Finance Bill

HC Deb 30 April 1991 vol 190 cc178-269

Order for Second Reading read.

[Relevant document: Second Report of the Treasury and Civil Service Committee of Session 1990–91 on the 1991 Budget ( HC289)]

4.1 pm

The Chief Secretary to the Treasury (Mr. David Mellor)

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 background to today's debate, the House has the benefit of the report of the Treasury and Civil Service Select Committee on the Budget—a thoughtful and thorough document. I am glad that so many members of the Select Committee are here for the debate. I hope that its Chairman and others will succeed in catching your eye, Mr. Speaker.

We are studying its recommendations carefully and will respond fully in due course. This is not the place to comment in detail, but perhaps I might briefly address one point made by the Committee. It was apprehensive in its report about the pace and strength of recovery. It is always difficult to forecast a turning point, but there is now accumulating evidence of one. Retail prices index inflation has fallen 2.7 points from its peak in 1990. Recent surveys show a rise in business and consumer confidence. Only this morning the CBI's quarterly trends survey showed a marked increase in optimism and output expectations. In the three months to February, private housing orders were up 12 per cent. over the previous three and exports, excluding oil and so-called erratic items, grew 2 per cent. in the year to March. That is firm evidence of the underlying strength and competitiveness of British business.

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

The engineering employers association for Sheffield has just published its April quarterly survey of its members. It is as contemporary as the report that the Chief Secretary is quoting in his aid. It offers no support for his view about a recovery in business confidence among engineering employers in south Yorkshire.

Mr. Mellor

If that is the case, I regret it. We can rely only on the national survey that was published today and on other evidence from which it is clear that there is a recovery of confidence. We are confident that that will lead to an increase in activity. All the business organisations have stated that the growth in the strength of so many companies in many different areas of economic activity during the 1980s means that the British economy is now far better equipped to come out of a recession than it was during the previous recession. I appreciate that that fact does not suit the Labour party's case, but it is what all the business organisations are saying and it is a matter of fundamental significance to this debate.

Mr. Giles Radice (Durham, North)

The right hon. and learned Gentleman will have noted that the chairman of the CBI said today, when commenting on the report: We should not underestimate the severity of the current recession and its impact on industry. The right hon. and learned Gentleman would do well to listen to those words.

Mr. Mellor

I imagine that the hon. Gentleman is referring to a quotation from Sir Brian Corby—

Mr. Radice

From Mr. David Wigglesworth, the chairman of the CBI's economic situation committee.

Mr. Mellor

Well, the president of the CBI, Sir Brian Corby, said this very month: Underlying confidence in the strength of British industry and commerce is much stronger than in the early 80s—quite rightly in the light of the improvements in productivity and profitability that we have seen over the past decade … This is a better picture than is currently believed to be the case. Indeed, part of the problem that manufacturing industry faces in the UK today is that perceptions lag behind reality. That is the crucial point.

Mr. David Winnick (Walsall, North)

rose——

Mr. Mellor

I have already given way twice and so that I do not unnecessarily detain the House, I shall continue for a while and then give way.

Mr. Winnick

Will the right hon. and learned Gentleman give way on this particular point?

Mr. Mellor

The hon. Gentleman is extremely persistent. I hope that he will appreciate that it will not be evasion if I do not give way so many times later in my speech, but I shall give way to him now.

Mr. Winnick

I am grateful to the Chief Secretary. Was he in his place during Prime Minister's Question Time when my right hon. and learned Friend the Member for Warley, West (Mr. Archer) referred to what is happening in the black country and throughout the west midlands? Is the right hon. and learned Gentleman aware that hardly a single day goes by in my region without some news of further redundancies or closures? The west midlands fears that it will go through the same sort of thing under this Government as in the early 1980s. Will that be the case?

Mr. Mellor

I have said that many companies are passing through difficult times, but I have also said that it is undeniably true that the exports figures to the end of the first quarter of this year show an increase over the preceding year of 2 per cent. Once again, that pays tribute to the underlying strength of the economy. If, as Sir Brian Corby said, perception is lagging behind reality, some Opposition Members must take their share of responsibility for any perception of gloom, given their enthusiasm for talking down the British economy.

Mr. John Watts (Slough)

Does my right hon. and learned Friend agree that the recovery will very much depend on a revival of confidence and that Opposition Members who seek to talk down the economy and to pour gloom and despondency on the country are doing nothing either to aid the recovery or to further the interests of their constituents, not least their prospects of better jobs?

