scheme—and £5 million. Organisations that benefit from large one-off donations—for instance, museums launching appeals for new galleries or major works of art—will be particularly advantaged by gift aid. The Government will be bringing forward a new clause in Committee to give effect to this proposal. The combined effect of the two measures should be a further substantial increase in charitable giving. Opposition Members are sceptical, but the Charities Aid Foundation has estimated that charities might take in an extra £50 million as a result of the measures in the Bill.

There is one notable and unusual feature in this year's Finance Bill. Clause 16 leaves the main rates of income tax unchanged. It is a measure of our success in cutting taxes that this is the first Budget and Finance Bill not to cut taxes or national insurance contributions since 1981. We may not be cutting income taxes this year, but we certainly have done so over the past 10 years. If the bands and allowances that we inherited in 1979 had merely been indexed to inflation and we had maintained the same rates, a married man on average earnings would today be paying more than £1,000 per year more in income tax.

It remains the Government's intention to cut taxes further and to move towards a basic rate of income tax of 20p. Our strategy, policy and commitment are clear. I only wish that the Opposition would be as forthcoming about their intentions on taxation, which remain shrouded in mystery. I always wondered what the Leader of the Opposition meant when, after their election defeat in 1987, he said that what Labour needed was a "relatively blank sheet". That blank sheet is the Opposition's taxation policy—even if it is not quite a blank sheet, the key details are certainly missing. It has been a remarkable achievement by the right hon. and learned Member for Monklands, East that he has made a brilliant success of saying nothing. He has become a leading expert on the content-free review. As Hugo Young put it, he is the chief exponent of minimalism. But the electorate is entitled to more than minimalism and will demand to know the details of Labour's tax proposals—the rates and bands of the new complicated graduated system that the Opposition intend to introduce.

Opposition Members did not like it when Mr. Keating of Credit Suisse First Boston estimated that as a result of their policy many couples without children and on below average earnings would be substantially worse off. He estimated that those earning only one and a half to two and a half times average earnings could, over time, find themselves paying up to £4,000 extra in tax—[Interruption.] Opposition Members cry out at that. If those figures are not correct, let them tell us what the correct figures are. They will not say, but some of their colleagues have. Last year, the hon. Member for Kingston upon Hull, East (Mr. Prescott) gave us a snippet when he was reported in Tribune as saying It is not credible for Labour to suggest that our policies for full employment or our policies for investing in the Health Service, funded by taxation, free at the point of use, can be financed on a programme of low taxation. It can't and the electorate knows it can't. We believe in low taxes. The Labour party believes in high taxes. Another difference is that we are prepared to say what our policy is, whereas the Opposition are not. Our policies are clear and unambiguous. The Bill consolidates the progress made in the last decade, and I commend it to the House.

6.31 pm

Mrs. Margaret Beckett (Derby, South)

Some aspects of the Bill we undoubtedly welcome because we have pressed for such changes over successive Finance Bills. I pick out in particular the concessions on workplace nurseries and on pools duty, for which my hon. Friends and I have called for many a long year, and we are pleased to see them delivered at last.

We are happy to welcome other proposals, such as the increased differential on unleaded petrol and the assistance for small companies which, as the Chief Secretary said, we shall debate later. There are other proposals that we observe with interest and without hostility, although perhaps with a degree of scepticism from time to time. I pick out, for example, the Chancellor's new savings scheme, TESSA. We are not hostile to that in any way, but whether it will increase savings or merely divert those that are already being made remains to be seen.

It seemed to me—it was also evident from the Chief Secretary's speech—that the most striking aspect of the Budget and of the debates that followed it was not the advent of TESSA, intended apparently to be the key feature of the Budget, but the return in all her glory of TINA, who was even more evident in the Chief Secretary's speech today. Hon. Members on both sides will remember TINA, the figure who highlighted the Prime Minister's first few years in office—"There is no alternative."

No great shifts in policy are reflected in the Bill. Indeed, there is precious little in it. Nor was there much in the Chief Secretary's speech to reflect or address the huge and growing problems of the economy. One would not think, from the Bill or from the right hon. Gentleman's speech, that a week ago the second worst trade figures in our history were announced. One would certainly not think that that trade deficit included record imports of over £10 billion. Equally, one would not think that as we debate this measure we are awaiting what Samuel Brittan in the Financial Times last week called "black Friday"—the arrival of the next set of inflation figures next week, safely of course after the local government elections.

Mr. Hanley

rose——

Mrs. Beckett

No, I will not give way.

Not only does the Bill tell us little about those problems, but Ministers tell us little about the state of the economy.

Mr. Hanley

rose——

Mrs. Beckett

I told the hon. Gentleman clearly that I would not give way. I will do so later.

The Finance Bill tells us that the economy is in a mess and that the Government do not know what to do about it, except to reiterate that there is no alternative to the policies that they are following. Worst of all perhaps is not what the Bill fails to say about the problems that we are experiencing, but what it fails to say about the problems of the economy of tomorrow and of all our tomorrows. It addresses in no way the shape of the economy in 1992, let alone in 1993, 1994, 1995 or at any time in the future not bounded by the next general election.

We said when the Budget was launched that it was a Budget for the next 10 days rather than for the next 10 years. It is an increasingly moot point which of its forecasts and prescriptions will survive the next 10 weeks. When Ministers talk about the problems of the economy, as was evident from the Chief Secretary's speech, as opposed to their paeans of selective self-praise, they do so only to assert that those problems are purely temporary.

Ministers seem to have stopped—the Chief Secretary did not use the word once in his speech—using the word "miracle", or perhaps even that is temporary. Even so, the rest of the rhetoric is still there. They continue to talk about greater growth and about a new indicator for inflation. The Chief Secretary used that phrase, and I shall study it with interest to see whether it stands up any better than some of the other phrases that they have used. We have had a new description of levels of employment or unemployment. There has not been much about investment, except for misleading statistics on business investment, and nothing about research and development.

In common with most of the statistics that Ministers use about their record, they are highly questionable at best, particularly when we examine the whole period for which the Conservatives have been in office. The Chief Secretary said, unusually for a Minister, that it was right to look over their whole period in office. I shall remind the right hon. Gentleman of that when, in other debates, he quotes—as he no doubt will again as he has in the past—a set of statistics from 1981, another from 1983 and yet another from 1985, depending on the best and most selective period to choose. The Conservatives' record over their whole period in office looks nothing like as flattering as Ministers normally describe it.

Particularly worrying is the theme of the Chief Secretary's speech, which is that our problems are temporary and soon will he resolved. He was scathing about people who do not believe that there has been a miracle—although he did not use that word today—and who do not believe that there has been an enormous underlying improvement in the economy.

I refer the right hon. Gentleman to the observations of Mr. Martin, the adviser to the Select Committee, who referred to the optimism that the Treasury and the previous Chancellor enjoyed for so long. Perhaps at this stage I should set the record straight by telling the Chief Secretary that my hon. Friends and I were not amused or critical of the Government's proposals on charities, although no doubt we shall debate them. We were amused that the Chief Secretary had dared to mention the name of the departed figure, the man who is not to be referred to except to be blamed for all the mistakes—the right hon. Member for Blaby (Mr. Lawson). [HON. MEMBERS: "Where is he?"]

Although the Chief Secretary may have omitted that, he referred to the claim relating to the background to the former Chancellor's remarks. So I direct him to Mr. Martin's observations about the special circumstances that the Government enjoyed in the late 1980s which created the appearance of greater strength than was there in the economy and which fed the optimism of which the Government have for so long been guilty.

When interviewed by the Select Committee, the Chancellor said that he did not know why the CBI had suggested, for example, that any improvement in the trade deficit might be temporary and that after improving it might deteriorate again. That was not quite the picture that was painted by the Chief Secretary, and was perhaps less than honest, if one dare say so, of the Chancellor.

Mr. Ward, another adviser to the Select Committee, is one of many commentators and forecasters, most of them using the Treasury model, to point out that, sadly, the most likely scenario is that, although the squeeze on inflation that the Government are presently undertaking might succeed in bringing down the balance of trade deficit, as soon as that squeeze is lifted, it is likely to deteriorate because of our propensity to import.

Mr. Hanley

How would the Labour party turn round the trade deficit? What import controls would be introduced?

Mrs. Beckett

The hon. Gentleman must have been reading some of the more hysterical contributions from the Paymaster General. We have made it crystal clear over and over again until we are bored with making it clear that we do not have the slightest intention of introducing import controls and—to save the hon. Gentleman from asking—we have no intention of introducing exchange controls either.

We recognise the Chancellor's problem and that he does not want to refer to the likely improvement in the trade deficit—if it improves, which we certainly hope that it will. The last thing that the right hon. Gentleman wants is for the public—he is not worried about the Select Committee or about hon. Members of whatever party—to realise that if his inflation squeeze works at all, the improvement may be short-lived. It is within that window of opportunity that the Government are hoping to call the next general election. I repeat that it is less than honest——

Mr. Neil Hamilton (Tatton)

rose——

Mrs. Beckett

It is less than honest for the Chancellor not to acknowledge the danger that the Treasury—and everyone else—has seen, no matter how ropey the statistics——

Mr. Quentin Davies (Stamford and Spalding)

rose——

Mrs. Beckett

The hon. Member for Tatton (Mr. Hamilton) was first.

Mr. Hamilton

The hon. Lady is advancing a partially attractive argument because she appears to be saying that the Government are not squeezing the economy hard enough. In the absence of exchange controls or import controls, to what extent would her proposals involve either an increase in taxation or an increase in interest rates at this moment?

Mrs. Beckett

The hon. Gentleman seems to be suffering from a pre-speech brief saying, "For heaven's sake, ask this question irrespective of whether it is relevant or follows on from what has just been said." [HON. MEMBERS: "No."] Well, I do not know how the hon. Member for Tatton read into my remarks that I do not think that the Chancellor is squeezing the economy sufficiently. I shall repeat what I said in case the hon. Gentleman did not catch it the first time. I said that if the squeeze that the Chancellor is applying works—we all hope that it succeeds in reducing the trade deficit—allowing for a time lag, the minute that the squeeze is lifted, the balance of trade deficit will deteriorate again.

My point, which I am happy to repeat for the hon. Gentleman's benefit, is that that is the time scale within which the Government are hoping to hold the next election, pretending all the time that the improvement that they have created is long-lasting and that the balance of payments will not deteriorate again, although they must know perfectly well from their Treasury model that that is exactly what is predicted. As I have said, that is less than honest.

Mr. Quentin Davies

rose——

Mrs. Beckett

If the hon. Gentleman is seeking to intervene on the same point, I am not sure that it will be worth giving way to him——

Mr. Davies

rose——

Mrs. Beckett

All right, I shall give the hon. Gentleman the chance.

Mr. Davies

I am grateful to the hon. Lady for giving way. As she now seems to have accepted that the major economic problem that we face is that of inflation, will she take this opportunity formally to repent of the consistent errors of the Labour party throughout 1987 and 1988, when Opposition Members continually told the Government that interest rates were too high and should be brought down and that the fiscal surplus was too high and should be lowered? If those policies had been pursued, they would have exacerbated inflation.

Mrs. Beckett

I shall come to the point about 1987 a little later, and I hope that the hon. Gentleman will rest content until I get there. However, the Dispatch Box is not quite the place for the repentence of one's sins.

If we are to judge from what the Government say now and from what they are likely to say if and when the trade deficit improves—the point at which the Government hope to have that window of opportunity—it would be wise for us to take a look at the Government's record on predictions and at how much reliance one can place on their word. I believe that it was Nye Bevan who said, "Why look into the crystal ball when you can read the book?", and I have been reading the book.

I do not want to be unfair to Conservative Members or to go back over their long period in government, so I shall go back no further than the last general election campaign. That must be fair. After all, in 1987 the Government had had two terms in office and that was the very point at which we were told that the economic miracle was in full swing and that we were ahead of West Germany and Japan. Therefore, it can only be fair to the Government to go back that far.

I shall take first the Government's statistics on inflation, which is one of the two most difficult problems that we are facing at the moment, and is what the right hon. Member for Blaby called the "judge and jury" of the Government's record. It makes interesting reading. During the election campaign and in their manifesto, the Government talked about pursuing the "conquest of inflation" and stated: We will not be content until we have stable prices, with inflation eradicated altogether. No wonder the Government look miserable at the moment.

By November 1987, five months after the election, the prediction for inflation in the fourth quarter of 1988, the following year, was 4£5 per cent. By March 1988, three or four months later, that forecast had improved and the forecast for the end of 1988 was 4 per cent. By November a little more realism had crept in and inflation for that same fourth quarter of 1988 was predicted at "a little over 6 per cent."

Mr. Norman Lamont

What does the hon. Lady think about the right hon. and learned Member for Monklands, East (Mr. Smith) who, at exactly the time to which she has referred, November 1987, said: Now is the time for cuts in interest rates to stimulate the economy … Now is the time for a programme of well planned public investment to mobilise the unused capacity", and called for a further stimulus and boost to the economy?

Mrs. Beckett

rose——

Hon. Members

Answer.

Mrs. Beckett

I am quite content to answer and have already told the Chief Secretary to the Treasury, who was in such a hurry with his quote, that I shall return to the question about what happened at that stage in 1987 and to the question about interest rates a little later. I am talking now about inflation in 1987 and about the record——

Mr. Stephen Dorell (Loughborough)

But 1987 is relevant.

Mrs. Beckett

There is no need for the hon. Gentleman to try to conduct a dialogue from a sedentary position. If he wants to come to the Dispatch Box, let him do so, otherwise he should keep quiet. I assure the Chief Secretary that I shall refer to the point that he made. That is the assurance that I gave to the hon. Member for Stamford and Spalding (Mr. Davies), and the right hon. Gentleman knows that I always keep my assurances.

As I was saying, by November 1988 inflation was being predicted at a little over 6 per cent. for the fourth quarter of that year, although in the event it was 6.5 per cent. and, instead of the predicted 4 per cent. by the end of the year, it was 6.8 per cent. The forecast for 1989 that was given in the 1988 autumn statement was that inflation would peak at some point "in the middle" of 1989 before falling back again to 5 per cent. by the fourth quarter."—[Official Report, 1 November 1988; Vol. 139, c. 824–5.] That was in November 1988.

By March 1989 and the Budget, the Chancellor was saying that the outlook was for inflation to rise a little further over the next few months—not from 4 per cent. or 6 per cent., but from 7.5 per cent.—to 8 per cent. before falling back in the second half of the year to 5 per cent. in the fourth quarter and to perhaps 4.5 per cent. in the second quarter of 1990. I repeat, that was the prediction in March 1989.

I concede at once that the prediction was half right. Inflation did rise a little and then fall back a little, but what about the prediction that was made just over a year ago of 4.5 per cent. inflation in the second quarter of 1990? I know that you, Mr. Deputy Speaker, will readily recognise that the second quarter of 1990 is the quarter that we are now entering, when predictions are just a little different.

Mr. Tim Yeo (Suffolk, South)

Will the hon. Lady give way?

Mrs. Beckett

No, not to the hon. Gentleman. That brings me to the autumn statement of 1989——

Mr. Yeo

rose——

Mrs. Beckett

I am not giving way to the hon. Gentleman—as he knows.

In the autumn statement of November 1989, the Chancellor—by this time, we are talking about the present Chancellor—predicted a further reduction in inflation.

The forecast last November was for 5.75 per cent. inflation by the fourth quarter of 1990. Alas, by March this year—only a month ago—the forecast had been revised again, to the following: A significant fall is still some months away. The position will worsen noticeably before it improves—though I now expect that it may be a little over 7 per cent. by the fourth quarter of this year compared to the 5.75 per cent. that I had previously expected"— only the previous November— but I expect inflation to fall below 5 per cent. during 1991. It is far from clear to me how any judge or jury could be expected to reach a verdict when the evidence changes with such rapidity. It is no wonder that Mr. Martin, who advises the Select Committee, stated that the Government have "nil credibility" on inflation.

Sir Peter Hordern

The hon. Lady started her speech, by saying that she would concern herself with the future—and she is now talking about forecasts. I am somewhat confused as I thought that she had ruled out any question of import controls and exchange controls. However, so far as we have been able to establish, the Labour party is in favour of lower interest rates and more public expenditure. The latest assurance from the right hon. and learned Member for Monklands, East (Mr. Smith) is of a guaranteed minimum wage. Will the hon. Lady tell the House by how much she expects wages and salaries to increase to keep that pledge?

Mrs. Beckett

I am sorry to tell the hon. Gentleman that there is nothing new in what my right hon. and learned Friend said—it was in the recent policy review. As I recall, the effect of that policy will be an increase in wage rates of about I per cent. The answers to the hon. Gentleman's other questions—if they were questions and not assertions—have been given repeatedly from the Labour Front Bench, and will be the subject of my later remarks.

The Government's balance of payments record is another area of considerable difficulty at present. In 1987, the deficit was £1.5 billion. We were told then that that was of no consequence because it would be covered by our earnings on invisibles. We have not heard so much about invisibles of late. In the Budget of March 1988, the then Chancellor forecast an end-of-year deficit of £4 billion. By November 1988—about five months later—the forecast was not a £4 billion deficit, but £13 billion, although falling slightly in 1989 to £11 billion.

In the March 1989 Budget—again three or four months after the autumn statement—there was no change in the prediction for 1989, although the outturn for 1988 had been £15 billion rather than the £13 billion that was initially predicted. However, by November 1989 the result for that year was not after all the £11 billion that had been predicted six months before, but £20 billion, although—of course—that figure was predicted to fall to £15 billion in 1990. That was the Budget forecast in March this year.

Although, of course, Opposition Members hope that those predictions, for once, have some accuracy, and that that deficit will fall, I am bound to observe that far from suggesting a fall from £15 billion, the annualised rate for the first quarter of 1990 suggests a further rise in our trade deficit to more than £22 billion. The Treasury and Civil Service Select Committee drew attention in its report to the Government's observations that they would expect to see the balance of payments gradually moving back towards balance. It said: This explanation and forecast is similar to that given at the time of our inquiry into the 1989 Autumn Statement." In other words, the Select Committee and the House have heard it all before. The Government say that the present difficulties do not alter the sweeping claims that they have previously made for their economic success. I recognise that the Government now admit to making a mistake, although apparently only one little mistake, made in 1987. Here I come to the point of the Chief Secretary to the Treasury and of the hon. Member for Horsham (Sir P. Hordern). Following the stock market crash, the Government lowered interest rates. I am sure that it is pure coincidence that the one mistake to which the Government are prepared to admit is one that was generally accepted as a wise move, and one that was supported by the Labour party. I concede that we agreed with the Government at the time that it seemed wise for interest rates to be lowered temporarily because of the possibility of a slump. What we have never agreed with or accepted is the path that the Government continued to follow which led directly to the 1988 Budget and the tax cuts that were made in it. There is no doubt that if that is the only mistake that the Government have made—and I do not notice them admitting to any more—it must have been a beauty as we are still feeling the effects and paying for it now. That will continue to the middle of 1990 at the best.

What is worrying is that sometimes Opposition Members have the impression that the Government really believe that that is the only mistake they have ever made. The Opposition argue that there have been others, the biggest being not the fact that the Government lowered interest rates in the autumn of 1987, but that they went on to add to demand by the huge tax cuts of 1988. They added to those tax cuts the grossly inflated rhetoric of the economic miracle—the stuff about Germany and Japan bringing up the rear. Those tax cuts were not only unjust, but a profound misjudgment of what our economy needed——

Mr. Quentin Davies

rose——

Mr. Neil Hamilton

rose——

Mr. Ian Taylor

rose——

Mrs. Beckett

I take the point raised by the Chief Secretary to the Treasury. We believe that those resources should have gone into a planned programme of investment in our economy. That is the choice that the Labour party would have made. Those resources were available to the Government. Sadly, they are not available now because the Government have used that money for tax cuts that have fuelled demand and the growth of credit in the economy.

Mr. Quentin Davies

rose——

Mr. Ian Taylor

rose——

Mrs. Beckett

I shall not give way again to the hon. Member for Stamford and Spalding (Mr. Davies). I have been speaking for 25 minutes and I am barely halfway into my speech. I may not give way for some time.

Apart from the Government's constitutional dislike of admitting that they have ever made a mistake, they have another important reason for refusing to accept the part that they played in causing our problems by the tax cuts of 1988. They do not want to admit that those tax cuts fuelled the explosion of spending and the demand for credit because they want to do it again. That is how they are hoping to win the next election—by either the promise or the performance of further income tax cuts.

Mr. Ian Taylor

rose——

Hon. Members

Give way.

Mrs. Beckett

I have given way on a number of occasions and I shall not do so again—if I do at all—until I have made substantially more progress.

The Government have tried to claim credit for trying to teach the British people that there is no such thing as a free lunch, but they are incredibly reluctant to apply that lesson to Government policy. The harsh reality is that we are paying now for the profligacy of 1988 with increases in mortgage rates, rents, the price of electricity, gas and water, prescription charges and bankruptcies, a collapse in the construction industry and, as sure as night follows day, inevitable increases in unemployment.

One of the shabbiest tricks that the Government have recently employed is that they have sought to pretend—as they did in their evidence to the Select Committee—that somehow the economic squeeze that they are applying to squeeze out inflation does not bring with it, as they know it does, the expectation of a rise in unemployment. My hon. Friend the Member for Norwich, South (Mr. Garrett) challenged the Chancellor on that point in the Select Committee, but he refused to take it up. I hope that the Government are not pretending that if unemployment rises this year—we hope that it does not—it will be purely as a consequence of wage increases. They know that that is not true. Of all the commentators and forecasters who have examined the Government model for the economy, the only one who did not say that it implied an automatic increase in unemployment because of the squeeze was the National Institute of Economic and Social Research because it predicted a further change in the manipulation of unemployment statistics. It predicted nothing different about jobs, but something different about the unemployment figures. This morning the Confederation of British Industry said that it seems likely that many thousands of jobs will be lost, especially in manufacturing, because of the economic problems that we are now experiencing. It refers especially to the high cost of finance as well as of labour.

So there is no question but that one of the consequences of the policies of the present Government is likely to be an increase in unemployment, and it is clear, too, that what is happening on the wages front—the Governor of the Bank of England made it absolutely clear in his evidence to the Select Committee when he spoke about "administered" price rises is—that wage rises are still following price rises.

The Select Committee expressed a little surprise that the diagram previously in the Red Book of unit labour costs was not in this year's, but I suspect that it is because the diagram showed that, while inflation has slowly and steadily risen in the past two or three years, wage costs have stayed remarkably stable, and that it is only when people are faced with the impact of the most recent interest rate rises, of the poll tax and of the other price increases coming through this year that wage claims have begun to rise.

Although a number of hon. Members intervened while the Chief Secretary was talking about wage costs, I do not recall hearing very much from any of them last year when a number of directors of the companies that support the Conservative party and give it a lot of money gave themselves wage increases, not of 7, 8 or 9 per cent. but of 27 per cent. or 28 per cent. That was only last year. I understand that some have already begun to award themselves increases on a similar scale this year. Yet these are the very people who benefited most from the income tax cuts in 1988; they are the very people who benefited most of all because of that considerable cut in the top rate of income tax——

Mrs. Alice Mahon (Halifax)

And from the poll tax.

Mrs. Beckett

And they are the very people—I take my hon. Friend's point—who benefit from the change from the rates to the poll tax.

I recognise—the Chief Secretary was at it again today when talking about marginal tax and so on—that the Government claim that none of this matters because they have been generous to workers who are low paid. This claim is particularly difficult to substantiate if one looks at the overall tax burden—not just at income tax but at the real impact on people's net disposable income of income tax, national insurance contributions, value added tax and the package of measures for which the Government are responsible and because of which the average household's tax burden has increased since this Government came to power.

I want to look, particularly because of the way in which the tax-exempt special savings account is described in this Budget, at what is happening under this generous Government, where all benefit from increased prosperity and the economic miracle, to the lowest paid of all. In the Budget, the Government refer to a group that they call moderate or relatively small savers who will save up to £150 a month or about £16 a week. They obviously regard these people as not especially well-off. I draw the attention of the House to a group of people who get very little attention in this place, particularly from hon. Members on the Government Benches—those who earn very low wages, from as low as £60 a week to £170 a week.

I have been following the detailed statistics for this group since spring 1988 when not only did we have these massive cuts in taxation which particularly benefited the best off but we had a massive package of reforms in social security. The figures are an average because they include average rents, average costs of travel and things of that kind, but they are figures from parliamentary answers and they show a particularly interesting comparison in the movement of incomes over the year and the marginal rates of tax to which the Chief Secretary referred. The figures that I have recently received from the Government are particularly illuminating. They show that someone in this low-earning bracket—the Government have deliberately fostered low earnings in their time in power—can have an increase in gross pay of £10 a week and see his net disposable income rise by as little as 55p. In one particular case, someone with a two-child family earning between £90 and £100 can experience a drop in income of 11p a week. That is a marginal tax rate, to pick up the Chief Secretary's phrase, of well over 90 per cent.

If we were particularly generous and took that whole spread of earnings, from £60 to £170—presumably, to get that kind of increase, someone would have to change his job—a married man with two children of four and six could have that gross increase of £110 a week and come out with just under £16.50 extra in disposable income—£16.50 gain for a gross rise in income of £110 a week. What was that again about marginal tax rates?

A single parent with two children presents a similar picture. By going into part-time employment with earnings of £20 a week, such a person would gain £8.10 of her £20 extra, but if she went into full-time employment and earned as much as an extra £40 a week she would still get only £9.21 a week more than she would receive on benefit—an extra £1.11 in net disposable income for a £40 increase in gross pay and the burden of full-time work, with no allowance made for any contribution to child care costs——

Mr. Quentin Davies

Explanation!

Mrs. Beckett

No, I would like to go through this comparison and finish the point. I do not need any explanation, I assure the hon. Gentleman. I am very familiar with these figures. Let me give him a little more explanation.

Let us take a family with two children. I have asked for a comparison to be made between their income now and their income in 1987 when these packages of tax and social security reforms were introduced. The House will, I know, be pleased to learn that this year, for the first time since 1987–88, the family are better off in cash terms, although in some cases by as little as 12p a week. That is a 12p increase in net disposable income over three years under a Government who have given us an economic "miracle". Of course, they are all worse off in real terms than in 1987.

If I take now the figures for a single parent with two children aged four and six, in cash terms those earning £60, £70 or £80 a week are worse off now than they were before the package of changes in 1988. If they are worse off in cash terms, they are substantially worse off in real terms.

I know that hon. Members on the Government Benches do not like criticism of the Government's record. There is an increasing and worrying tendency to equate criticism of the Government with disloyalty to the country. The Chief Secretary was at it during Question Time the other clay. The phenomenon is seen at its most extreme in the case of the Prime Minister. It began—although it seems hardly to have been noticed and certainly not much commented on—when the Prime Minister began to talk about "my Government", a phrase that I had previously heard only on the lips of Her Majesty the Queen. Then we got on to the use of the royal "we". Then we had gates to protect the Prime Minister from the admiring populace. Now we have the change in approach to the civil service, who are told that their loyalty is not to the Crown but to the Government of the day, and the increasing identification of the interests of the country with those of the present Government, which is percolating along the Back Benches.

What we seem to have, therefore, is a Government who do not like the attitude of the civil service and who feel that they must change its code of conduct, and who do not like the attitude of Opposition Members. We had that again today from the Chief Secretary, who thinks that there is something wrong with an Opposition who dare to think that they have the right to criticise the Government. We have seen the ultimate in the wish to ensure proper agreement with the Government's policies in that, although the Government have not actually tried to change the electorate yet, they are doing their best to manipulate who will vote. I understand that there is a well-funded campaign, headed by the hon. Member for Dorset, West (Sir J. Spicer), to persuade those who left the country as much as 20 years ago that it is their moral duly to prevent people who have been so unpatriotic as to stay here from exercising what we had previously thought was their right to change their Government.

I find it particularly offensive in this regard that the hon. Member for Dorset, West should apparently focus his campaign in South Africa, where he is telling white South Africans to vote Conservative because Mrs. Thatcher is the best friend that they have in the world. There would be no point in his addressing any remarks to black South Africans——

Mr. Andrew Mitchell (Gedling)

On a point of order, Madam Deputy Speaker. A good many people wish to take part in the debate on the Second Reading of the Finance Bill. The hon. Lady's comments, while entertaining, are entirely irrelevant to the matter under discussion.

Madam Deputy Speaker (Miss Betty Boothroyd)

The hon. Gentleman should leave it to the Chair to determine what is in order. If there were no interventions I am sure that the hon. Lady would finish her speech earlier.

Mrs. Beckett

You know me well enough, Madam Deputy Speaker, to know that I am about to relate my remarks directly to the proposals and policies of the Government. Despite the hon. Gentleman's intervention, however, I shall finish the point. The hon. Member for Dorset, West is appealing to white South Africans; it would be a waste of his time to appeal to black South Africans, who do not even have the vote in their own country, let alone in ours.

The other way in which the Government are attempting to influence the composition of an ungrateful electorate is through the poll tax. In theory it might be possible to separate registration on the electoral roll from registration for the poll tax, but this is certainly the nearest thing to reintroducing a link between the ability to pay and the right to vote that has been seen in this country for many a generation.

This brings me directly back to the Government's record on inflation. One of the many administered price rises imposed on us, as the Governor of the Bank of England said, by political decision, is the poll tax itself. I know that the Select Committee received differing evidence about whether it is the equivalent of increasing income tax by a ha'penny or by twopence, but it is clear that however it is quantified or explained it is yet another increase in the tax burden that ordinary people are trying to meet; and yet again, the only answer that they receive from the Government when they complain about that tax burden is that inflation can be dealt with only by interest rates and the price rises that they bring. I ask the Government again whether they will reconsider even now whether the use of interest rates alone is as successful as they have claimed, or whether the sheer bluntness of that instrument is not affecting its impact.

I draw to the attention of the Chief Secretary the report by the Treasury and Civil Service Select Committee which states: The time which it has taken for successive increases in interest rates to restrain demand sufficiently calls into question the effectiveness of interest rate policy on its own. The Chief Secretary quoted the Select Committee report. I shall read his remarks in the Official Report with care, but I am not sure whether he was entirely accurate. He said that the Select Committee had said that the role of reserve asset ratios had no impact on the growth of money, but in fact that was the Select Committee quoting the Red Book. So the Chief Secretary was quoting what the Government say, not what the Select Committee said.

The report suggests—in particular, the comments of Mr. Reading suggest—that the Government should consider alternatives to the use of this single instrument. The report recently produced by the Bundesbank—[Interruption.] I shall be happy to send a copy of it to the hon. Member for Richmond and Barnes (Mr. Hanley) so that he can read it. The report draws attention to the fact that everywhere in Europe and across the western developed world, except here and in Luxembourg, there is a use—in a variety of degrees and with various detailed arrangements—of some form of credit management, some means of influencing the extent to which banks are prepared to lend and add to the growth of credit—

Mr. Hanley

What does the report mean?

Mrs. Beckett

The hon. Gentleman should read the Bundesbank report and not waste the time of the House.

We have never said that the use of such instruments would be a replacement——

The Financial Secretary to the Treasury (Mr. Peter Lilley)

rose——

Mrs. Beckett

The hon. Gentleman will have a chance to make his own speech.

We have never claimed that the use of such instruments would be a replacement for the use of interest rates. All that we have ever observed is that their use, even temporarily, might have allowed, and even now might allow, slightly lower interest rates than are necessary when the policy pursued is one of interest rates alone. That is a matter of particular moment at a time when the danger is that interest rates may have to be raised again.

Mr. Lilley

Can the hon. Lady point to any phrase in the Bundesbank report that shows that it is possible by using minimum reserve ratios to have lower interest rates than would otherwise obtain? I am sure that she cannot, because it does not say that.

Mrs. Beckett

It does not say as much in those terms, and I cannot find the precise reference now, but the report shows that Spain and France, by manipulating their credit instruments, were able to avoid a rise in interest rates.

Mr. Norman Lamont

The hon. Lady is wrong.

Mrs. Beckett

Perhaps we can pursue this some other time; I have not marked the exact passage in the report. It is no good the Chief Secretary shaking his head. It is not five minutes since the former Chancellor and the present Chancellor told us that no one in Europe uses these methods any more. We were told that they did not exist and that, in so far as they did exist, they had been abolished. The Bundesbank report clearly says that every country—Japan, the United States and every country in Europe except ourselves and Luxembourg—uses some form of this mechanism in a variety of ways. The report says even more clearly, in a clear contradiction of the remarks of the Chief Secretary, the Chancellor and the former Chancellor, that it is not true that the use of these instruments is being abandoned. They are being refined and made more effective. Further, the report suggests that if there is to be progress towards economic and monetary union, some measure along these lines will have to be considered in every country.

Mr. Norman Lamont

On a point of accuracy, the previous Chancellor argued not that these instruments were not used but that they were not an alternative to putting up interest rates. He argued that reserve asset ratios were merely an instrument by which interest rates were manipulated. I wonder whether the hon. Lady has read the remarks made this week by the president of the Bundesbank who has called into question the use of reserve asset ratios throughout Europe and who says that all Europe should consider getting rid of them—they are becoming redundant.

Mrs. Beckett

I have not read the report of that. The report to which I am referring was published only two weeks ago, so perhaps the Bundesbank needs to sort out what advice it is giving the rest of the world— [Interruption.] I am quoting from a report published by the Bundesbank in March 1990. If, in the third week of April 1990, the Bundesbank is saying something different, I shall study it with considerable interest. I remind the Chief Secretary of how he misquoted the Select Committee's report earlier, so perhaps all these reports seem to have a different flavour depending on which party uses them.

Mr. Quentin Davies

rose——

Mrs. Beckett

I cannot give way; I have spoken for too long already.

I turn now to the impact of interest rates on investment decisions. I was amazed to see—I note that the Select Committee was, too—that the Governor of the Bank suggested that the level of interest rates was not particularly important as an influence on investment decisions, although there were exceptions. Unfortunately, that does not agree with reports from the engineering industry, the CBI or a variety of sources. Recent reports from Peat, Marwick, McLintock, from the senior receiver, and from Barclays bank and the Midland bank suggest that these difficulties are having a serious effect on the Government.

I note also that the Select Committee remarked on the difficulties experienced because of the poor quality of statistics available to the Government. That is rich in irony: the Government have sown the seeds and they are now reaping the whirlwind. They have cut down the signposts and now complain that they do not know where they are. Here, too, the scale of the problem is alarming. I note that in his report to the Select Committee Mr. Martin says that the errors in the Government's statistics are "beyond the pale". Sir Douglas Wass, not so long ago Permanent Secretary to the Treasury, complained that as a result of economies, industrial statistics in Britain are inferior to those of almost all our competitor countries.

But although the signposts in the form of statistics may be missing, the real economy tells us all too clearly what is happening. There have been cuts in the construction industry; a fall of 40 per cent. in starts was announced a few weeks ago. At long last British Rail has recognised that it can no longer square the circle of squeezing the consumer directly to fund investment. There has been a predicted fall in the Government's phoney measure of business investment, in which investment in casinos is seen as just as valuable as investment in manufacturing. There are problems with output and imports; a downturn in the balance of payments is predicted based on a presumed drop in those imports. Mortgage rates are at their highest ever. We have a record manufacturing deficit and trade deficit.

The Government have utterly and comprehensively lost their way. The Chief Secretary told us that no one apart from the Opposition believes that. Let me quote from the House Builder magazine, again of March 1990. The director of the House Builders Federation says that these are signs of a Government in terminal decline. It has lost the ability to take sensible, pragmatic decisions, it is afraid of its own shadow, but contemptuous of important groups and industries whose support it needs. The Government seem to have made the elementary mistake of believing their own propaganda and of believing that they have performed a miracle. The Greeks call that hubris. It is certainly being followed by nemesis. The way in which the Government are approaching the issue is our greatest charge against them, the Budget and the Finance Bill. Even now there is no evidence that the Government have the wisdom or the foresight to invest what is left of our oil wealth in training, industry, civil research and development, and in the engines of growth that are driving our competitors further and further ahead every month and year. These are the policies which are needed for long-term prosperity. These are the areas in which the Government are still making cuts.