Mr. Mellor

I entirely agree with my hon. Friend. His point is even more relevant when one considers what Opposition Members would try to do if they were ever elected to Government. They would make whatever situation they inherited far worse, but I have no doubt that we shall come to that later in the debate.

Mr. Roger King (Birmingham, Northfield)

rose——

Mr. Mellor

I give way to my hon. Friend—[Interruption.] I have already given way to three Opposition Members. This is only the second intervention from a Conservative Member. Perhaps the right hon. and learned Member for Monklands, East (Mr. Smith) will keep to that ratio in his speech.

Mr. King

I am extremely grateful to my right hon. and learned Friend for giving way and will seek to press the problems of the British car industry at a later stage. However, is he aware that in the first few months of this year, its production is already running at 6 per cent. more than in the first quarter of 1990, which in itself was level with the record production of 1989? In terms of exports, therefore, the British car industry is doing better than ever before.

Mr. Mellor

I was glad to give way to my hon. Friend the Member for Birmingham, Northfield (Mr. King) and I was even more glad to hear the point that he made. He is exactly right. If one industry has shown more clearly than almost any other what happened to the British economy in the 1980s as opposed to the 1960s and 1970s, it is the car industry, its rebuilding and its record of export achievement. In the 1960s and 1970s, nothing exhibited more clearly the folly of the fudge and mudge of corporatism under a Labour Government than what happened to the car industry, which is now recovering.

Several Hon. Members

rose——

Mr. Mellor

The blood pressure of the right hon. and learned Member for Monklands, East would not stand my giving way to anyone else. He is always passing responsibility to others, but I shall shoulder the burden of refusing to give way to my hon. Friends. I wish to press on.

We were discussing the underlying strength of the British economy, which I assert and on which my hon. Friends agree. More significantly, hosts of business organisations also agree, notwithstanding the difficult times through which we are passing. It may be worth dwelling for a few moments more on the transformation of the British economy in recent years.

Before plunging into the thicket of detail rightly contained in the Finance Bill, we must remember how far we have come from the stagnant economy over which the previous Labour Government presided. Lest I be accused of excessive partiality and as we have already heard the Opposition cite one CBI officer, let me remind the House of a striking passage in a recent publication by the CBI which was called "Business Agenda for the 1990s". It states: It is all too easy to forget what the situation was like in the late 1970s. Industrial disputes, apparently regarded as inevitable, were exacerbated, if not caused by wage and price controls and over regulation. Tax avoidance and 'grantsmanship' were growth industries. Wealth was being destroyed rather than created, with negative real returns in many businesses. Investment in all its forms—new plant, innovation and skills—fell back. Britain's share of world trade was declining, seemingly inexorably. Failure was almost expected, success a surprise. That is the CBI's comment on what happened in the 1970s and that was what we inherited.

The strength of the British economy since then has surprised many people because, despite the current recession, the past 10 years have been a success story. We have cut through the tangle of unnecessary controls which immobilised industry. We have reformed the tax regime for business and for individuals and that process is taken a stage further in the Finance Bill. Tax rates, which were punitively high under Labour, have been reduced and we have already done away completely with six taxes. We have made far-reaching changes to trade union law, while keeping a firm grip on expenditure. As a result, the nation's finances have been transformed and the budget brought back into balance, far from the days when the right hon. Member for Leeds, East (Mr. Healey) might have echoed the words of President Hoover: "Blessed are the young for they shall inherit the national debt."

The results were dramatic by any standards. For eight years, the United Kingdom economy grew by an average of 3 per cent. a year.

Dr. Lewis Moonie (Kirkcaldy)

rose——

Mr. Mellor

I shall finish this point. [Interruption.] I was saying that President Hoover would have lined up with the right hon. Member for Leeds, East in his addiction to the national debt and its growth and to saddling future generations with the cost of borrowing to sustain unsustainable public expenditure. The right hon. Gentleman was a member of the Government in 1975 when the public sector borrowing requirement was—in today's cash terms—£60 billion. It is against that background that we might find ironic criticism of the limited PSBR that we shall be running this year.

Mr. John Smith (Monklands, East)

As the right hon. and learned Gentleman has been claiming that the Government have been successful during their period in office, will he comment on an answer given by one of his colleagues? When asked what was the annual average economic growth for 1979 to the end of 1981, the answer was 1¾ per cent. Is that a creditable record?