In the race to 1992 our competitors are three quarters of the way round the track and we have not even left the starting block because we are still busy listening to the team captain claiming that the tactics and techniques of the other runners are wrong. We are not even in the race. We are not running in the race because we have a Government who have run out of ideas and of steam, and who are fast running out of time.

7.21 pm

Mr. Terence L. Higgins (Worthing)

The task of a Chief Secretary on the Second Reading of the Finance Bill is never easy. Although he may spend some time discussing the general economic position, he inevitably spends quite a lot of time discussing individual clauses in the Bill. On the other hand, the House traditionally tends to concentrate very little on the clauses and very much on the general economic position, and in particular to consider whether it has changed between the time of the Budget speech and the Second Reading of the Bill. The Budget looks sometimes better and sometimes worse than it did initially.

This year the Budget looks much the same as it did on Budget day, for the simple reason that the overall economic position has been confused and obscure. Inevitably that reflects the fact that we are suffering severely from the problem of inadequate economic statistics. In the report of the Select Committee, which I am glad to say was not only unanimous but on which there were no divisions, we stress strongly how important it is to get the statistics right.

The debate so far has dealt at length with the position in 1987 after the stock exchange crash. I do not think that there is any doubt that mistakes were made at that time. I think that that is generally recognised on these Benches and on the Opposition Benches, where even more reflationary measures were advocated. We live now with the consequences of those misleading statistics and the actions which were mistakenly taken upon them. That is now notorious.

I do not think, as the hon. Member for Derby, South (Mrs. Beckett) suggested, that it was a question of what happened on interest rates; she would assert that it was a problem of tax cuts. Even after the tax cuts at that time the Budget surplus was still 10 times bigger than any surplus achieved under a Labour Government. Therefore, I do not believe that the hon. Lady's argument was right. None the less, the fact that stimulus was imposed on the economy at that time has caused serious problems. The Select Committee, in its report, draws attention to the possibility of using the asset price index as an additional lead indicator of what is happening in the economy. If we had paid attention to that at the time, I believe it would have been helpful.

We are still suffering from the statistical problem. At the time of the Budget the public sector debt repayment was anticipated to be £7 billion. We now know that the estimated outturn, after only about a month, is £8 billion. At one time a difference of £1 billion in the public sector debt repayment or borrowing requirement would have been regarded as a major change in economic policy, yet that is now the difference being thrown up by the statistics within a few weeks. That brings out strongly the problems we are suffering.

The latest balance of payment figures have been referred to. The biggest deficit ever shown has led to very little reaction in the City because I do not believe that the City thought the figures were right. Indeed, I find the figures in conflict with what we know is happening in the high street and the market. By now it ought clearly to have come through into the import figures or, on the other side of the equation, into the export figures when the exchange rate over the last year has gone down 10 per cent.

As the Select Committee says, it is essential to put more resources into getting better statistics. As the Chief Secretary courteously said, there has been a team effort between the Select Committee and the Treasury to try to bring that about. We have had the Pickford report and an action plan to improve matters. However, further action must be taken urgently. The disadvantages of not spending money on it, compared with the potential benefit, are very great.

What worries me also—this came out in the autumn statement report of the Select Committee—is that almost always we find that the turning point errors in the forecast are very much bigger than the errors when there is an upturn or a downturn. It is when the economy turns round that the errors are great. We are at the turning point because all the Chancellor's measures are deliberately designed to get the economy back on course.

Taking everything I have said into account, I fear that the economy is probably slowing down a great deal more than the statistics or the forecasts suggest. Therefore, the Chancellor was right in his Budget to do very little to change the overall balance in the economy. A further massive move, such as some commentators in the City suggested, would have caused a real danger within a few months of a massive recession which it would have taken a long time to dig ourselves out of.

One lesson from 1987 is that when a mistake is made, largely because of bad statistics, it takes years to get the position right again. My hon. Friend was right in his Budget judgment, and he was right also in seeking not to raise interest rates further.

Mr. Ian Taylor

rose——

Mr. Higgins

I shall give way very briefly because I believe that Privy Councillors should not speak for more than 12 minutes.

Mr. Taylor

My right hon. Friend has made an extremely important point. Does he agree that a further tightening of fiscal policy in the Budget, as was urged by the City and by Opposition Members, would not have taken effect until the end of this year or the beginning of next year when we might already be in a severe recession?

Mr. Higgins

I agree very much with my hon. Friend. The point which emerges is that my right hon. Friend the Chancellor has a more difficult task, because of all the conflicting signals, than perhaps any of his predecessors.

The other major problem is unit labour costs. The Select Committee published a chart, provided by the Treasury, which was not in the original Red Book. There are real dangers for our competitive position because of international relations. The fact that unit labour costs are expected to rise again is of grave concern against the background which I have just described. Although the position is vastly different in many respects from 1980, with public expenditure a much smaller percentage of gross national product and a public sector debt repayment of £8 billion plus compared with an £8 million deficit in 1980, none the less if the Chancellor's deflationary measures, which in my view are stronger than are generally supposed, run into inflationary wage settlements, we will be in danger of getting back to the position of 1979–80 and unemployment could rise substantially. We have made great progress in reducing unemployment in recent years, but the position is now dangerous. That is why it is so important to take into account what is happening with wage settlements. Overall, I believe what is happening is right.

I am anxious to allow time for others to speak because a large number of hon. Members are waiting to do so, but I shall say a word or two about the relationship between monetary and fiscal policies. Up to now I have not taken the view that my right hon. Friend the Chancellor of the Exchequer or his predecessor were guilty of a one-club policy. It is not the case that, up to now, only interest rates have been used. That policy has been backed up by a tight fiscal policy, and the two have been working together. However, as the Select Committee points out, we need a better measure of fiscal stance than we have had so far. There is considerable obscurity about that at present.

However, the Committee stresses strongly that there can often be a dilemma about the use of interest rates. Sometimes, one might have to move them upwards for exchange rate stability while, at the same time, one should move them in the other direction to control the domestic economy. That is currently true and has always been true. There is not always a dilemma; sometimes the interest rates should move in the same direction for both reasons.

If we join the exchange rate mechanism, as everyone expects—the Governor of the Bank of England rightly said that the only barrier to our joining was the differential inflation rate between this country and Europe—interest rates will necessarily be dedicated to the maintenance of the exchange rate within whatever range band is selected. In cases of conflict, the interest rate would not be available for managing the domestic economy. Therefore, it will increasingly be necessary to adopt a more flexible approach towards fiscal policy, as well as using interest rates.

While I do not think that the one-club gibe has been a legitimate attack on the Government until now, we shall need an interest rate putter in relation to the exchange rate. However, if we try to use that same club for driving the economy, we shall not hit the ball very far. Therefore, our approach to the problem will need such a change.

I believe that, in the immensely difficult position in which he finds himself, the judgment of my right hon. Friend the Chancellor of the Exchequer has been right. We all wish that he is successful in his policies. We say in our

report that he has taken the view that what is being done at present is sufficient to put matters right. Further dramatic changes would not be either wise or necessary.

7.33 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

It is always a pleasure to follow the right hon. Member for Worthing (Mr. Higgins), particularly when he produces one of his best reports. The reports are bound to vary considerably because of the wide range of membership of his Select Committee and other factors. However, this is undoubtedly a valuable report, which I read with great interest.

I take fully the right hon. Gentleman's point about statistics. The Government were wrong to try to save money on that crucial matter. I understand full well the comments which have been made by the Chief Secretary. Treasury Ministers always make such comments, belittling and scorning statistics, but when it comes to making decisions, it is those statistics that they use, because they have nothing else to use. They can rely only on their own guesses or the figures produced for them. In my experience, they use them to a much greater extent than they confess.

The Chancellor of the Exchequer has been prepared to listen. In his Budget statement he went into great detail in producing a reasoned defence of interest rates as the only practicable weapon. I welcome such dialogue, which we have not generally had throughout this Government's lifetime. It is important for the Chancellor of the Exchequer—I give him full credit for it—to engage in such dialogue so that he can learn from some of the experiences and arguments of other hon. Members. That is the proper way to deal with such matters. I am sorry that the Chief Secretary to the Treasury did not follow that way of handling such matters, but I hope that he will in future.

I do not agree with the Chancellor of the Exchequer about interest rates being the only practicable weapon. The suspicion that we have had about the present policy rests on the fact that it was on 3 June 1988—nearly two years ago—when interest rates commenced their upward drive. The purpose of that was to slow down consumer demand. The Prime Minister became involved in this matter when she spoke on 30 June. The Leader of the Opposition asked why the right hon. Lady had to inflict the increased interest rates on British industry and British home buyers. Her answer was: To keep downward pressure on inflation."—[Official Report, 30 June 1988; Vol. 136, c. 520.] We have had two years of that, but it has not been successful. Inflation has been going up and up. Therefore, this policy has had little effect on inflation and little observable effect on the demand for credit. One estimate is that £150 billion of extra credit has been created during those two years. That was a complete reversal of the Government's intentions. So far from credit being reduced and demand slowing down, they have increased.

Previous Chancellors of the Exchequer may have been deficient in many ways, but one thing they all knew was how to bring about a reduction in demand. It is a simple trick. All one has to do is to raise taxes or, in the old days, use the regulator and, as further measures, restrict credit and put up interest rates. Almost from day two, one could see the spending level decline. However, the Chancellor of the Exchequer did not agree with that way of handling such matters. He said: fiscal policy is not, in my view, a flexible instrument which should be altered to meet short-term contingencies. Fine-tuning fiscal policy is not only disruptive to the public sector, to business and to taxpayers, but its effects on the economy are uncertain and often destabilising."—[Official Report, 20 March 1990; Vol. 169, c. 1015.] I am sure that if he were to find himself back in time to two years ago, he might have a different view on that. There is no question but that during the past two years he has not succeeded and there are political as well as economic problems.

Mr. Neil Hamilton

The right hon. Gentleman will be aware that the tax cuts of the 1988 Budget amounted to about £4 billion. The amount of credit generated by the reduction in interest rates was £40 billion. By how much would he have recommended that the Chancellor increase taxation in 1988 in order to choke off the inflationary impetus which that gave?

Mr. Sheldon

We must not take too simplistic a view. We must take into account such matters as people's perceptions. Once they found that the brakes were being taken off, people got into a spending spin that lasted longer than it should have done. A sum of £150 billion credit is a large amount to have accumulated in those two years. Now that the two years have passed we must ask why Conservative Chancellors of the Exchequer are totally unable to do what their predecessors did so effortlessly, bring about a reduction in demand and create what might be a soft or hard landing. The trouble now is that we have had no landing. Two years have gone by and we have not landed yet. They have been unable to do so because, once again, they are impaled on a dogma, which is what rules such matters. Changes in taxation under the Government are said to be a one-way movement downwards. They cannot even be used to smooth the flow of a changing economy. That is one of the important factors. That was why the Conservative party introduced the regulator. It is not necessarily fine tuning; there has been more fine tuning on interest rates than on taxation. They have tried to reduce the levels of demand without making changes in taxation.

The Government rely on interest rates, but they do not bring about changes next week or next month; they work on a long-term perception of what will happen. Taxation takes money out of the pocket and has an immediate effect. The Chancellor found that he could not use credit controls or taxation, so he was left with interest rates. Now, for the first time in recent years, he is left only with exhortation. Given the civilised behaviour of this Chancellor, it is a mild form of exhortation—somewhere between exhortation and advice. He said in his Budget statement about extended credit: I believe that the financial institutions would be wise to reconsider their policy, and I hope that the subject will be covered in the code of practice …"—[Official Report, 20 March 1990; Vol. 169, c. 1012.] It is all very well asking the financial institutions to be wise, but their mail shots continue to pour into our homes. Recently my bank manager even berated me for not borrowing. A good customer is one who borrows, as that is to the advantage of the bank or finance house.

Another fallacy is that interest rates reduce the demand from everybody. Many people do not have high mortgages. Indeed, many have savings and they will benefit from high interest rates. There is no reason why they should reduce their spending. The great advantage of using the tax system for smoothing the ups and the downs of economic fortunes is that that affects everyone who spends. No one objects to tax changes downwards, but within that direction there should be fluctuations to take account of the position facing the Chancellor.

The problem facing the Government is that they are trying to be obedient not to the demands of the economy but to the needs of the election and the opinions of the Prime Minister. Although they may be cursing the fate that led them into this position only two years from the next election, they will have to live with that. They did not take the necessary measures two years ago when they had plenty of time to do so. Although they could have engineered a short-term recovery in time for the election if they had started from the position of 3 June 1988, when they first diagnosed trouble, they have now left it too late. They cannot rail against fate. They were left with plenty of time for the usual economic election tricks. In fact, surprisingly, fate has, in limited terms, been rather kind. Pay increases are running at about 9.5 per cent.—very high, but only at about the same level as last year. However, inflation is now approaching 10 per cent.

Some people decry the inflation figures in pay settlements. Sam Brittan's words are especially colourful—he insults what he calls idiot inflation figures. However, whether or not they include mortgage relief, the figures assess the spending of the family and they lead to pay increases. If the Government wish to reduce inflation, they need to take account of those factors over which they have some control, and that includes interest rates. Indeed, it appears that, however bad the trade or inflation figures, or however bad they might become, the game of playing with one club has just about run its course. The next step—if, unfortunately, one is needed—would be to choose between letting the pound go, doing a U-turn on taxation or introducing some form of credit controls.

Of course, there are those who think that the Chancellor has the ultimate secret weapon—entering the exchange rate mechanism. They say that if we do that interest rates will come down, the pound will be steady and that, although there will be problems in the long run, that will take Britain to the other side of the general election. Meanwhile, they think that the short-term effects will be good. There will be a shock to companies that cannot increase pay because there is no prospect of devaluation. Trade unions will learn that new rules have come into play that will limit their wage claims.

Let me consider the role of companies and workers. If anyone really believes that companies and workers will be disciplined by the ERM, they are even more out of touch than the Government. After all, we have covered the same ground before. Almost 20 years ago, there were those who said that entering the Community would provide a shock; that Britain would have to face reality. Some 10 years ago there were those who thought that monetarism and sterling M3 would provide a shock. They held to the lofty theory of rational expectation—the rational expectation that trade unions would enter negotiations saying, "Because sterling M3 is a bit too high, we will not put in much of a wage claim." What nonsense. Only the Government could believe that. The rational expectation that I and many others had was that that would prove to be nonsense. Trade union leaders and management did not believe it, and they were right.

I agree that we should join the ERM, although my reasons for saying that are largely political in the context of a Europe in which we cannot for ever remain a dissentient voice. When we join the ERM, there will be a honeymoon period of six or nine months, and then unless fundamentals are changed there will be a forced devaluation of the pound. In political terms, that could be difficult for the Government. They have to make a judgment on the right timing and they may have little control over that. My advice to the Chancellor, for what it is worth, it to do the proper thing: act like a Chancellor, enter the ERM, and make use of his fiscal and credit control weapons. He must remember that if he gets it wrong he will be to blame, not the Prime Minister.

I am worried about investment. With 25 per cent. capital allowances, there is no longer a great deal of incentive to invest. If a company buys a machine for £1,000, the next day it will be written down to £750. That is serious because it means that companies are having to borrow money at high interest rates, and with depreciation being wholly out of line with the worth of the machine. That could result in serious cuts. I am sure that the Confederation of British Industry is right to highlight that important factor.

The Chancellor could have done something about that. A 15 per cent. interest rate acts differently on different people. For an individual, there is a problem with the mortgage. For those with savings, it will improve income. For an expanding industrialist, it hits very hard. Not only is the level of capital allowance less than the actual depreciation, but the industrialist must also find a large sum of money in a market that is uncertain because of the uncertain future of the economy. The Chancellor could have dealt with those matters. If he was so optimistic about the future, he could have said that for this year only capital allowances would be improved. That would have had a strong effect. He could have judged the right level to encourage the sort of investment that could have been afforded. That would help industry at a time when it is under pressure.

The invisible earnings have shown us that only manufacturing industry will save the country, yet we have treated it abominably, shabbily and disgracefully. It is to manufacturing industry that we must now look, and it is time that we started looking after its interests.

7.48 pm

Mr. Neil Hamilton (Tatton)

I must admit that I had some difficulty in understanding the logic of the right hon. Member for Ashton-under-Lyne (Mr. Sheldon). If he agrees with the hon. Member for Derby, South (Mrs. Beckett) that the rapid reduction in interest rates following black Monday in 1987 was substantially responsible for the credit boom, I do not understand why that theory does not work in reverse and that credit is discouraged when interest rates are increased sharply. The right hon. Gentlemen seems to have the odd idea that we should not have increased interest rates and that the economy could have been calmed down by some increase in taxation, when to match the volume increase in spending which has occurred in the past few years, the increase in taxation that would have been required to substitute for rises in interest rates would have been absolutely colossal and, I have no doubt, quite unacceptable. I do not believe for a moment that any Labour Government faced with such a problem would ever have been able to do that.

I shall start my speech with a text, as the rest of it may sound a little like a sermon: Let us admit it frankly as a business people should. We have had no end of a lesson, it will do us no end of good. Those were lines written by Kipling on the Boer war, but I want to apply them to the experience of the Government in the past few years in what I hope to be the temporary abandonment of monetarism.

I was heartened by the speech of the hon. Member for Derby, South as it betrayed no understanding of the causes of the problems that the economy poses for us today, and certainly showed no idea of what to do about it. That bodes well for us politically at the next election, whenever it will be.

I hope that Conservative Members, at any rate, now recognise the problems that have been caused and the reasons for them. I believe them to be threefold: first, the end of overfunding; secondly, the abandonment of broad money targeting; and, thirdly, the fixation with fixed exchange rates, particularly following the Louvre agreement and the unofficial peg with the deutschmark up to early 1988.

It would be as well for us to admit that at that time my right hon. Friend the Prime Minister was right. She faced a Chancellor who took a different view of the role of monetary policy, and in particular the role of exchange rate targeting. There was a public row when the Prime Minister was regarded or accused, as she always is, of being intolerant, dogmatic and handbagging Cabinet Ministers round the table in the manner of "Spitting Image". But she was defeated by the then Chancellor, my right hon. Friend the Member for Blaby (Mr. Lawson), and had to retreat, and what a disaster it was for us all.

Mr. Nicholas Budgen (Wolverhampton, South-West)

My hon. Friend ought to remember also that she was undefeated by the 1922 Committee, who told the Prime Minister that the position of the Chancellor of the Exchequer was unassailable in the Tory party at the time.

Mr. Hamilton

I know nothing of the workings of the 1922 Committee, which is a mythical body which I seldom attend.

The myth of the dictatorial Prime Minister is hard to dispel. But when the Prime Minister is being accused similarly in other areas of policy, it is as well to recognise that perhaps the truth is different.

On 30 January 1985 my right hon. Friend the Member for Blaby delivered the following judgment: I have never believed in intervention in the foreign exchange market as a way of life, still less as a substitute for firm fiscal and monetary action. How correct he was and how that has been proved by the experience of the past two years.

Having started out very successfully in our fight against inflation by targeting broad money and having no exchange rate target, we reversed our policy and did not target broad money and had an exchange rate target. The end of overfunding meant that we could no longer be confident of meeting broad money targets by selling gilts to neutralise the effects of high bank lending, and thereby denied ourselves the opportunity to bolster our anti-inflationary policy. I remember agreeing with my hon.

Friend the Member for Wolverhampton, South-West (Mr. Budgen) at the time, but my voice may not have been heard as he is far noisier than I am.

The second error was that we attached ourselves to a policy of stabilising exchange rates and managing the global economy. My right hon. Friend the Member for Blaby is a man of some distinction and considerable abilities, but managing the global economy was a bit much even for him. But he enthusiastically adhered to that policy following the Plaza reports of 1985. I believe that the rot set in at that moment because our domestic monetary policy was compromised to sustain the exchange rate of the dollar. There was a significant increase in the rate of bank lending to the private sector which trebled in three years. The rate of growth of that lending doubled in the same period.

Paragraph 58 of the Treasury and Civil Service Select Committee referred to the massive expansion in broad money in the period since 1979. It stated: Broad money (as measured by M4 definition) has increased dramatically from £98 billion to £423 billion, that is by over four times. Over the same period nominal GNP has increased by 157 per cent. with real GDP rising by 25 per cent., the rest of the increase representing inflation. We take the view that the rapid monetary growth has contributed to the United Kingdom's high rate of inflation. I believe that judgment to be correct.

The Treasury argues that broad money targeting is no longer appropriate in deregulated markets, but I do not believe that there is more than a grain of truth in that. It may well be difficult to ascribe particular numbers to the broad money measures, but it is a long step from that to say that those measures mean nothing at all. I believe that we must return to targeting broad money if we are to be more successful than we have been in the past few years. I do not believe that MO is a valuable predictor of what the economy will do. I believe it to be a coincident indicator, not a leading indicator, because it ignores inflation of asset prices and the diversion of domestic demand into imports in an overvalued exchange rate.

The principal cause of the ills with which we are so painfully having to grapple arises from the policy of concerted intervention in foreign exchange markets. In 1986 that intervention increased M3 by £181 million In the three months following the Louvre agreement on 21 February 1987 there was a massive increase in intervention and the extent to which that fed through into broad money expansion. From that increase of £181 million for the whole of 1986, the month of March 1987 produced a growth in M3 of £946 million, which increased in April to £1,750 million and in May to £2,861. Interest rates then came down—enthusiastically supported by the Labour party for which interests rates are too high in all conditions and at all times—to 9 per cent. In June 1987 bank lending was up 32 per cent. on the previous year, and in July it was up 63 per cent. on the previous year. That caused a small increase in interest rates to 10 per cent.

Following black Monday, interest rates came down to 8.5 per cent. and we all shared the misapprehension that the consequence of black Monday would be the possibility of the economy plunging into recession. We all overestimated the effect of share prices and underestimated the effect of property prices. So we all have to accept a share of the blame for that error of policy.

At that time domestic monetary policy should have been tightened severely, but because of our fixation with maintaining a pegged exchange rate, particularly against the deutschmark, we reduced interest rates, when, if anything, we should have been increasing them, to the inappropriately low level of 7.5 per cent. in early 1988. That led to massive intervention which boosted broad money growth when it should have been slowed.

I believe that the present fixation with the exchange rate mechanism of the EMS will simply cause us to repeat the mistakes. I should like the Government to say that there is never a right time for us to join the ERM because I believe that it is a chimera. The more we follow these false gods, the less likely we are to keep to the true monetarist path which is so eloquently and picturesquely defended by my hon. Friend the Member for Wolverhampton, South-West.

Joining the ERM is no soft option. We have a choice. Either we can use interest rates to stabilise the currency, in which case the economy will go up and down, or we can stabilise the economy, in which case the currency will go up and down. There is no way of wishing away that distinction and that choice.

The level at which the argument for joining the exchange rate mechanism is advanced—certainly by the Labour party and also by the hon. Member for Berwick-upon-Tweed (Mr. Beith) on behalf of the SLD—does not do justice to the serious fundamentals of the controversy.

There are structural differences between economies that cannot be magicked away by the philosopher's stone of the ERM. There are psychological differences between people and the way in which they respond to different economic stimuli. They mean that at whatever rate one goes into the mechanism—if the decision to do so is taken in due course—almost by definition divergences will occur swiftly.

Mr. John Watts (Slough)

Does my hon. Friend agree that we could expect to enjoy German interest rates and levels of inflation only if the British people had the same in-bred fear of inflation as the German people?

Mr. Hamilton

I entirely agree with my hon. Friend. As my hon. Friend the Member for Wolverhampton, South-West has said on many occasions, the British people are wedded to inflation. They love it when it is high. It is only the contraction that is necessary to cure it that is disliked, as Conservative Members are finding out to their cost now.

Mr. Budgen

Does my hon. Friend agree that the 1922 Committee performed a signal and excellent service to the British nation by demonstrating, at a time when inflation was being furiously stoked up, how grateful it was to the stoker up?

Mr. Hamilton

My hon. Friend is being mischievous. I shall not respond to that invitation to join him. His career is behind him and mine lies ahead of me.

The structural and psychological differences to which I referred would make some countries more prone to inflation than others and mean that, if we joined the ERM, ultimately there would be a confrontation between the requirements of domestic monetary policy and those of exchange rate management, which have brought us to our present state of difficulty.

To some people the ERM is a totem, a lodestone of European attachment. It is one which, I am glad to say, I have never shared. Others say—and it is at least a semblance of a respectable argument—that joining the ERM would show a determination to fight inflation. However, if the fundamentals of economic policy are wrong, that position will become unsustainable in due course.

In our entusiasm for returning to fixed exchange rates, we shall repeat all the mistakes that we made throughout the 1960s and 1970s. We shall return to the days of sterling crises and all the political problems that they caused. I have recently read the account by Lord Wilson of Rievaulx of the Labour Government of 1964–70, which I recommend to right hon. and hon. Gentlemen. I particularly recommend the passages that refer to the period of devaluation in 1967. On page 448 he gives us this account of his difficulties: As the foreign exchange markets opened for a new week, they showed themselves in a highly neurotic condition; any rumour, any press article, however well-intentioned, could cause millions of pounds to swing for or against any particular currency. One can see the same thing happening now. An incautious word by the Prime Minister's Parliamentary Private Secretary in the Tea Room might set off a run on the pound. Any such remark in those difficult circumstances can produce tremendous political problems.

In his Lord Mayor's Banquet speech at about the same time, Lord Wilson said: Not the least of my difficulties was what words to use about sterling which would be true and at the same time not a signal to speculators. What a moral hazard for the Prime Minister of Britain to be in. He did not say which of those two options he elected to take up, but Conservative Members can guess.

There may be a right time for us to join the ERM, but that time would not survive for long. A divergence would soon occur that would falsify the whole basis of the assumptions on which entry took place.

Mr. Ian Taylor

Will my hon. Friend give way?

Mr. Hamilton

No. I should like to give way to my hon. Friend, but I am aware that I am taking a lot of time in the debate. I do not wish to be as self indulgent as the hon. Member for Derby, South.

The exchange rate mechanism is a means of subsidising German exports and now German reunification. It is an attempt to impose on the British people a new kind of poll tax—a Pöhl tax. The British people will pay to underwrite the inflationary costs of the exchange of ostmarks for deutschmarks at a wholly unrealistic rate. We could learn from history, although we do not often do so. We can look back to the period in 1925 when we went back on to the gold standard at an inflated rate of exchange, when British prices were 10 per cent. higher than German prices. Keynes, whom I do not often quote in support of my theories, in a book called "The Economic Consequences of Mr. Churchill", said that Churchill was committing himself to force down money wages and all money values, without any idea how it was to be done. … If everyone was to accept a similar reduction at the same time, the cost of living would fall, so that the lower money wage would represent nearly the same real wage as before. But in fact there is no machinery for effecting a simultaneous reduction … Deliberately to raise the value of sterling money means, therefore, engaging in a struggle with each group in turn. We should be back to exactly the same confrontations in industrial relations which prices and incomes policies and all their works brought and from which we freed ourselves in 1979.

I regret that I do not share the fashion or fad for the ERM which many other candidates for the leadership of our party espouse. I lay my stall out before my fellow Conservative Members. If, in due course, there is a contest for the leadership of our party, at least one person will follow the lines that our Prime Minister has so stalwartly followed in recent years. I very much hope that she will continue to do so.

8.7 pm

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

It is always a delight to see the theologians of monetarism coming out to take the Government to task. But they met their Waterloo during a previous session of the Treasury Select Committee, before its earlier reports. The Committee saw fit to recount that important exchange in our report in paragraph 56. We quoted the present Chancellor of the Exchequer who said: You answered your own question yourself, Mr. Budgen, when you said that used to be the theory in your judgment, the Government may have followed some time ago. It certainly has not been the theory that the Government have followed during any period I have been in the Treasury. Those were harsh words for some members of our Committee.

Mr. Budgen

They are true.

Mr. Beith

Of course, they are acknowledged to be true.

I agree with the hon. Member for Tatton (Mr. Hamilton) that regard should always be had to important indicators, whether monetary or asset prices, and with some other points that he made. However, he is wholly wrong in supposing that the exchange rate mechanism is a system of entirely fixed exchange rates. It manifestly is not. He also suggested that it would damage our economy. On the contrary, it offers us the opportunity of lower interest rates without losing all discipline. If there is one area of agreement between us it is that there should be some measure of firm discipline on inflation. I shall return to that point in a moment.

The Finance Bill is overshadowed by two things. One is the fact that, at the same time as it is being introduced, the most important change in personal taxation that most ordinary people have experienced in their lives is taking place. It is the introduction of the poll tax. The Bill is also overshadowed by events that have taken place since the Budget.

It seems extraordinary that we should be about to embark on a long series of Committee discussions and debates on the Floor of the House on a taxation Bill which is miles removed from the main tax preoccupation of most people. It would be reasonable to make an offer to the Government. There is much discussion about last-minute changes that might be made to the poll tax this year. It would be reasonable for the Opposition to say that we should facilitate the introduction of any new clauses that would bring immediate relief from the impact of the poll tax this year. We see no reason why the Finance Bill should not be used to carry out those measures. I should prefer to see the Finance Bill used to abolish the poll tax entirely and to set in its place a far better tax. [HON. MEMBERS: "Hear, hear."] I must say to those who cheer from the Labour Benches that I am grateful for their support, but I hope that it will extend also to support for a better alternative—local income tax—than they have so far been able to devise.

Many people at present have in mind the need for some immediate relief this year from the enormous impact of the poll tax on those on low incomes, and the Finance Bill would be an appropriate vehicle for that. I extend to the Government the offer that we shall assist them—I have no doubt that hon. Members of other parties will do the same—if they will have the common sense to use the Finance bill to implement some relief for this current year. Who knows what it will be; even Ministers do not seem to know.

I was present when one Minister had a piece of paper stuck in front of him revealing that the announcement of the Prime Minister's parliamentary private secretary had been widely publicised and it all seemed to be news to him. It is obvious that great turmoil is going on. We can only hope, for the sake of our constituents, that some useful result comes of it in terms of help with the terrible impact of that tax on so many people.

I referred to economic developments since the Budget, the most obvious of which is the appalling trade figures which have called the Budget judgment into question. Some of us called the judgment into question at the time. The Chairman of the Select Committee on the Treasury and Civil Service, the right hon. Member for Worthing (Mr. Higgins), did not do so. He is on record as having supported every Budget judgment of every Conservative Chancellor of the Exchequer since he came to the House, and certainly since be became Chairman of the Select Committee. Suffice it to say that he has not been right on every occasion and that he has come to recognise that fact.

The trade deficit reveals that we must achieve an average of £1 billion a month as against £2.2 billion to satisfy the Chancellor's latest forecast. There was genuine hope in many quarters that the most recent set of trade figures would be a great deal better than it was. The trade figures were a real disappointment to many people and they have again called hugely into question the Chancellor's forecast. "Erratic" and other strange descriptions will not explain them away and will certainly not explain the size of the difference from expectations. Despite hopes that the trade figures were improving, the comparison of the latest three months with the previous three months suggests that, once again, the trend is adverse. Exports are up, but imports are going up more and that is the most worrying feature of the figures.

The analysis that the trade deficit was simply the result of excess demand seems flawed if demand is reducing to the extent that the Government claim. One wonders how many appalling sets of trade figures the pound can bear without the Chancellor being put under pressure to increase interest rates to protect sterling at the same time as he should reasonably be preoccupied with the problem of inflation.

It is significant that the Government no longer seem keen to draw our attention to underlying inflation. The Chief Secretary and other Ministers always used to talk about it and whenever Opposition Members referred to the retail prices index, they corrected us immediately and said that it was the underlying figure that counted. The underlying figure has gone up to a worrying 6.3 per cent., and that high level of underlying inflation is likely to get worse. It is likely to be pushed further by the wage-price spiral on which we now seem to have embarked. Inflationary expectations, whether of trade unionists or of those in the markets, suggest that we may have a far higher underlying inflation rate.

All that is worsened by what the Governor of the Bank of England called administrative price increases—those price increases in basic services over which the Government have control and some of which arise from political decisions to privatise industries. However much the Government soften us up for a dreadful set of RPI figures in just over a week's time, the Government's anti-inflation strategy is in tatters. It is extraordinary that the Government now seem to be hinting that we shall have a 10 per cent. RPI by the end of next week. There seem to be briefings attributed to the Treasury to that effect. That may mean that the rate may be only 9.9 per cent. and that an attempt is being made to make it sound worse than it will be, but it will clearly be very serious.

It is not surprising that with an anti-inflation policy in such a markedly unsuccessful phase there is increasing interest in the idea that we need some other framework within which to operate. It is not surprising that interest is widening in the independence and anti-inflationary role of a central bank. I still believe that the former Chancellor's paper should be dug out of the wastepaper basket and published so that it could be the subject of genuine public debate.

The inflation dangers also cast into doubt the Government's programme for entering the exchange rate mechanism. It is now reasonable to call it a programme as Government spokesmen throw no doubt on the intention to enter the exchange rate mechanism. They say, "When we join" and they talk about what the terms are. What is to be the inflation measure by which we judge whether inflation is proximate to or approaching that of the other Community countries? The Governor suggested that the only condition that the Government had set which had not been satisfied was inflation. The Select Committee sought to establish with the Chancellor what figure he would use to determine whether our inflation was on course to enable us to join the exchange rate mechanism. The Committee asked whether he would consider the trend, the retail prices index figure or the underlying inflation figure. The Chancellor said: We made it perfectly clear initially that we needed to see a substantial fall in British inflation and I have refined that by explaining that we are looking for a proximate rate of inflation between ourselves and the Community overall, but I am not going to go into further details, I am afraid. I do not think it would be wise or productive to do so. That comment suggested to me at the time that the Chancellor hoped that he would have a free choice of about three different inflation measures and that one of them would be appropriate at the time that the political decision was made to enter the exchange rate mechanism. He would not tell us whether that decision had already been made. His comments did not suggest that he now knew what was the most effective measure of inflation and would apply it in making that decision. The present pressures towards higher inflation cast doubt on the timetable that the Government may be operating for entering the exchange rate mechanism.

I believe that we should be in that mechanism as early as possible. Without it, the Chancellor is in considerable danger of being forced into a position where he knows that he should have higher interest rates, if that is the weapon on which he has to rely, but is in no position to bring that about. Even those in the Conservative party who take a view different from mine on the general management of the economy believe that the Chancellor may have reached the political limit of what he can do with interest rates because of the effect they have and the way in which that effect is seen in the Government's own unpopularity. The Government's unpopularity is apt to increase the pressure on sterling and to increase the demand for further rises in the exchange rate, so the Government are caught whichever way they go.

To make matters worse, high interest rates do not hurt everybody. Some benefit from high interest rates and would have substantially more disposable income as a result. They would, no doubt, buy imported goods with the fruit of those higher interest rates. Again, there are more circular pressures on the Chancellor which mean that a total dependence on interest rates is likely to bring him to the point where he cannot increase them to the extent that he and his advisers would regard as necessary to bring about the necessary correction.

When one thinks about using interest rates as a corrective against high borrowing, it is worth bearing in mind that the value of private housing in 1988, after deducting the money borrowed to buy it, was £740 billion, which is an awful lot of asset value to use as collateral for further borrowing. A number of people are in a position to make use of that collateral for a great deal of further borrowing.

For a long period the Government have ignored the combined effect of their fiscal stance and the structural changes in the housing market, the credit institutions and the mortgage markets, and the competition between the financial institutions. That constitutes a failure to apply their various doctrines and beliefs to actual facts and changes which they knew were taking place and of which the most graphic example was the previous Chancellor's failure to see what the effect would be of postponing the changes he was making in the mortgage rate so that people had long enough to make house purchases, taking advantage of the tax relief.

That worrying set of circumstances is the background to the Bill and has called into question the Budget judgment. I believe that the Chancellor should have taken a tighter stance in the Budget. Had he done so, he would have allowed himself more room for manoeuvre. I reject the Chancellor's view that levels of personal taxation as an aspect of fiscal policy are not an appropriate means to use for the regulation of the economy. The Chancellor will not be able to continue in that view once we are in the exchange rate mechanism, as the Select Committee has pointed out. The interest rate instrument is tied up with the operation of the exchange rate mechanism, so the Chancellor will not be able to use it for regulation purposes. At times, he will have to use fiscal policy.