Mr. Mellor

In the first two years, we dealt with the recession caused by the economic mayhem of the previous Labour Government. The question that perhaps should be asked is about the position since 1982, as the benefits of our policies came into effect.

Mr. Smith

That is ridiculous.

Mr. Mellor

The right hon. and learned Gentleman would say that. However, when did a Labour Government last give us eight years or even five years of sustained growth of more than 3 per cent. with investment, much of of it in productive capacity, at 80 per cent.? When did a Labour Government last give us that kind of record on productivity, output and on all the indicators in which we used to be bottom of the league during the 1970s, but in which we have been top of the league during the 1980s? When, under a Labour Government, did the British economy grow faster than the economies of the majority of the G7 countries? The right hon. and learned Member for Monklands, East would be hard pressed to find a precedent.

Mr. David Shaw (Dover)

Has my right hon. and learned Friend the Chief Secretary had time to consider the latest Labour party document and the costings carried out by people in the City of the Labour party's programme showing a total of £50 billion? Are there any Treasury estimates of the level of interest rates required if the public sector borrowing requirement was increased by £50 billion a year?

Mr. Mellor

A very interesting story will be told quite soon about the cost of Labour's programme. That story will be a revelation. My hon. Friend the Member for Dover (Mr. Shaw) referred to Labour's policies. In their enthusiasm, for electoral or other reasons, to ditch the neo-Trotskyists of the early 1980s who dominated so much of Labour's thinking we are back—in the words of Sam Brittan upon which I cannot improve—to the soft collectivism of the 1960s and 1970s which failed under Wilson and Callaghan. That involved national assessments, interference, quangos, the things that were solemn and binding and the minimum wage. Although all those matters are probably more properly the subject for another debate, Tory Members approach them with some relish. There is precious little evidence that Labour Members can say anything about the state of the economy today that would in any way be improved by the remedies that they propose. Indeed, it is hard to think of a remedy that was not tried in the 1960s and 1970s which did not fail catastrophically.

In the 1980s the United Kingdom's GDP, investment and manufacturing productivity grew faster than that of Germany or France. Our ability to compete was restored internationally. Profitability reached a peak in the late 1980s and was at its highest level since 1973 living down the problems of the late 1970s. Combined with dramatic improvements in capital productivity, there is clear evidence of the higher quality of investments as well as of higher levels. That basic underlying strength is pulling the British economy through this recession.

I wish to consider the Bill against that background. I recall that happy phrase, "To govern is to choose." The Budget is full of wise choices. The Budget's first priority is to help businesses of all sizes both immediately and as they plan for future recovery.

Clauses 22 to 24 deal with corporation tax.

Mr. Michael Grylls (Surrey, North-West)

There is a very imaginative proposal in the Budget about carrying back corporation tax from losses against profits in earlier years—from one year to three years. That is very helpful because it gives a cash injection at a time of recession. We all welcome it because it will help companies in a difficult position. Obviously my right hon. and learned Friend the Chief Secretary to the Treasury will not be able to answer my question now. However, will he consider putting that date back further because the date of 31 March 1991 announced in the Budget would mean that the cash injection for those companies would not arrive until 1992? One needs a lifeboat when one needs it, not when the storm is over. If that date could be brought back to 31 March 1990, companies would receive the cash this year when they most need it.

Mr. Mellor

I shall certainly reflect on what my hon. Friend said, knowing that few hon. Members have more knowledge of what is happening with business, particularly small business, than he has.

I now refer to the principal clauses, 22 to 24, on corporation tax. Clause 22 cuts the main rate of corporation tax for 1990 to 34 per cent. That allows companies to keep £380 million in profits which they were expecting to pay in tax. Clause 23 goes a step further by cutting the rate for 1991 to 33 per cent. That double cut will benefit 80,000 companies to the tune of £830 million in 1992–93. That will increase the reward to profitable investment without subsidising uneconomic investment. It represents what I hope the House will consider to be a worthy further step along a road on which we so dramatically set out in 1984 when the main rate of corporation tax was cut from 52 per cent. to 35 per cent. Of course, that gave us the lowest taxes on companies of any economy in the industrialised world. Other countries then followed our example. Now we are setting the pace again. That is a worthy point with which to start our detailed consideration of the Bill.