Why was income tax not reduced by a penny in the pound in the present Budget? It is the Government's declared intention to reduce income tax to 20p in the pound. They have not done so in this Budget because they considered that it would not be prudent. What is that but a decision about the management of the economy in present circumstances? The Government have set aside a declared policy objective to do a bit of fine-tuning by not taking any more off income tax. That option would not have been available to the Government if they had achieved their objective. If the Government had achieved their chosen level of income tax in the long term, there would no longer be room for manoeuvre. But let there be no doubt that this year the Chancellor exercised his freedom to make a judgment of fiscal policy based on current circumstances. It is absurd for the Chancellor to argue that such measures are not appropriate, and in future years he will have to change his doctrine.

I wish to comment on the taxation aspects of the Bill which will not take too long, because there is much in the Bill that is not in the least controversial. At first glance, there does not seem to be much that is controversial in the Bill although, last year, we found ourselves dealing with some fairly controversial retrospective clauses in the later stages of our deliberations. Some of them were introduced during the passage of the Bill. I do not know why once again the Government are having to resort to introducing important clauses on composite rate taxation at a late stage. That suggests that they decided to make the composite rate change at the last minute. I shall not be too critical, however, because I welcome the change; indeed, I wish that it had taken place a year ago.

As it is, building societies are devising complicated but useful schemes to enable people—particularly married women—who will be non-taxpayers this year to gain the benefit of a year under the present system and have the interest paid in the first year of the new system because of the one-year delay. If that were not done, all the money would go into offshore accounts in a year in which there will be a larger number of non-taxpayers but no change in the system.

I cannot agree with the argument of the right hon. Member for Llanelli (Mr. Davies), who thinks that the change is somehow unfair to people who previously had their rates of tax reduced by the contributions of people who should not have been paying tax at all.

Mr. Denzil Davies

I did not say that it was unfair; I merely pointed out that more people would pay more tax and that a minority would benefit but the majority would not.

Mr. Beith

But previously a minority were being penalised. That was unfair; it should have been changed and I am glad that it is now being changed.

I welcome the provisions on football pools duty and on tax incentives for savings—at least as far as they go. They are very much in line with the arguments that the Liberal Democrats have advanced. But I must reiterate that I find it absurd that the tax that is affecting most people does not find a place in our debate.

One of the relatively widely welcomed features of the proposals have been the child care provisions. They have been welcomed by the Labour party because they were precisely what the Labour party asked for—tax relief on workplace nurseries. Nevertheless, I think that the provisions will prove a great disappointment to many working women who do not have access to workplace nurseries but who are paying out of their taxed income for access to nurseries or child care.

How flexible does the Chief Secretary intend the Bill to be? We can discuss it in detail in Committee, but let me ask him this. If two or three employers on adjacent sites on an industrial estate combine to run a workplace nursery, will that provision be excluded or included? If two or three branches of a bank in the same town provide a workplace nursery, which has to be at one of the branches, will all the employees in all three branches benefit, or only those who work on the premises at which the nursery is located? The provision seems very limited.

The Liberal Democrats believe that there should be a wider form of tax relief on child care that extends to all those who are now having to pay for the facility out of their taxed income. It will seem doubly unfair to many women that a limited number who have access to workplace nurseries should receive tax relief when nothing will be done for them. The change is desirable, as far as it goes, but it will appear particularly divisive and disappointing to the many more women who pay for child care, whose skills are particularly needed at present and who will not be helped by the Bill. Last year when we pressed the case, the Labour party disagreed with us. Labour Members argued that we were going too far and that the relief should be confined as the Government proposed. I think that the issue will continue to be discussed for some time to come.

It is disappointing that we still have no useful new environmental taxation measures in the Budget, apart from the extension of relief on lead-free petrol and some change in company car arrangements. The opportunity could yet be taken if the Secretary of State for the Environment came up with the new tax proposals. Perhaps he is too busy with the poll tax to bother about this subject. The right hon. Gentleman was supposed to have been introducing proposals and I hope that, if he does, they will include tax proposals.

There is still much concern among charities about their future zero-rating. I hope that the Government will make clear their position on that. The fact that there are measures in the Bill to help charities does not allow us to escape that problem. Charities are very concerned about what will happen from 1992, and anxious to protect their status. If their status were changed, it would severely damage a great deal of charitable work in Britain.

If hon. Members go back to their constituencies, especially before next Thursday, waving copies of the Bill and saying to their constituents, "This wonderful Government have removed stamp duty on securities", their constituents will ask them, "What have you done about the poll tax—the real tax measure that is hitting so many of us so hard?"

8.26 pm

Mr. Michael Grylls (Surrey, North-West)

The hon. Member for Derby, South (Mrs. Beckett), who opened the debate for the Opposition and who spoke for an inordinately long time, tried to make a very gloomy assessment of the British economy, in addition to referring to particular problems that are well known to all of us. I suppose that that is her job. The important thing is the overall position of the economy, not the specific problems that have been referred to, which I shall not rehearse now. New firms and new jobs are being created, the budget is in surplus, we are paying back debts, the economy is not going into decline but is still growing, albeit more slowly than before, and business activity generally is pretty good. To me, those are not the signs of a moribund economy—they are signs of an economy that has been freed by deregulation in successive Budgets introduced by Tory Chancellors.

The hon. Member for Berwick-upon-Tweed (Mr. Beith) chided us by saying that we could not go to our constituencies in advance of polling day on Thursday and say what a wonderful Budget this year's Budget was. I cannot imagine anything worse than introducing a Budget designed to sell to people on polling day. The great thing about the Budgets of the past 10 years is that in them successive Chancellors have tried steadily to improve the lot of the economy. They have been long-term Budgets, reforming taxation and changing the basis of the British economy, and the country has benefited enormously from the changes.

The hon. Member for Derby, South referred in particular to the change in the small firms rate of corporation tax, to the 25 per cent. band and to the increase in the level for marginal relief from £150,000 to £200,000. I was glad to hear her say that she welcomed that. I also welcome it because medium-sized companies can grow only by using internally generated profits. If those are overtaxed, the companies will not grow and expand.

Tax reform is important and it should continue. Although we did not see substantial changes in income tax in this Budget, we hope that those changes will continue in future Budgets. I believe that it is generally accepted that we are still taking too much from people by way of personal taxation. Although we have reformed taxes and cut tax rates, and we should be proud of doing that and should signal to the outside world that our tax rates are among the lowest in the world, the generality of tax is still too high. I am sure that my right hon. Friend the Chief Secretary to the Treasury would agree about that.

Mr. Graham Allen (Nottingham, North)

Will the hon. Gentleman give way?

Mr. Grylls

No. If the hon. Gentleman will forgive me, I will be brief and allow another hon. Member to speak.

Generally it is agreed that we want to return to reducing personal taxation, certainly at the lower end. Tax cuts must be a continuing part of our long-term policy and I hope that that will continue in succeeding Budgets.

I wish to refer to a particular omission from the Budget. I do not decry the positive things that have been done, some of which I have referred to while others are already well known, but I hope that the omission that I intend to highlight will be corrected in a future Budget from this Government. One of the Government's great successes has been in creating what has been accurately called the enterprise society, in which people have been encouraged by tax changes and other incentives to invest their money in small and medium-sized firms and to take a risk.

Many of these small and medium-sized firms are still hit very hard by the level of inheritance tax. It is true that there have been big changes in that tax—the top rate used to be 80 per cent., but it is now down to an effective rate of 20 per cent. once business relief is taken into account—but we should not be satisfied while inheritance tax is still applied to family businesses. That cannot be right.

I know that the Treasury asks, "What are you fussing about?" because the inheritance tax is avoidable. If one gives away the company or hands over one's share to the next generation or the managers within seven years, no inheritance tax has to be paid. However, that argument misses the point. We cannot decide when we are going to die; we have very little control over that. Inheritance tax distorts business decisions. Too much business planning is spent trying to decide when shares should be handed over to the next generation, whether it be the family or managers. If someone is wise under the present tax system, he arranges that early, but the person to whom control is being handed over may not be ready to accept it. The assets may therefore be damaged. The business might be damaged by someone who is not ready to take on the reins.

I am not talking about inheritance tax on personal wealth—that is a completely different issue—but we should be seriously considering 100 per cent. relief from inheritance tax for businesses so that they can be passed on from one generation to another without being damaged or facing a big bill.

If a company has assets of £1 million—that need not be a big company these days—and pays the normal rate of inheritance tax, it would have to find £200,000 in cash to hand over to the Chancellor. The Treasury sometimes seems to believe that businesses have that kind of money in a drawer somewhere, waiting to be paid out when the proprietor retires or dies, but that is not the case. The company to which I have referred would be badly damaged and would probably have to be sold and taken over by a bigger firm. I am sure that neither the Opposition nor the Government would want that to happen.

We want businesses to grow from generation to generation. Very few businesses succeed in reaching their maximum size in one generation. That is true of business after business. We should ensure that businesses remain independent units of competition and can therefore be handed over to the next generation.

In discussions in relation to the next two Budgets, I beg my right hon. Friend the Chief Secretary to the Treasury to consider how marvelous it would be for Ministers at the end of 12 or 13 years of this Government to abolish inheritance tax for businesses because we want them to thrive and pass on to the next generation as that is the best way to ensure that they grow.

8.35 pm

Mr. Giles Radice (Durham, North)

I am sure that the hon. Member for Surrey, North-West (Mr. Grylls) will forgive me if I do not follow his remarks.

I believe that it is a good custom that we consider the report of the Treasury and Civil Service Committee when we debate the Second Reading of the Finance Bill. I hope that the Chief Secretary to the Treasury will not mind my saying that it is a particularly good custom this year because of the rather dry and technical nature of this Finance Bill. Probably the only group of people to enjoy this Bill will be the accountants, who I am sure are already sharpening their pens and giving advice to their customers about the Bill. Of course I accept that there are hon. Members on both sides of the House who are longing to spend our summer nights considering the Bill's 104 clauses. However, we have done the House a service by producing our Treasury and Civil Service Committee report in time for this Second Reading debate and I will concentrate my remarks on that report.

The 1977–78 Procedure Committee which set up departmental Select Committees hoped that they would oversee the work of Government Departments and would come to be a check on the Executive. It is probably fair to say that, despite all the limitations, the Treasury and Civil Service Committee is beginning to do that. I believe that we have been helped by television, too, which informs the public and helps to sharpen the questions, which places Ministers under greater pressure than previously.

The Select Committee's investigation into the economic background of this year's Budget provides a good indication of the progress that has been made. Our sittings, as usual skilfully chaired by the right hon. Member for Worthing (Mr. Higgins), revealed the significant difference of emphasis between the Governor of the Bank of England and the Chancellor of the Exchequer on two key issues—the level of inflation and the exchange rate mechanism.

The Governor—whose evidence as the guardian of the currency we must, of course, respect—predicted that inflation would rise higher than 9 per cent., mostly because of the impact of what he called administered or politically decided prices, especially the poll tax. When we put that to the Chancellor, he refused to answer. To most of us, his silence was as revealing as if he had spoken. It is clear that the retail prices index is likely to go well over 9 per cent. As the hon. Member for Berwick-upon-Tweed (Mr. Beith) said earlier, it could reach 10 per cent. next week.

With regard to the exchange rate mechanism, the Governor of the Bank of England was brutally frank about the Government's conditions for entry which, he said, apart from the level of inflation, were "mere details". In contrast, the Chancellor played a very dead bat. Clearly he was still worried about his relationship with the Prime Minister.

I use those two examples to show that the Select Committee process of question and answer, if properly employed, as I believe it was in our hearings, can throw considerable light on the attitudes and motives of Ministers, and in that sense the Executive becomes more accountable than it otherwise would be.

Given the varied views of the members of the Committee, our reports are usually better known for their analyses than for their prescriptions. I do not believe that they are any the worse for that. Thanks partly to our advisers, our track record is rather better than that of the Treasury. In April 1988, when the then Chancellor was still boasting about an economic miracle, we were warning of the dangers of overheating. We also began to be concerned about the level of inflation and the balance of payments. It was not a matter of hindsight—we got it right at the time.

Mr. Higgins

And house prices, too.

Mr. Radice

And house prices, too, as the right hon. Member for Worthing reminds me.

It is worth seeing what we have to say in our 1990 report, which is closely based on the evidence that was presented to us. We repeat our warnings about inflation and, like the Governor of the Bank of England, we place special emphasis on the possible response of pay bargainers to the impact of the poll tax and other administered crises. We are concerned also about the effect of further currency depreciation on the Government's counter-inflationary strategy. Bearing in mind that there has already been a depreciation of 10 per cent. in the past year, which has clearly had an impact on inflation, one can see what we mean. We are also much less sanguine than the Government about prospects for a significant reduction in the balance of payments. The latest trade figures show just how far we have to go even to bring the annual deficit down to £15 billion, the forecast level for this year.

For once, the Committee's most interesting observation relates not to economic analyses but to economic policy. Significantly, we note the implication of the stress that the Chancellor laid in his Budget on the medium-term nature of the Government's fiscal policy. Several hon. Members have remarked on that point. By definition, and of necessity, it means that the Chancellor's counter-inflationary strategy is a one-club policy. The consequences are serious. Most hon. Members know from their constituency experience just how damaging the one-club policy has already been. It is literally clobbering small business and investment generally. As the Committee points out, it is also taking a long time to dampen demand. I agree with the right hon. Member for Worthing who chairs our Committee that it is important to have the right statistics, but even so it is clear that it has taken an enormously long time to work.

The Committee points out also that, once in the exchange rate mechanism, the Chancellor will be forced to abandon his one-club policy. Interest rates may need to be used more to support the exchange rate than as part of a counter-inflationary strategy. That means that he will need to use fiscal policy as a short-term weapon. If that is to happen inside the exchange rate mechanism, he might as well get used to it now.

The Chancellor would do well to look across the channel to see how the French economy is now being managed. Another recently published report, the OECD report on the French economy, congratulates the French authorities on their economic management and predicts a period of non-inflationary growth. After two years of sustained growth and low inflation, the OECD report expects the French economy to out-perform other OECD countries on the inflation and growth fronts. That is quite significant, given the problems that the French economy had during the 1980s.

The secret of French success with inflation is that, in contrast to the British Government, the French authorities have been prepared to use all available instruments—monetary, fiscal and exchange rate policy, and even wages policy. As the OECD report points out, French membership of the exchange rate mechanism played a key role in bringing French inflation down to the German level. There is a lesson for us. A country with a similar economy in some ways—it is certainly a similar size—has managed substantially to reduce inflation and to make its economy far more competitive. It has done that without the benefit of North sea oil, which we have enjoyed for the past 10 years or so.

In conclusion, the message of the Select Committee's report is that, in contrast to the French economy, our economy remains dangerously out of balance with a high level of inflation and a big balance of payments deficit. What is more, the report casts doubt on whether the Government are pursuing the appropriate policy instrument to bring the economy back into balance again. Those are disturbing findings that the Government will ignore at their peril.

8.45 pm

Mr. David Howell (Guildford)

We are told that there is nothing to be said in 10 minutes that cannot be better said in five. Therefore, I shall attempt to adopt that principle at this late hour—a principle that the hon. Member for Derby, South (Mrs. Beckett) would have been wise to adhere to after an inordinately long speech that said nothing much.

I admire the Budget strategy and the Finance Bill. It is a thoroughly workmanlike operation that meets many of our medium-term supply side needs. As the Treasury Select Committee says in yet another excellent report, it is probably broadly neutral in so far as the Budget's impact on the economy can be measured. Of course it has not really made much difference to our immediate economic worries, of which the most overwhelming by far is the level of inflation, partly as measured by the retail prices index and partly by the underlying inflation rate, which may not be so high but which all would agree is far from satisfactory.

A decade ago we used to say that inflation was the fundamental enemy. It was not only unjust but poisoned everything. Those words were true then and they are true today. I still think that hon. Members do not fully understand just what appalling poison the inflation rate and the RPI rate are injecting into the rest of the economy and creating all sorts of secondary infections throughout the system. We know that every point increase in the RPI immediately adds just under £1 billion to public expenditure, through indexing of state pensions and social security benefits. Straight away, the Budget is hit sideways by an increase in the RPI. Although my right hon. Friend the Chief Secretary tried bravely to head off the proposition—he was talking about another aspect, keeping aside the proposition that the community charge has any immediate relevance to budgetary constructions—the truth as enumerated in the Select Committee report is that it has a devastatingly direct impact on the Budget and, of course, immediately adds to public expenditure. That is quite aside from the fact that we then move on from an RPI figure to pay settlements related to the RPI figure, which gives the whole matter a further spiral upwards, and quite apart also from the fact that inflation has helped to screw up the introduction of the community charge by involving the Treasury in making some absurdly hopeful estimates of inflation rates that had no chance of being met. Local authorities, which are not businesses and do not act like businesses, merely said, "We shall do what is open to us, which is to pile it on to the community charge." Inflation is our problem, as it was a decade ago, and we must get on top of it much more decisively than we are doing now. Of course we have hopes for next year and we must act more urgently.

There are two broad strategies to deal with inflation—there always have been and they remain today. One is to make operative and effective our own domestic monetary discipline in ways that ensure that, whatever happens to different levels of prices—even to the community charge—it is not validated by increases in the money in circulation. The second, in an open economy such as ours, set as we are alongside the huge continental exchange rate bloc of the exchange rate mechanism, is to have an exchange rate policy rather than not to have an exchange rate policy.

That is a controversial view for my hon. Friends and others who think that, if only we can get the monetary discipline at home right, the exchange rate will look after itself. I fear that in the real world, in the real currency markets, that is too simplified a view. They are right in half their proposition—that we must get our monetary discipline more effective—but they are wrong in their proposition that we can then leave the exchange rate side to look after itself. Both are necessary and interlocking elements. Without them both being pursued with more vigour. we shall not get matters right.

On the monetary discipline side, the position is not good. Whether one is a monetarist or a revised monetarist or one merely appreciates in a common sense way the importance of money in the inflationary process, it is worrying to note that the monetary aggregates are going astray. M3 rose by 2.4 per cent. in the period to March; M4 by 17.3 per cent.; and even M0, which is the Government's published target—it is the only one and is only an indicator, not a quantity of control of monetary demand or supply—is moving outside the frame.