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

The Chief Secretary will set the matter in context, will he not, and compare the gains from that useful measure with the £1.6 billion additional spending by business on the uniform business rate, which has gone up by an amount much higher than the actual rate of inflation?

Mr. Mellor

That is not a fair statistic. The hon. Gentleman knows that what we have done for business is to remove the vagaries of local government decision-taking that we can see in London. Perhaps it resulted in booms in business in sensibly run areas such as Wandsworth, where I have my constituency, but it left large swathes of London denuded of industrial investment. People were not prepared to invest because of the increase in business rates imposed by left-wing authorities. The hon. Gentleman will know also that, although there is a difficult transitional period—there was bound to be—the maximum increase for the business rate is tied to the rate of inflation. That is the maximum. Over the past decade, the actual increase in business rates was 40 per cent. above the rise in inflation. We know that, in 1978, in boroughs such as Ealing and Waltham Forest, rates were put up 50 per cent. overnight. That was the reason. It is worth noting that the policies of the Labour party are to give back to councils that power to raise taxes locally from business. I am sure that that point will not be lost on the business community.

Clause 24 raises profit limits for small companies and, of course, the limit for marginal relief both by 25 per cent. That will benefit about 30,000 companies. It means that the limit for small companies rate has now been raised by 150 per cent. in the past three years—a real help to small companies. Of course, as well as rewarding success and allowing companies to keep more of their profits, as my hon. Friend the Member for Surrey, North-West (Mr. Grylls) pointed out, we have made arrangements so that those who temporarily make a loss can recover back taxes paid in the three previous years.

It is worth noting also that all levels of business are important and that all levels of business require assistance. That is why, in clause 64, my right hon. Friend helps small firms as well as larger ones with losses by allowing unincorporated businesses to set off trading losses against capital gains, just as companies may already do. That is a help.

The total value to British industry and commerce of this package of measures relating to company taxes is £1.1 billion next year—money that can be used for productive investment. Of course, we have gone beyond that and made other efforts to change the way in which the tax system works when those in business who have to operate it told us ways in which it could work better.

Sir Robert McCrindle (Brentwood and Ongar)

In directing his attention not only to small companies that need assistance but to large companies, will my right hon. and learned Friend include building societies? If that is the case, will he be prepared to look again at clause 50? People are saying to me and, I suspect, to other hon. Members that that clause is a vehicle not only for retrospective legislation but for double taxation. As this stems from a court victory by one building society, would not it be extremely unfair that it should result in the Government's gaining about £250 million in taxation? That would represent a reduction in the capacity of the building societies to lend, just at a time when we hope that the housing market is beginning to prosper again, and it would have an adverse effect on investment.

Mr. Mellor

As the immortal Jim Hacker would have said, I am glad that my hon. Friend asked me that question. It gives me an opportunity to deal with a point that is giving rise to concern among a number of hon. Members. I shall deal with clause 50 as thoroughly as I can. As my hon. Friend knows, the Finance Act 1985 made changes in the manner in which building societies pay tax on the interest paid to their investors. Previously those money had been rendered up in one lump sum on 1 January each year. The change meant that, from the tax year beginning in April 1986, those moneys had to be rendered up quarterly, as had been done for some time in the case of banks and other financial institutions.

Regulations to deal with a problem that was very openly signposted at that time were laid before the House. Building societies have different year ends, and we needed to cover the period between the end of their 1985–86 year and the beginning of April 1986, when the new arrangements were to come into force. The regulations charged building societies at the 1985–86 rate of tax. One case went all the way to the House of Lords, which determined that, while it was lawful for the Government to make arrangements for those moneys to be liable to tax, it was ultra vires that we should apply, by way of the regulations, the rate that prevailed in 1985–86. It was only right that tax should be rendered up on moneys withheld from interest payments to investors. The court's determination was that it was lawful—of course, it must be—for tax to be paid, but not lawful for a rate to be applied. That is the present position.

The Bill will put us in the situation in which we understood ourselves to be before the House of Lords gave its judgment, and will apply the 1985–86 tax rate. Without it, a number of building societies would make windfall profits, as the moneys that they had withheld—perfectly properly-from interest payments to their depositors would not then be liable to be rendered up. The moneys would not go to depositors. There is no question of double taxation; the issue is whether there should be taxation at all. The amount involved is £250 million. This is the basis of clause 50.

Sir Robert McCrindle

I followed with great interest the technical explanation that my right hon. and learned Friend offered, and I accept at least a goodly part of it. Irrespective of the position for investors, it is extremely difficult to deny that if this £250 million ends up under Government control, money that would have been available for future mortgages, at a time when, we hope, the housing market is beginning to move, will be in the coffers not of the building society but of my right hon. and learned Friend.

Mr. Mellor

With great respect to my hon. Friend, whose return to vigour and effectiveness in the House all of his hon. Friends welcome so much—I say that genuinely as someone who has admired and respected him throughout my time in Parliament—I cannot agree with his point. The money was interest due to depositors with building societies. If it were not for the fact that there was a tax liability, all that money would have had to be paid to investors. Moneys were withheld on the basis that they would have to be rendered up to the tax authorities. But for the fact that a change was made from annual to quarterly payment, those moneys would have been paid to the Government without argument.

In making the change, there was a transitional period for which we thought provision had been made, between the end of the financial year of the building society through to the beginning of the financial year in which the new arrangement would come into effect, in which the tax rates prevailing for 1985–86 would apply. The only consequence of no tax being applied would be that moneys had been deducted by building societies from interest properly due to their investors which, because they were not rendered up to the taxation authorities, would go, in my judgment quite undeservedly, into the coffers of the building societies themselves. That is the position. All that we are doing is restoring the position to what everyone understood it to be until it was subject to legal challenge.

Several Hon. Members

rose——

Mr. Mellor

I will give way once more. The fact that so many hon. Members want to make points is precisely the reason why we have a Committee stage, which will give hon. Members a chance to explore the matter further.

Mr. Peter Bottomley (Eltham)

May I try to help my right hon. and learned Friend? Is not the position that the money which was withheld from depositors would have been paid in tax in a subsequent year because the tax to be paid in the actual year had already been paid? Is not it also the position that people who had mortgages with the Woolwich or who had lent money to the Woolwich—I do both—have got their £90 million, and that all other building societies have been treated differently? Was it not the House of Lords' judgment that it was restrospective and double taxation, which the House had authorised, without knowing that it had done so? Would not it be better for the Government to think again and drop clause 50?

Mr. Mellor

Plainly there will be plenty of opportunity in Committee to explore the matter. The position is that but for the action which the Government are taking, no tax whatsoever would be levied on a substantial sum that fell due between the end of the financial year 1985–86—whatever month that was for the building society concerned—and 6 April 1986. I take the view that that would not be acceptable. I am sorry if it is held against us, but we are expecting the normal rules of the game in regard to the Woolwich. If the Revenue loses a case, it does not seek to take back from the litigant the benefit that has been gained. When one is dealing with £250 million, which, but for this, should have been in the pockets of depositors, there is no reason why other building societies should gain the benefit.

I appreciate that others take a different view on the matter. One reason for Committee stages is that people apart from me will be able to justify the policy in Committee. My hon. Friend the Financial Secretary, a man of infinite resource, is ready and available, as is the Economic Secretary. They will be willing to entertain the Standing Committee at whatever hour of the night appears appropriate to deal with the matter.

I shall deal briefly with some other major points in the Budget. VAT relief on bad debts was widely welcomed when the scheme came into operation in April. It is worth noting that clause 14 will halve the waiting period to one year. That will boost cash flow by some £340 million—a vital way to help growing firms on whom the burden of bad debt can be particularly heavy.

On the serious misdeclaration penalty, clause 17 responds to widespread representations about the VAT penalty regime. I hope that it shows the value to the House of the detailed representations that hon. Members make on behalf of the business community.

Sir Eldon Griffiths (Bury St. Edmunds)

May I suggest to my right hon. and learned Friend, and indeed to the Financial Secretary, that there is likely to be a good deal more bad debt in VAT if nothing is done to help the racing industry? Will he, in the course of this Finance Bill, perhaps in Committee, give the Minister of State an opportunity to report to the House on how she is getting on in her search for a solution to a problem that is seriously damaging an important industry?

Mr. Mellor

My hon. Friend the Minister of State will meet representatives of the industry next week to discuss this very point. I understand that it is because the great town of Newmarket is within my hon. Friend's constituency that he speaks as he does.

I am anxious not to detain the House for too long, so I shall pass over a number of items in the Bill to which I might otherwise have drawn attention.

On vocational training relief, I think that it has been widely welcomed that those who wish to improve themselves by financing training out of their own pockets will now get tax relief for it. I believe that that is a help to the work force.