It is worrying that we appear to lack the mechanisms and systems by which to control the monetary conditions inside the country. We shall never make a good member of any exchange rate mechanism until we get our own qualifications right as regards monetary discipline. That is why the Chancellor was right when, at the beginning of this year, he said, as he repeated in his Budget speech, that he was concerned about mechanisms of monetary control in this country and was seeking to reform them in a number of ways.

We must face the fact that our present structure does not operate on the supply of money. It operates mostly on the demand for money. Setting the short-term interest rate sets the price, and the Bank of England then says that it will supply virtually unlimited funds, one way or another, to the banks at that level. It is then left to the banks to decide what they do with all that money. The result is that if it is available and they can lend it, they lend it; and if it is lent, it is spent. That position continues even with the very high short-term interest rates that we have today. We shall not achieve effective control over monetary conditions in this country until we move more to controlling the supply of money as opposed to the demand for money.

It is in that area that we must apply our minds if we are to achieve credibility internationally that we have monetary discipline at home. We must give thickness and quality to Britain's monetary policies to ensure that our currency performs decently in international markets, thereby enabling us to command respect and make a contribution in international monetary circles.

The time has come to move towards the proposition being advanced—vigorously by the Governor and deputy Governor of the Bank of England and others—that we need a central monetary authority. The Bank of England is a politically subordinate organisation—it is effective in that role—but it must have a clear statutory obligation to achieve monetary targets and maintain control in the price and value of money. To do that, we should consider more than we have going against the monetary base of the banks, using the weapon of monetary reserve asset ratios—which on occasions the Select Committee examines and does not turn down—and developing a number of other techniques, which I do not have time tonight to enumerate, for going against the supply of money.

In the end, it all comes out in the interest rates. It is valid to say that everything we do is reflected in interest rates. But there is a difference between setting an interest rate and then finding that we must slip away from it, or otherwise operating through a variety of ways on the supply of money and seeing interest rates come out differently. It is the difference between letting the banks lend happily in the knowledge that they will never be caught out, and putting the banks in the position of having to start drawing in their lending in case they find that they must borrow short money at a price higher than they can lend it.

The other part of the policy is the exchange rate mechanism. I agree that it is not a quick fix. We must first get our own monetary position under much better control. If we can do that, it makes sense to move into the exchange rate mechanism, and we should declare more openly our preparedness to do that. When we do that, we may have higher interest rates in certain conditions, but with less volatility.

The interest rate has been moved by public policy decisions 84 times since May 1979. Short-term interest rates have moved that number of times in this country. We can do better. We could have a calmer pattern of interest rates if we had a context in which sterling was seen to operate and in which people could lend across the exchanges without such an exchange rate risk. People could invest in this country to take advantages of our relatively high interest rates with fewer exchange rate risks and that would create a downward and calming pressure on interest rates. It would enable us to get through the next difficult year with less strain than using a system of monetary control that is not up to the task that we face.

Those were the only remarks that I wished to make on that narrow issue. What I am endeavouring to put forward is fundamental to our success in beating inflation, which in turn is fundamental not only to the success of the Government but to the viability and prosperity of Britain in the coming five years.

8.55 pm

Mr. Denzil Davies (Llanelli)

This debate, as with previous Finance Bill debates, has in essence been about the development of the economy, certainly since the Budget, and there are no prizes for guessing the facts about that development. It has been poor since the Budget.

Inflation is rising again, the trade deficit is horrendous, unemployment is beginning to rise again or will rise soon, our interest rates are the highest in Europe, as we have been told, and they could rise further—that matter is not entirely within the control of the Chancellor—and manufacturing investment is beginning to stagnate and stop.

I should remind Conservative Members—there were echoes of this in the speech of the right hon. Member for Guildford (Mr. Howell)—that in 1979 they came to power to defeat inflation, to right the wrongs and curb the excesses, as the radical right say them, of the 1960s and 1970s and to stop, as the Conservatives of the time say it, the economic decline of Britain.

We see, 11 years later, that they have failed to do those things. We have heard today that inflation, measured by the RPI, may be 10 per cent. this or next month, and Government spokesmen—and the few who still have some sympathy with the Government—try to console themselves by saying that the underlying rate of inflation is about 6 per cent. Even so, 6 per cent. is twice the rate of inflation in France and Germany, our major competitors on the continent.

By the time that the increases in the poll tax, the mortgage rate increases and the raised excise duty have fallen out of the RPI, perhaps the rate of 10 per cent. will come down. But by that time the underlying rate of inflation may have gone up from 6 to 8 per cent., partly as a result of wage increases and partly because of the devaluation of the pound which has taken place but which has not fully worked its way through the system.

I had always thought that there was an inner contradiction in the policies of the radical right. It believes in controlling and regulating the money supply, but it does not believe in controls or in regulations. That has been the fundamental problem. Indeed, that point was touched on by the right hon. Member for Guildford (Mr. Howell). If one does not believe in regulating the market but believes in freeing everything, including money, how on earth can one control the money supply? Of course, one cannot do so, as has been demonstrated to a considerable extent.

In the latter part of the 1970s it was difficult to control the money supply in a country such as Britain which, because the City of London is an international trading centre, was an open financial economy even then. However, it is far more open today than it was in 1979. Yet a Government came into power who at least espoused monetary policy and called for controls on the supply of money, but who deregulated everything and did not leave themselves any instruments with which they could control the money supply.

The contrast with France and Germany is stark. Germany has a fairly flexible governmental regulatory system but a strong independent central bank. On the other hand, France has a weak central bank—that used to be the case and I believe that it is still true because we certainly do not hear much about the Banque de France—but has a strong, central and almost inflexible governmental regulatory system.

Therefore, while one country has an independent central bank and a looser system of government, the other has the opposite, but both are now maintaining a rate of inflation of between 3 and 3.5 per cent. In Britain we have neither. We do not have a governmental regulatory system and, although I am not advocating an independent central bank, we have a central bank that is somewhere between the Banque de France and the Bundesbank. We have neither one system nor the other.

As I have said, I do not believe that we should have a central bank that is totally independent because I do not believe that in a democratic society bankers should be allowed to control the supply of money. That is something for Government. With great political will and great political skill, plus the instruments at their disposal, the French have shown that that can be achieved through democratic institutions in a democratic society.

The other problem is the balance of payments. The March deficit of £2.2 billion was a shock to everybody, especially the Treasury. Last year we had a deficit of £20 billion, some of which, I concede, resulted from excess demand, and eventually some of the deficit will disappear as demand is reduced. Nobody can know for certain about such things because they are extremely difficult to forecast, but I do not believe that we will get our balance of payments deficit down to much below £15 billion even with high interest rates.

In the past all kinds of excuses have been made about the balance of payments deficit. First, we were told by the right hon. Member for Blaby (Mr. Lawson) that it did not matter and that we should forget about it. Then we were told that, although it did matter, it did not matter as long as we could finance it. Then we were told that if the figures were wrong anyway, why pay any attention to them? Now we have "erratics" and are back to diamonds and to being told about jumbo jets and Boeings. We have been over that ground before, but the deficit now is much greater than it was in 1970 when the Labour Government lost the election.

It does not give me—or, I hope, anybody else—any pleasure to say that I am fearful that we shall not be able to reduce the deficit to below £15 billion because there may very well be a structural problem, which could have arisen in two ways. First, large sections of our manufacturing industry have been wiped out. That means that we are not substituting for imports because we cannot produce the goods that would provide that substitute. I am talking about a vast range of consumer goods—the kind of goods that most people want to buy and are determined to buy despite the high rates of interest.

Secondly, although I concede that to some extent there has been a change in some industries in the past 10 years, even in those parts of British industry which are now more productive, most of the plant and machinery that is used and most of the investment goods have come from abroad. That is a continual process. It is not a case of buying something once and for all because, in today's world, plant and machinery must change, change, change and we must keep up with the changes.

All hon. Members have toured factories in their constituencies. We have all seen foreign machinery, plant and equipment. The replacement parts and even the servicing of that equipment come from abroad and have to be paid for ultimately in our balance of payments.

Therefore, I cannot see how we can reduce our balance of payments to much below £15 billion without stringent measures.

The other night I Watched "Newsnight" in which my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) participated, along with that highly respected—I say that with the greatest of respect—financial columnist, Mr. Samuel Brittan. On that occasion my right hon. and learned Friend the Member for Monklands, East was not up to his usual standard. Perhaps he was speaking with tongue in cheek, but he suggested that one advantage of having an economic monetary union was that one could wipe out the balance of payments deficit. We know that there can be an act of union and no balance of payments deficit, but that does not solve the problem. All that will do is turn Britain into the South Dakota or the Oklahoma of the united states of Europe. The problem is still there as a drain on our resources and infrastructure. The balance of payments is one of the best indicators of an economy's health. We fall down badly on that, as the Government fall down badly on inflation.

The Government can be accused of many things, such as the neglect of public services and the introduction of the awful, ridiculous poll tax, but in the end it is the economic mess that they have created during the past 10 years that we must consider. It will have to be cleared up by the next Government, at great cost and with great problems for the British public.

9 pm

Mr. James Paice (Cambridgeshire, South-East)

I have listened with interest to the whole debate. I support strongly what my right hon. Friend the Member for Worthing (Mr. Higgins) said, especially when he supported the Chancellor for not heeding the siren voices that called for substantial increases in taxation, and his comments about Government statistics. As we visit businesses in our constituencies and talk to bankers—as we all do—it must be abundantly clear to us all that the Government's actions on interest rates are already having a strong effect. We can see the effects on the retail sector in the difficulty faced by shops in our constituencies. Sales are down; many have had to shed staff and many are closing. The Chancellor's medicine is clearly working. It is a matter of regret to us all that it is taking longer than we hoped, but that could be construed as a measure of how strong the economy was in the first place.

Until recently, I had lingering yearnings for credit controls, but, such thoughts were dashed and destroyed, not by my right hon. Friend the Chancellor, or even his predecessor my right hon. Friend the Member for Blaby (Mr. Lawson), but by the right hon. and learned Member for Monklands, East (Mr. Smith) who on 24 October 1989 was espousing the cause of voluntary restraint by the banks. When he was pressed by my hon. Friend the Member for Croydon, South (Sir W. Clark) about the foreign banks—which since the abolition of exchange controls have developed a major stake in this country—he said: I do not think that foreign banks would take an irresponsible view if approached by the Government"—[Official Report, 24 October 1989; Vol. 158, c. 694.] That is naive. Foreign banks would be more likely to heed the advice of their own Governments and shareholders than that of the Government of the country in which they operate. They operate solely for commercial benefit.

Credit controls by voluntary restraint and moral persuasion were first introduced in the early 1950s. For the following two decades, the severity of the "voluntary" persuasion was increased, until finally in 1971 it was abandoned for positive constraints on the banks. I do not believe that they have any part to play in controlling credit today, to say nothing of the fact that they would not tackle the problem of housing credit, which is the root cause of many of the difficulties.

I hope that my right hon. Friend the Chancellor will examine what has happened in the past week with credit cards. Credit card borrowing accounts for a minuscule amount of total credit, but I object—I know that others do, too—to paying charges that are used to keep interest rates down for those who use the card to borrow. The fact that people who regularly pay off their credit card accounts every month are subsidising other people's interest is especially distasteful. I do not know whether it is something in which we should intervene as a Government, but it gives me cause for regret.

Much has been said this evening about the exchange rate mechanism. I lend my voice entirely to those who are trying to persuade my right hon. Friend the Chancellor not to adhere too strongly to the Madrid requirements but to seek entry sooner rather than later. I say that not because I believe that it is some wonderful palliative or panacea; it is clearly not the sole answer to our difficulties, and anyone who believed that it was would be foolish. My right hon. Friend said in his Budget statement that it would provide a new framework for interest rate decisions, but that even then no one should suppose that it would bring a dispensation from the need for a strong domestic monetary policy, and that is absolutely right. But belonging to the exchange rate mechanism would provide the stability in the currency markets for which industry yearns, and it would be an extra weapon—an extra club in the bag—for the Chancellor in his constant battle to control inflation.

Those of my right hon. and hon. Friends who believe that there is some national pride at stake and that we should not on that account join the rest of Europe in the exchange rate mechanism are, I believe, mistaken: for a long time we have been influenced to a very large extent by what happens in other capitals and by other Governments' activities.

In thinking about the Bill I have also considered what is not in it and what could be in it if there were another Government. My right hon. Friend the Chief Secretary has already mentioned the minimum wage promised by Opposition Members at a cost of 500,000 jobs. What is not in the Bill is anything that could be construed as assisting inflation or accepting inflation as inevitable, but it is clear from an examination of the policy of Opposition Members that they accept a degree of inflation as an inevitable part of progress.

Perhaps most significant of all, the Bill does not introduce any extra income tax on investment income, such as a surcharge on income over £3,000 from some form of savings. Three thousand pounds is the sort of income that would come in from a relatively small amount of savings, perhaps a half-share of an inherited property—the sort of savings and income that many families would expect to have, particularly pensioners. It is not a Budget which reintroduces the gift tax or destroys the opportunity for many people to rent a home by removing the business expansion scheme exceptions from private landlords.

From listening to debates here on the economy I find that many Opposition Members have still not grasped the fundamental fact that the tax rate reductions that we have followed for the past 11 years have increased the Government's revenue and therefore the Government's ability to spend on important services. If people really care about public expenditure on those vital services, what is crucial is not the individual rates of tax but the total sum of money raised from that tax policy; and it has been clear to us all who have followed the path of the past 11 years that the reductions in the tax rates have served to increase the overall take to the Government and therefore the amount of money available. The alternative would be to borrow or to cut expenditure, the path followed by Labour Governments in the past and one that would be followed in the future.

Hon. Members have mentioned the changes in charity taxation. They are widely welcomed on both sides of the House and are not in dispute. I know that it is outside his direct remit, but I suggest to my right hon. Friend the Chief Secretary that the changes would be considerably enhanced if he could persuade my right hon. and learned Friend the Home Secretary to bring forward a Bill for charity law reform to make sure that charities are in a strong position to use to the very best the enhanced resources that they will receive from this Bill. Concern has been expressed in the press only in the past few days about one large charity—

Mrs. Alice Mahon (Halifax)

Will the hon. Gentleman give way?

Mr. Paice

I will not; other hon. Members want to speak.

I believe that the Government would be wise to introduce charity reform as soon as possible.

TESSA has been widely welcomed on both sides of the House. Its strength is that it is a simple scheme that will be readily understood by ordinary people. The personal equity plan scheme has worked very well, but it has been too complicated, I fear, for many people. I should have liked a more front-end loaded savings scheme that would have enabled the saver to see his benefits more clearly. TESSA, which is fundamentally simple, will go a long way towards remedying our savings difficulties, and that in turn will, I hope, lead to a shift in the underlying levels of interest that it will be necessary to charge in the long-term future.

The abolition of composite rate tax must be right. As a parent I have found it difficult to examine possible investment schemes for my children's meagre savings, since so many of them carry composite rates of tax. Although the abolition will not take place until next year, it will be a great improvement.

The Bill is largely neutral, but my right hon. Friend the Chancellor has clearly shown that in a broadly neutral Budget it is possible to deal with unfairnesses and difficulties and to hand out a range of remedies to those who would otherwise suffer. This is a good Bill, welcomed in many sectors, and the House should welcome it, too.

9.17 pm

Mrs. Alice Mahon (Halifax)

I tried to intervene when the hon. Member for Cambridgeshire, South-East (Mr. Paice) was speaking about charities because I, like other Labour Members, was disgusted to hear Oxfam singled out for political treatment. I think that the line goes back to No. 10. I should have liked to have told the hon. Gentleman that the Adam Smith Institute is also a charity. It is highly political, and it certainly never supports Opposition policies.

The Bill fails to address the real problems facing our nation. Our economic predicament is grim, but listening to speeches by Conservative Members one would think that we were in the middle of an economic miracle.

I want to concentrate on the fact that the Bill singularly fails to do anything for manufacturing industry. Manufacturing industry faces grave difficulties, yet Government policies, such as high interest rates, have brought investment almost to a halt and that has further damaged our manufacturing base.

The other day I talked to a director of a good textile firm in Halifax. Textiles have been in retreat, badly damaged by Government policies of the past 10 years. He told me that he had planning permission for an extension to a factory, he had full order books, yet he could not make the required investment because of the expense of borrowing money.

The Government have severely neglected manufacturing industry. The latest figures show that manufacturing output has ground to a halt. The forecasts in the Budget assume zero growth, and that is bad enough for manufacturing. But recently we had a debate on the multi-fibre arrangement, in which a junior Minister at the Department of Trade and Industry spoke. He hinted that we did not need a multi-fibre arrangement and that it would save no jobs. Hon. Members who heard that must have been depressed about the future for textiles. Those representing constituencies where thousands are employed in the textile industry were very worried. The Silberston report thought that 30,000 jobs would go; the TUC gave a more realistic assessment of about 100,000 jobs. If that happens, an important industry may be wiped out.

The Government have a dismal record on the support of manufacturing industry. The growth rate in manufacturing output in the United Kingdom between 1979 and 1989 was 12.2 per cent. That places us seventeenth of the 20 OECD countries. It would be difficult to find a Government policy which did not damage industry and workers. High inflation, high mortgages and the poll tax mean that low-paid workers have no choice but to ask for pay rises. For the Government to pretend that that in itself will lead to higher inflation is a cheek.

I have already said that high interest rates are damaging manufacturing. Nothing in the Bill will help industry. Families have not benefited, nor have low-paid workers. If Government Back Benchers were honest, they would have tried to do something for families. We have heard praise for tax relief on workplace nurseries, but we heard nothing about the freeze on child benefit which has damaged families.

The so-called reform of the social security system has led to great hardship. Every day we find out about some new hardship. Only the other day I discovered that women who were in receipt of family credit are now much worse off.

Women who work only during school hours and who, for obvious reasons, have the school holidays off cannot claim family credit. They are excluded because they are not working for 52 weeks a year. That is unfair. We are told that the adjudicator will have to decide on those cases. In whatever the Government have done, they have damaged the low-paid and people on low incomes.