I should just pause over the policy for the family which is furthered in this Budget. Although business was the central theme of the Budget, my right hon. Friend made room for measures to benefit families. The rise in child benefit is already well known and I need say no more about it. It deals with an issue that has caused a great deal of interest in the House in recent years. I hope that this sets us on a course which the whole House will appreciate as being wise and necessary.

There are also, of course, measures for the elderly. Clause 21 provides for the married couple's allowance generally to be unchanged, but the normal indexation provisions will continue to apply to the married couple's allowance for the elderly. For a couple over 75 the increase this year could be worth up to £4

47 a week.

With regard to health and the environment, I am personally pleased that in the Budget we recognise the need to make further substantial increases in the taxes on tobacco. Clause 2 raises the duty on tobacco products by 15 per cent. That puts an extra 16p on a packet of 20 king-size cigarettes—in itself the biggest cash increase in taxes on tobacco since 1981. This, with the VAT increase, makes the total additional tax burden on 20 cigarettes about 22p. I believe that in raising the real level of total taxes on tobacco to the highest since the mid-1960s we have done the right thing for the future health of the nation.

The duties on alcohol are increased in line with inflation. There are changes in clause 6 to the way in which we tax beer. The new system will be simpler and fairer, because the duty will be related more precisely than it is at present to alcoholic strength, so some strong beers and lagers will bear more duty. I believe that that is right, and anyone who is concerned about the problems of lager louts, particularly the extent to which strong lagers have come into fashion among youngsters today, might think that this a step in the right direction which is capable of being built on in the future.

On the environment, this was not the year to burden industry with a tax on carbon. It was certainly not the year for the Government to strike out or take unilateral action to put our businesses at a competitive disadvantage. Nor, I thought, was it the year to introduce new complexities, such as different rates of car tax, graduated vehicle excise duty, and so on. But we have put up the cost of car use in what I believe is an acceptable way but which nevertheless leans in the direction of a policy that deals with some of the problems of pollution. The increase in fuel duties offers all of us a choice: pay more and forget about it, or think more carefully about our use of vehicles and cut costs. Of course, it adds to the incentive to buy a more fuel-efficient car, which I think is a responsible stance for us to take.

One of the successes of the use of tax incentives to environmental ends has been the growth in the use of unleaded petrol. Four years ago the share of unleaded petrol in the United Kingdom market was negligible. A gallon of unleaded cost more than a gallon of leaded.

My right hon. Friend the Member for Blaby (Mr. Lawson) introduced a tax differential to offset the cost disadvantage. Then he widened it to give motorists a positive incentive to convert to unleaded fuel. In last year's Budget, my right hon. Friend the Chancellor widened it still further. Now, just a few years later, unleaded takes 39 per cent. of the market. This year's proposal will widen the tax differential again. It now stands at 4p a litre.

Mr. Keith Mans (Wyre)

Bearing in mind my right hon. and learned Friend's comments about unleaded petrol, does he believe that there should be a move in the direction of diesel, which is also environmentally friendly, and that we should encourage its use as much as possible?

Mr. Mellor

We always consider such issues at the time of the Budget. I know that my hon. Friend appreciates that others argue against that approach, but I shall certainly have regard to his points.

I should not end my comments on the Budget's effects on families without mentioning the relief that my right hon. Friend the Chancellor gave community charge payers. We have already enacted legislation to give effect to that. There cannot be a free lunch. The Bill implements the other parts of the switch from local to central Government taxation. Clause 12 raises the rate of VAT to 17.5 per cent. In the circumstances in which we found ourselves, that was an appropriate step to take.

VAT is a proportionate tax—the more we spend, the more we pay. Our zero-rated range is wider than that of any other European Community country. When we buy zero-rated items, we pay no tax. On average, half our spending on goods and services is on zero-rated items. Those are weighted heavily towards the necessities of life. I cannot improve on the comment in The Guardian after the Budget: Using VAT to pay for the reduction in the poll tax was thus a broadly progressive measure. On that occasion at least, The Guardian was right.

Mr. John Battle (Leeds, West)

rose——

Mr. Mellor

With respect, I have given way a lot. I have probably more than outstayed my welcome and I must conclude. If one gives way, one always faces the danger that people will say, "He spoke for far too long."

Mr. John Smith

No, carry on.