A few months ago, a regulation was pushed through the House which will mean that textile workers and other workers who are laid off regularly will not be entitled to full unemployment benefit. The Government have inflicted low pay upon us. The Budget and the Bill will do nothing about it. We have heard from various hon. Members tonight about low pay. Conservative Members have talked about workers claiming exorbitant pay increases. Let me tell them about low pay. In my constituency C and M Packing pays its workers only £10 per day. That is the kind of economy that the Government say we need.

The one provision in the Bill which I welcome is the tax relief on workplace nurseries. Tax should never have been imposed on the nurseries. It was a scandal to pretend that workplace nurseries were a benefit which should be taxed, along with company cars. When we look at what the Government have done, we see how little it is and that the Government are not concerned.

This week in the House of Commons Magazine the Secretary of State for Employment talked about the demographic time bomb and the fact that 95 per cent. of workers in the future will be women. He praised the Government for taking off that unfair taxation in the Budget. Child care in this country is an absolute disgrace, and the Government do nothing about it. Workplace nurseries represent only 3 per cent. of child care in this country. If the Government were serious about trying to get women back to work, they would be talking about a comprehensive child care policy giving local government the money needed to fund nurseries and local authority community nurseries, doing something about low pay and making sure that women could get back to work.

One of the most comprehensive surveys conducted on workplace nurseries—a Government survey conducted by the Department of Employment—showed that less than 0.2 per cent., or 198 women, out of 1 million women surveyed had children in employment-provided creches. That shows the Government's lack of commitment towards getting women back into the workplace. Government Ministers will have to do something more than stand at the Dispatch Box and pretend. If the women of this country are to get back into the work force, they need to do something about who looks after their children, and that is a Government problem.

9.25 pm

Mr. Nicholas Budgen (Wolverhampton, South-West)

I am sure that the hon. Member for Halifax (Mrs. Mahon) will find it difficult to believe that those of us caricatured as hard-faced monetarists are so mostly because we are concerned, like her, about the weakest sections of the community who are hit hardest by inflation.

I had not expected to catch Mr. Speaker's eye in this debate. I have heard most of the speeches and came into the Chamber expecting not so much to contribute as to benefit from hearing the speeches. Having heard the various speeches, particularly that of my right hon. Friend the Member for Guildford (Mr. Howell), I reflected that he, most of all, represented respectable opinion. In all his speeches he goes on about the way in which we all want to defeat inflation, and says it is extraordinary that inflation continues. He speaks of various monetarist statistics as though he, and he alone, had the privilege of seeing them and almost says that ordinary commentators in this country had no means of noticing, for instance, that house prices were going up by 20 per cent. in one year or 30 per cent, in another. It seemed to suggest that all those signs of the stoking up of inflation can only now, retrospectively, be seen with the benefit of hindsight. In fact, all those figures were there for all to see at the time. The conclusion that we all reach is that, initially, inflation is much welcomed in this country.

Every time interest rates are unwisely brought down, it is put forward by the Government of the day as an indication of their wisdom, good management or personal generosity. The time must come—I do not know when—when this country will finally decide that it is serious about wanting to get on top of inflation. At that stage, it will surely say that the track record of Governments is so bad that the control of the money supply must, sadly, be delegated to another independent organisation.

Like my right hon. Friend the Prime Minister, I am highly sceptical of the proposals put forward with such magnificent effrontery by my right hon. Friend the Member for Blaby (Mr. Lawson). I recollect that on an earlier occasion he said that the relationship between the Treasury and the Bank of England was one of the Treasury deciding the policy and the Bank of England carrying it out. If a Labour Chancellor had said that, the pound would have dropped, all respectable opinion would have taken to the correspondence columns of The Times and there would have been a near constitutional disaster. However, at the time it was regarded as an engaging expression of my right hon. Friend's vigour and supremacy.

My right hon. Friend the Prime Minister was properly sceptical of the proposals to make the Bank of England more independent. She suspected that it was part of a wider scheme to bring Britain within the exchange rate mechanism and closer to a European central bank. As she rightly says, we believe in a supreme Parliament with an entirely independent central bank.

I see your eagle eye upon me, Mr. Speaker, so I will conclude. We have an independent judiciary, which is not supported by any special Bill of Rights. It is supported by convention. That is recognised by all parts of what I might pompously describe as educated opinion. In the same way, if we find, as we shall, that entering the ER M does not bring a painless attack upon inflation, and if we find that it has gone exactly the same way as prices and incomes policies, the control of interest rates through reserve assets, credit controls, or all those other myths of a painless way to control inflation, we shall have to give to the Bank of England greater independence within our constitution because we shall have plainly proved that, sadly, over all the years since the war democratic politicians have demonstrated that they and the British people, if in doubt, like inflation.

9.32 pm

Mr. Chris Smith (Islington, South and Finsbury)

Perhaps inevitably, much of today's debate has focused on the general condition of our national economy rather than on many of the detailed items of the Finance Bill. That is as it should be because the Bill will ultimately be judged by what it does or does not do to bring relief, improvement or assistance to our ailing economy. It roundly fails that test.

I wish to remind the House about some of the overall economic indicators. Had my hon. Friends the Members for Nottingham, North (Mr. Allen) and for Leeds, West (Mr. Battle) been lucky enough to catch your eye, Mr. Speaker, I am sure that they, too, would have wanted to draw attention to those indicators.

Many hon. Members have referred to the balance of payments deficit. The March figure is the second worst ever. The figure for the first quarter of this year of £5.6 billion is the highest ever first quarter figure in our history. Hon. Members have drawn attention to the rate of inflation, which now stands at 8.1 per cent. and is set to rise dramatically in a week and a half.

It is worth reminding ourselves that when the Government took office they inherited an inflation rate just above the European average. It is now double the European average. Right hon. and hon. Members have drawn attention to the record on output. The latest figures show that manufacturing output is lower now than it was in January 1989. They have also drawn attention to the investment figures. In the last quarter of 1989 investment in manufacturing was 5 per cent. down on the previous quarter, so we have stagnant output, falling investment, a record balance of payments deficit and rising inflation.

It is scarcely surprising that the Chief Secretary concentrated on what had happened in the past rather than on what is happening now to the British economy. However, he made one slip. He tried to convince us—as he has tried to do in the past and we have tried to put him right—that the present Conservative Government believe in low taxes. He may have forgotten what the Government themselves have said in the Red Book which was published at the same time as the Budget. Table 2.5 of the Red Book shows clearly that the overall taxation burden in the economy in 1978–79 was 34 per cent. of GDP. In 1989–90—the financial year just gone—after 10 years of Conservative stewardship of the economy, the overall taxation burden was 36¾ per cent. of GDP. What is worse, in the current financial year, 1990–91, the overall taxation burden goes up by a full percentage point from 36¾ per cent. of GDP to 37¾ per cent. The bulk of that increase is largely due to the unfair and undemocratic imposition of the poll tax on the people of Britain.

The Government are not the party of economic success, nor are they the party of low taxation. What about the Government's chosen policy to bring an errant economy to heel—high interest rates? We have the highest interest rates among the major economies and the highest mortgage rate ever in our history. Those interest rates are supposed to be bearing down on the demand side of the economy, but the figures to which my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) referred show that they are not working.

Since the previous Chancellor of the Exchequer began to tighten monetary policy to bear down on the demand side, a further £150 billion worth of credit has been pumped into the domestic economy. We have had 21 months of pain, increasing repossessions, household budgets in savage difficulty and mortgage payments increasing by £200 a month or more. And all for what? For £150 billion of extra credit going into the domestic economy.

Interest rates not only have an impact—however loose and ineffective that impact may be—on the demand side of the economy; they also harm the supply side of the economy. We need look no further than the account given by Midland bank on 24 April this year when its chairman warned that high interest rates were hitting businesses as well as individuals and leading to the worsening of the bank's bad debt situation. That warning was echoed again two days later by the deputy chairman of Barclays bank.

The evidence is clear that the operation of high interest rates is hitting business even more harshly than it is hitting the mortgage payers who are paying so much more each month for the homes in which they live.

Mr. Quentin Davies

Will the hon. Gentleman give way?

Mr. Smith

No. I am afraid that time is extremely limited.

Against that background, the Finance Bill fails completely to measure up to the task that the economy demands. Some items in the Bill are sensible and we welcome them. We have pressed some of them on the Government for some time. Last year we pressed for assistance for friendly societies. The Bill contains a little assistance for them. Last year the Government said that there was no way in which fiscal measures should be used. Now they are using them. We asked for changes in the provisions on Third world debt. The Bill introduces some changes that will help to stop the gravy train for banks to some extent, but those measures will do nothing specific to assist the ailing economies of the Third world.

Last year we asked for the abolition of the tax on workplace nurseries. We have argued that case throughout the past four years. It was dismissed out of hand last year by the Chief Secretary. Now he asks us to accept a Finance Bill that includes it. We welcome that. We are glad that the Government have changed heart on some matters.

We wish to scrutinise other items more closely, such as the changes in oil taxation. We shall want to be convinced that the relief on abandonment costs is balanced by the cap on petroleum tax payments. We are not sure that it is.

We shall examine the treatment of unit trusts, which seems to leave investment trust companies out in the cold. We shall scrutinise the precise operation of relief against VAT for bad debts. We shall examine the closing of loopholes for dual resident companies, a long overdue measure. We shall want to know that those loopholes have been fully closed.

We shall examine the abolition of the business expansion scheme locality rule which makes yet more attractive the private rented property sector of BES, which is already gobbling up 80 per cent. or more of BES relief.

Most important of all is not what the Finance Bill does but what it fails to do. It contains no green agenda for environmental use of the taxation system. Before the Budget we urged the Government to consider some sensible measures such as reducing VAT for energy-efficient appliances, insulation material, recycled material and catalytic converters and increasing VAT on chlorofluorocarbons and other polluting substances. We urged them to use the allowance system against corporations in an environmentally friendly way, to grade the vehicle excise duty scale of payments to encourage people to have smaller cars, and to reduce car tax where catalytic converters are fitted. None of those ideas has been taken up by the Government.

The Government have included no green agenda in the Bill. Nor is there any real help for investment in the manufacturing sector of our economy. There is no help on first-year capital allowances. There is no switch of the emphasis of the business expansion scheme from rented property to manufacturing.

The Bill contains only relatively minor measures on training. The negligible estimated cost of training and enterprise council provision in the Bill reveals that the Government do not intend very much training to take place as a result of the change that the Bill brings about.

The Bill contains no relief for ordinary people facing financial problems with their mortgages, electricity payments, water rates, transport fares, rents or the poll tax. Indeed, the Government have given clear signals that high interest rates are likely to be with us for a long time until there is an unseemly dash to the ballot box with electoral bribes to the people. By that time the British people will have rumbled the Government for what such bribes undoubtedly will be.

Above all, there is no statement in the Bill or in any of the speeches about it that gives us any hope that the Government are more serious than they have been recently about British membership of the exchange rate mechanism. The evidence of the Select Committee on the Treasury and Civil Service is extremely instructive here. When the Select Committee asked the Governor of the Bank of England whether all the conditions, other than the condition on inflation, out of the Madrid conditions had been met, the Governor said clearly, "Yes." When the Chancellor of the Exchequer was asked the same question, he said, "No." We are entitled to ask the Financial Secretary tonight which of them was giving the Government's position. Have the conditions other than the inflation condition been met or not? On the exchange rate mechanism, as on so much else of Government policy, there is doubt and confusion leading ultimately to disaster.

The Bill is a tinkering Bill which merely scratches the surface of the major problems facing the British economy. It fails miserably to measure up to the task. When the Chancellor commented on the appalling trade figures last week, he made much of what he called "erratic" items in the accounts. The Financial Times on Saturday had the right riposte to the Chancellor and the Government. It said: Erratic imports are being blamed for the Government's latest trade disaster. Other factors leading to the economic mess, presumably, include erratic inflation, erratic bank lending and erratic productivity growth. But I guess that the Government will never blame erratic policies. The truth is that we have a Government with erratic policies who have failed the British economy and the British people. The sooner they go, the better.

9.46 pm

The Financial Secretary to the Treasury (Mr. Peter Lilley)

Before I begin properly, I will answer the question asked by the hon. Member for Islington, South and Finsbury (Mr. Smith). Yes, we are on course to join the exchange rate mechanism of the European monetary system. We welcome Italy's recent moves to abolish exchange controls, but there remain conditions to be met—notably the reduction of inflation in this country. We wait to hear whether the Opposition are still committed to, as they said, "major changes" in the working of the European monetary system before they would be able to join.

This has been an important debate with a number of excellent contributions. I especially regret missing the contributions of my right hon. Friend the Member for Guildford (Mr. Howell) and of my hon. Friends the Members for Surrey, North-West (Mr. Grylls) and for Cambridge, South-East (Mr. Paice). I shall read their contributions closely after the debate. If I am unable to reply to them or to a number of other hon. Members now, I hope that I shall be forgiven due to the brevity of time available. I will provide written replies on any outstanding points.

My right hon. Friend the Member for Worthing (Mr. Higgins) made an especially important contribution. He will appreciate that I cannot pre-empt the reply that my right hon. Friend the Chancellor of the Exchequer will make to the excellent report of the Treasury and Civil Service Select Committee. My right hon. Friend the Member for Worthing placed particular emphasis on getting the statistics right. I assure him that my right hon. Friend the Chancellor is fully seized of the importance of that and is vigorously pursuing measures about which he has given the Select Committee an idea and on which he will report to it further. We certainly do not intend to spoil the ship for a ha'porth of tar, and it is fair to say that the problems with statistics are not the result of reductions in expenditure, but a consequence of deregulation and more rapid change in the economy with which the statistical process has not kept up.

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) said that we should return to fiscal fine tuning to control demand and that interest rates were unsuitable for that task. We should be virtually alone among the major countries of the world if we accepted that advice. Most other countries rely on interest rates and on small and regular adjustments, and are successful in so doing. They include socialist countries as well as Conservative countries. Moreover, I do not recall exclusive or major reliance on fiscal policy being as easy or successful as the right hon. Gentleman suggested.

My hon. Friends the Members for Gosport (Mr. Viggers), for Croydon, South (Sir W. Clark) and for Horsham (Sir P. Hordern) expressed concern about our measures on sovereign debt. They were particularly concerned that the new tax treatment might interact adversely with prudential provisioning for bad debt. I can reassure them on that. One effect of our measures will be to separate the tax treatment from the prudential aspect of provisioning, which will remain the responsibility of directors, taking into account the advice that they receive from the Bank of England. The measure will bring certainty both to the Exchequer and to the bank and will phase future increases in relief over a period. It will also increase the relative attraction of selling back debt to debtor nations—a measure that I know is welcomed by hon. Members on both sides of the House.

My hon. Friend the Member for Tatton (Mr. Hamilton) was in vintage form. I heard it suggested that he was being rather brave, at a time when the possibility of promotions is in the air. I thought that his speech was a naked bid for promotion—if only to shut him up. I am certainly not brave enough to comment on all the thorny issues that he raised.

My hon. Friends the Members for Tatton and for Wolverhampton, South-West (Mr. Budgen) joined together in affirming that the British are wedded to inflation, but I believe that they are wrong. It may have been so in the past, but since the experience in the foothills of hyper-inflation in the late 1970s, things have changed. That experience registered a shock on the British psyche similar to the shock which made the German people permanently hostile to inflation. Our shock may have been smaller, but it is fresher in our minds. I believe that there is now a much larger constituency in this country for anti-inflationary policy. I do not expect people to express pleasure while undergoing the painful measures that are essential to get inflation down, but I am certain that they will never vote in a party which is manifestly soft on inflation and whose policies are wholly lacking in credibility.

That brings me directly to the speech made by the hon. Member for Derby, South (Mrs. Beckett). I am grateful to her for her welcome for a number of the measures included in the Bill. Those apart, however, she did not mention a single item in the Bill, nor did she use the occasion—as one might have expected from the spokesman of a party which hoped to be taken seriously as an alternative party of Government—to spell out Labour's alternative tax proposals. There was not a word about them. Sometimes Treasury Ministers are criticised for going into pre-Budget purdah. The present Opposition are the first Opposition to go into a post-Budget purdah, which is in fact a pre-election purdah. Labour Members intend to remain mum on the subject for as long as they can, but we shall not permit them to do so.

The hon. Member for Derby, South refused to answer the question posed by a number of my hon. Friends: what would the Labour party do to get inflation down? We know what Labour would do to get inflation up. It would cut interest rates prematurely, increase public spending, squander the surplus and return to deficit financing. The hon. Lady admitted that Labour had endorsed the mistake that we have acknowledged that we made in reducing interest rates in October 1987, following the worldwide stock market collapse. What she did not admit was that the Labour party demanded that we do more—lots more—and continued demanding it for some months afterwards. The right hon. and learned Member for Monklands, East (Mr. Smith) said: Now is the time for cuts in interest rates to stimulate the economy … Now is the time for a programme of well planned public investment to mobilise the unused capacity … There is no economic constraint on such action"— only the restraint of what the right hon. and learned Gentleman called "self-imposed dogma."

The Labour party is in a difficult position. If Labour Members admit that our problems resulted from cutting interest rates too much and holding them down for too long, they would have to acknowledge that a period of high interest rates is a necessary and practical way of getting inflation down. Instead, Labour tried to blame everything on the 1988 Budget—the first Budget with a £14 billion surplus that I have ever heard described as inflationary. At that time, no other Government in the western world were running a surplus of that magnitude. The income tax cuts that we made then were more than offset by rises in tax revenues elsewhere, so that Budget was more than fully balanced. There were only £4 billion of reductions in income tax then. As my hon. Friend the Member for Tatton explained, there was something like a £50 billion increase in borrowing over the ensuing year. It is hard to believe that any increase in taxation could have been adequate or appropriate to offset that rise in borrowing. Clearly, one should treat such matters at source—and that means dealing with interest rates.

The hon. Member for Derby, South thought that there might be some salvation for her position in a rather obscure Teutonic document from the Bundesbank. She said that if we adopted minimum reserve ratios we would be able to reduce our interest rates but still control the volume of credit. Nowhere in that document is it suggested that minimum reserve ratios enable the Bundesbank to restrict the volume of credit while keeping interest rates below the market clearing level. Minimum reserve ratios are simply a device to help to ensure that the interest rates set by the Bundesbank are transmitted throughout the banking system.

That point is made crystal clear in a research paper, also published by the Bundesbank, which states: the Bundesbank can work only indirectly towards ensuring that the … money stock develops along the envisaged lines, by the appropriate fixing of interest rates". Central bank interest rates are only transmitted through the banking system in Germany or in the United Kingdom if the banks rely on the central bank for their extra cash. The central bank therefore fixes an interest rate at which it will lend to the commercial banking system. It must ensure that the commercial banking system is borrowing from it.

In Germany that shortage is ensured by the minimum reserve ratio. The Germans must use the M RR because for constitutional reasons they are not allowed to intervene in the money market in the way that we are by selling Treasury bills. In this country we are free to sell Treasury bills and maintain a shortage on that basis.

Mr. Allen

rose——

Mr. Lilley

If the hon. Member for Derby, South seriously believes that she has found a solution to the problems of reducing interest rates while controlling credit, she is deluding herself.

This year's Budget is important because it is the latest in a series of reforming Budgets in which my right hon. Friend the Chancellor of the Exchequer and his two predecessors have cut tax rates and abolished seven major taxes. In this Budget alone we have abolished two major taxes—we have abolished the composite rate tax on savings held by those with low incomes, and we have also abolished stamp duty. We have yet to hear whether the Opposition would reinstate stamp duty or whether they intend to follow our lead and acknowledge that it is right to abolish it. Even though the time left to me is limited, I will allow the Opposition to make their position clear on that. They have still not made up their minds.

We have reformed the tax structure in our series of reforming Budgets. We have reformed the structure of corporation tax, of national insurance contributions and of income tax at all levels. We have also reformed the taxation of husbands and wives and in this Budget we have reformed the taxation of savers. This Finance Bill contains a variety of measures which have been welcomed by savers in particular and also by women, small businesses, charities and football. I commend it to the House.

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

The House divided:Ayes 335, Noes 205.

Division No. 189]	[10 pm
AYES
Adley, Robert	Banks, Robert (Harrogate)
Aitken, Jonathan	Batiste, Spencer
Alexander, Richard	Beaumont-Dark, Anthony
Alison, Rt Hon Michael	Bellingham, Henry
Allason, Rupert	Bendall, Vivian
Amery, Rt Hon Julian	Bennett, Nicholas (Pembroke)
Amess, David	Benyon, W.
Amos, Alan	Bevan, David Gilroy
Arbuthnot, James	Biffen, Rt Hon John
Arnold, Jacques (Gravesham)	Blaker, Rt Hon Sir Peter
Arnold, Tom (Hazel Grove)	Body, Sir Richard
Ashby, David	Bonsor, Sir Nicholas
Aspinwall, Jack	Boscawen, Hon Robert
Atkins, Robert	Boswell, Tim
Baker, Rt Hon K. (Mole Valley)	Bottomley, Peter
Baker, Nicholas (Dorset N)	Bottomley, Mrs Virginia
Baldry, Tony	Bowden, A (Brighton K'pto'n)

Bowden, Gerald (Dulwich)	Griffiths, Peter (Portsmouth N)
Bowis, John	Grist, Ian
Boyson, Rt Hon Dr Sir Rhodes	Ground, Patrick
Braine, Rt Hon Sir Bernard	Grylls, Michael
Brandon-Bravo, Martin	Hague, William
Brazier, Julian	Hamilton, Hon Archie (Epsom)
Bright, Graham	Hamilton, Neil (Tatton)
Brown, Michael (Brigg & Cl't's)	Hampson, Dr Keith
Browne, John (Winchester)	Hanley, Jeremy
Bruce, Ian (Dorset South)	Hannam, John
Buchanan-Smith, Rt Hon Alick	Hargreaves, A. (B'ham H'll Gr')
Buck, Sir Antony	Harg reaves, Ken (Hyndburn)
Budgen, Nicholas	Harris, David
Burns, Simon	Haselhurst, Alan
Burt, Alistair	Hawkins, Christopher
Butler, Chris	Hayes, Jerry
Butterfill, John	Hayhoe, Rt Hon Sir Barney
Carlisle, John, (Luton N)	Hayward, Robert
Carlisle, Kenneth (Lincoln)	Heath, Rt Hon Edward
Carrington, Matthew	Heathcoat-Amory, David
Carttiss, Michael	Heseltine, Rt Hon Michael
Cash, William	Hicks, Mrs Maureen (Wolv' NE)
Channon, Rt Hon Paul	Higgins, Rt Hon Terence L.
Chapman, Sydney	Hill, James
Chope, Christopher	Hind, Kenneth
Churchill, Mr	Hogg, Hon Douglas (Gr'th'm)
Clark, Hon Alan (Plym'th S'n)	Hordern, Sir Peter
Clark, Dr Michael (Rochford)	Howard, Rt Hon Michael
Clark, Sir W. (Croydon S)	Howarth, Alan (Strat'd-on-A)
Clarke, Rt Hon K. (Rushcliffe)	Howarth, G. (Cannock & B'wd)
Colvin, Michael	Howe, Rt Hon Sir Geoffrey
Conway, Derek	Howell, Rt Hon David (G'dford)
Coombs, Anthony (Wyre F'rest)	Howell, Ralph (North Norfolk)
Coombs, Simon (Swindon)	Hughes, Robert G. (Harrow W)
Couchman, James	Hunt, Sir John (Ravensbourne)
Cran, James	Hunter, Andrew
Critchley, Julian	Irvine, Michael
Currie, Mrs Edwina	Irving, Sir Charles
Davies, Q. (Stamf'd & Spald'g)	Jack, Michael
Davis, David (Boothferry)	Jackson, Robert
Day, Stephen	Janman, Tim
Devlin, Tim	Jessel, Toby
Dickens, Geoffrey	Johnson Smith, Sir Geoffrey
Dorrell, Stephen	Jones, Gwilym (Cardiff N)
Douglas-Hamilton, Lord James	Jones, Robert B (Herts W)
Dover, Den	Jopling, Rt Hon Michael
Dunn, Bob	Kellett-Bowman, Dame Elaine
Durant, Tony	Key, Robert
Dykes, Hugh	Kilfedder, James
Eggar, Tim	King, Roger (B'ham N'thfield)
Emery, Sir Peter	King, Rt Hon Tom (Bridgwater)
Evans, David (Welwyn Hatf'd)	Kirkhope, Timothy
Evennett, David	Knapman, Roger
Fairbairn, Sir Nicholas	Knight, Greg (Derby North)
Fallon, Michael	Knight, Dame Jill (Edgbaston)
Fenner, Dame Peggy	Knowles, Michael
Field, Barry (Isle of Wight)	Knox, David
Finsberg, Sir Geoffrey	Lamont, Rt Hon Norman
Fookes, Dame Janet	Lang, Ian
Forman, Nigel	Latham, Michael
Forth, Eric	Lawrence, Ivan
Fowler, Rt Hon Sir Norman	Lawson, Rt Hon Nigel
Fox, Sir Marcus	Lee, John (Pendle)
Freeman, Roger	Leigh, Edward (Gainsbor'gh)
French, Douglas	Lennox-Boyd, Hon Mark
Fry, Peter	Lester, Jim (Broxtowe)
Gale, Roger	Lilley, Peter
Gardiner, George	Lloyd, Sir Ian (Havant)
Garel-Jones, Tristan	Lloyd, Peter (Fareham)
Gill, Christopher	Lord, Michael
Gilmour, Rt Hon Sir Ian	Luce, Rt Hon Richard
Glyn, Dr Sir Alan	Lyell, Rt Hon Sir Nicholas
Goodhart, Sir Philip	McCrindle, Robert
Goodson-Wickes, Dr Charles	Macfarlane, Sir Neil
Gorman, Mrs Teresa	MacKay, Andrew (E Berkshire)
Gorst, John	Maclean, David
Gow, Ian	McLoughlin, Patrick
Greenway, Harry (Ealing N)	McNair-Wilson, Sir Michael
Greenway, John (Ryedale)	McNair-Wilson, Sir Patrick
Gregory, Conal	Madel, David

Major, Rt Hon John	Shelton, Sir William
Malins, Humfrey	Shephard, Mrs G. (Norfolk SW)
Mans, Keith	Shepherd, Colin (Hereford)
Maples, John	Shepherd, Richard (Aldridge)
Marland, Paul	Shersby, Michael
Marlow, Tony	Sims, Roger
Marshall, John (Hendon S)	Skeet, Sir Trevor
Marshall, Michael (Arundel)	Smith, Tim (Beaconsfield)
Martin, David (Portsmouth S)	Speed, Keith
Mates, Michael	Speller, Tony
Maude, Hon Francis	Spicer, Sir Jim (Dorset W)
Mawhinney, Or Brian	Spicer, Michael (S Worcs)
Maxwell-Hyslop, Robin	Squire, Robin
Mayhew, Rt Hon Sir Patrick	Stanbrook, Ivor
Meyer, Sir Anthony	Stanley, Rt Hon Sir John
Miller, Sir Hal	Steen, Anthony
Mills, Iain	Stern, Michael
Miscampbell, Norman	Stevens, Lewis
Mitchell, Andrew (Gedling)	Stewart, Allan (Eastwood)
Mitchell, Sir David	Stewart, Andy (Sherwood)
Moate, Roger	Stewart, Rt Hon Ian (Herts N)
Monro, Sir Hector	Stokes, Sir John
Montgomery, Sir Fergus	Stradling Thomas, Sir John
Moore, Rt Hon John	Sumberg, David
Morris, M (N'hampton S)	Summerson, Hugo
Morrison, Sir Charles	Tapsell, Sir Peter
Morrison, Rt Hon P (Chester)	Taylor, Ian (Esher)
Moss, Malcolm	Taylor, John M (Solihull)
Mudd, David	Taylor, Teddy (S'end E)
Neale, Gerrard	Tebbit, Rt Hon Norman
Needham, Richard	Temple-Morris, Peter
Nelson, Anthony	Thatcher, Rt Hon Margaret
Neubert, Michael	Thompson, D. (Calder Valley)
Newton, Rt Hon Tony	Thompson, Patrick (Norwich N)
Nicholls, Patrick	Thorne, Neil
Nicholson, David (Taunton)	Thornton, Malcolm
Nicholson, Emma (Devon West)	Thurnham, Peter
Norris, Steve	Townend, John (Bridlington)
Onslow, Rt Hon Cranley	Townsend, Cyril D. (B'heath)
Page, Richard	Tracey, Richard
Paice, James	Tredinnick, David
Patnick, Irvine	Trotter, Neville
Patten, Rt Hon Chris (Bath)	Twinn, Dr Ian
Patten, Rt Hon John	Vaughan, Sir Gerard
Pattie, Rt Hon Sir Geoffrey	Viggers, Peter
Pawsey, James	Walden, George
Peacock, Mrs Elizabeth	Walker, Bill (T'side North)
Porter, Barry (Wirral S)	Walker, Rt Hon P. (W'cester)
Porter, David (Waveney)	Waller, Gary
Price, Sir David	Ward, John
Raffan, Keith	Wardle, Charles (Bexhill)
Raison, Rt Hon Timothy	Warren, Kenneth
Rathbone, Tim	Watts, John
Redwood, John	Wells, Bowen
Renton, Rt Hon Tim	Wheeler, Sir John
Rhodes James, Robert	Whitney, Ray
Riddick, Graham	Widdecombe, Ann
Ridley, Rt Hon Nicholas	Wiggin, Jerry
Ridsdale, Sir Julian	Wilkinson, John
Rifkind, Rt Hon Malcolm	Wilshire, David
Roberts, Wyn (Conwy)	Winterton, Mrs Ann
Roe, Mrs Marion	Winterton, Nicholas
Rost, Peter	Wolfson, Mark
Rowe, Andrew	Wood, Timothy
Rumbold, Mrs Angela	Woodcock, Dr. Mike
Ryder, Richard	Yeo, Tim
Sackville, Hon Tom	Young, Sir George (Acton)
Sainsbury, Hon Tim	Younger, Rt Hon George
Sayeed, Jonathan
Scott, Rt Hon Nicholas	Tellers for the Ayes:
Shaw, David (Dover)	Mr. Alastair Goodlad and Mr. David Lightbown.
Shaw, Sir Giles (Pudsey)
Shaw, Sir Michael (Scarb')

NOES
Abbott, Ms Diane	Armstrong, Hilary
Adams, Allen (Paisley N)	Ashley, Rt Hon Jack
Allen, Graham	Ashton, Joe
Anderson, Donald	Barnes, Harry (Derbyshire NE)
Archer, Rt Hon Peter	Barnes, Mrs Rosie (Greenwich)

Battle, John	Hinchliffe, David
Beckett, Margaret	Hogg, N. (C'nauld & Kilsyth)
Beggs, Roy	Home Robertson, John
Beith, A. J.	Hood, Jimmy
Bell, Stuart	Howarth, George (Knowsley N)
Benn, Rt Hon Tony	Howell, Rt Hon D. (S'heath)
Bennett, A. F. (D'nt'n & R'dish)	Howells, Geraint
Bermingham, Gerald	Howells, Dr. Kim (Pontypridd)
Bidwell, Sydney	Hughes, John (Coventry NE)
Blunkett, David	Hughes, Robert (Aberdeen N)
Boateng, Paul	Hughes, Roy (Newport E)
Boyes, Roland	Hughes, Simon (Southwark)
Bradley, Keith	Ingram, Adam
Brown, Nicholas (Newcastle E)	Janner, Greville
Brown, Ron (Edinburgh Leith)	Jones, Ieuan (Ynys Môn)
Buchan, Norman	Jones, Martyn (Clwyd S W)
Buckley, George J.	Kaufman, Rt Hon Gerald
Caborn, Richard	Kirkwood, Archy
Callaghan, Jim	Leadbitter, Ted
Campbell, Ron (Blyth Valley)	Leighton, Ron
Campbell-Savours, D. N.	Lestor, Joan (Eccles)
Canavan, Dennis	Lewis, Terry
Carlile, Alex (Mont'g)	Litherland, Robert
Cartwright, John	Livingstone, Ken
Clark, Dr David (S Shields)	Lloyd, Tony (Stretford)
Clarke, Tom (Monklands W)	Lofthouse, Geoffrey
Clay, Bob	McAllion, John
Clelland, David	McAvoy, Thomas
Clwyd, Mrs Ann	McCartney, Ian
Cohen, Harry	Macdonald, Calum A.
Cook, Frank (Stockton N)	McFall, John
Cook, Robin (Livingston)	McKay, Allen (Barnsley West)
Corbyn, Jeremy	McKelvey, William
Cousins, Jim	McLeish, Henry
Cox, Tom	Maclennan, Robert
Crowther, Stan	McNamara, Kevin
Cryer, Bob	McWilliam, John
Cummings, John	Madden, Max
Cunliffe, Lawrence	Marion, Mrs Alice
Cunningham, Dr John	Marek, Dr John
Dalyell, Tarn	Marshall, David (Shettleston)
Darling, Alistair	Marshall, Jim (Leicester S)
Davies, Rt Hon Denzil (Llanelli)	Martin, Michael J. (Springburn)
Davies, Ron (Caerphilly)	Martlew, Eric
Davis, Terry (B'ham Hodge H'l)	Maxton, John
Dixon, Don	Meacher, Michael
Dobson, Frank	Meale, Alan
Doran, Frank	Michael, Alun
Duffy, A. E. P.	Michie, Bill (Sheffield Heeley)
Dunnachie, Jimmy	Mitchell, Austin (G't Grimsby)
Eadie, Alexander	Moonie, Dr Lewis
Eastham, Ken	Morgan, Rhodri
Evans, John (St Helens N)	Morley, Elliot
Ewing, Harry (Falkirk E)	Morris, Rt Hon A. (W'shawe)
Fatchett, Derek	Morris, Rt Hon J. (Aberavon)
Faulds, Andrew	Mowlam, Marjorie
Field, Frank (Birkenhead)	Mullin, Chris
Fisher, Mark	Murphy, Paul
Flannery, Martin	Nellist, Dave
Flynn, Paul	Oakes, Rt Hon Gordon
Foot, Rt Hon Michael	O'Brien, William
Forsythe, Clifford (Antrim S)	O'Neill, Martin
Foster, Derek	Orme, Rt Hon Stanley
Foulkes, George	Owen, Rt Hon Dr David
Fraser, John	Patchett, Terry
Fyfe, Maria	Pendry, Tom
Galloway, George	Pike, Peter L.
Garrett, John (Norwich South)	Powell, Ray (Ogmore)
George, Bruce	Prescott, John
Godman, Dr Norman A.	Primarolo, Dawn
Gordon, Mildred	Quin, Ms Joyce
Gould, Bryan	Radice, Giles
Graham, Thomas	Redmond, Martin
Grant, Bernie (Tottenham)	Rees, Rt Hon Merlyn
Griffiths, Win (Bridgend)	Reid, Dr John
Grocott, Bruce	Richardson, Jo
Hardy, Peter	Robertson, George
Harman, Ms Harriet	Robinson, Geoffrey
Hattersley, Rt Hon Roy	Rogers, Allan
Heal, Mrs Sylvia	Rooker, Jeff

Rowlands, Ted	Taylor, Rt Hon J. D. (S'ford)
Ruddock, Joan	Thompson, Jack (Wansbeck)
Salmond, Alex	Turner, Dennis
Sedgemore, Brian	Vaz, Keith
Sheldon, Rt Hon Robert	Walley, Joan
Shore, Rt Hon Peter	Wardell, Gareth (Gower)
Short, Clare	Watson, Mike (Glasgow, C)
Sillars, Jim	Welsh, Andrew (Angus E)
Skinner, Dennis	Welsh, Michael (Doncaster N)
Smith, Andrew (Oxford E)	Williams, Rt Hon Alan
Smith, C. (Isl'ton & F'bury)	Williams, Alan W. (Carm'then)
Smith, Rt Hon J. (Monk'ds E)	Winnick, David
Smith, J. P. (Vale of Glam)	Worthington, Tony
Snape, Peter	Wray, Jimmy
Soley, Clive	Young, David (Bolton SE)
Spearing, Nigel
Steinberg, Gerry	Tellers for the Noes:
Stott, Roger	Mr. Frank Haynes and Mrs. Llin Golding.
Straw, Jack
Taylor, Mrs Ann (Dewsbury)

Question accordingly agreed to.

Bill read a Second time.