Mr. Mellor

I wish to draw attention to two points. Despite the injunction of the right hon. and learned Member for Monklands, East for me to carry on, I shall resist temptation. On fairness, clause 26, which limits mortgage interest relief to the basic rate of tax, means that the same mortgage now receives the same relief, irrespective of the home buyer's income. That is fair. It has been compensated for in clause 20 by raising the basic rate limit to take account of most of it.

I am grateful to those in the press who drew attention to the problems of non-resident trusts. We have devised an effective way of dealing with them so that they cannot be used unfairly to avoid tax. That provision is made in clauses 71 to 80.

Fairness, families and business were the themes of the Budget introduced by my right hon. Friend the Chancellor. They are faithfully given effect to in the Finance Bill. I hope that we can fully discuss any problems in Committee. I commend the Bill to the House.

4.43 pm

Mrs. Margaret Beckett (Derby, South)

For the past year or more, my right hon. and hon. Friends and I have spent a great deal of time not just talking to people in industry and commerce but listening to them speak about the specific measures that they argue would promote success. One of the most noticeable features, especially in the past few months, is that, as those conversations develop, certain questions keep emerging—questions which came into my mind when I listened to the Chief Secretary to the Treasury.

I find that I am continually being asked, "Do the Government really believe what they are saying about the state of the economy? If they do, why do they believe it? If they do not, why do they keep saying it?" I can answer the last question. It is clear that the Government keep saying it because they hope that, if they do, someone else will believe it. It appears from the Finance Bill that perhaps the Government believe what they are saying—that there is little need for action by them.

The Government claimed in grandiose terms that this was a Budget for business. However, the Institute of Fiscal Studies and one of the advisers to the Treasury and Civil Service Select Committee suggested that that was overstating the consequences for business. S. G. Warburg said that it was difficult to find a list of positives for business in the Budget, although it had no difficulty finding a list of negatives.

The measures in the Budget that alleviate business costs through the reduction in the rate of corporation tax are almost offset by the introduction of national insurance contributions on company cars. As the hon. Member for Berwick-upon-Tweed (Mr. Beith) said, those measures must be set against the decision to increase the business rate by 10.9 per cent., the decision to increase business costs by reducing the share of statutory sick pay that the Government are prepared to fund—quite apart from the administrative charges incurred—and the charges on mobile telephones, which the Chief Secretary did not mention.

We welcome some of the help that is given in the Finance Bill to small businesses. We particularly welcome the bad debt provisions, which we proposed in the debate on last year's Finance Bill, and the measures that include some movement to deal with the loophole involving offshore trusts. We give a whole-hearted welcome to the ending of the freeze on child benefit, even if we have reservations about the way in which the Government have done that. We welcome these and other measures for which we called either in debates on previous Finance Bills or in our proposals.

We note the rejection of the argument, widely made by industry, that the most effective help for investment would have been to improve investment allowances. We note also—the Chief Secretary touched on this point—the minuscule help given in the Budget for training. That is particularly astonishing if both those measures are set against the considerable and continuing cuts in Government support for industry and training in this year of recession.

Mr. John Butterfill (Bournemouth, West)

Would not the Labour party's proposal to put a payroll tax of 1.25 billion on industry to help pay for training be disastrous at a time when employers are trying to reduce costs?

Mrs. Beckett

As we have no such proposal, I do not propose to dwell on that intervention. [HON. MEMBERS: "Oh."] The hon. Member for Bournemouth, West (Mr. Butterfill) may be referring to another proposal—that those who do not train at all and make no contribution, other than to poach on those who train, would have to contribute through training or through a contribution to a training fund. That is eminently sensible. Competitor countries have similar policies, which they have no difficulty in policing. We believe that that proposal will strengthen training and the position of the many people, to whom clearly the Government did not listen, who desperately resent the fact that while they invest in training, their competitors poach from them. The evidence of the Bill, and what it would do, must be examined in the context of what the Government say about the state of the economy.

At long last, the Government have been forced, by a rising tide of incredulity, to admit that we are in recession, although they continue to claim that this recession will not be as bad as their last one in the early 1980s. They argue that not only we but many other countries are in recession and that our recession is caused by the problems of excessive success, and we are on the way towards recovery. I believe that yesterday the Chancellor said that recovery was "around the corner".

The argument about recession being caused by the problems of success is particularly hard to follow, especially as the Government contend that other countries are in a recession that is not as deep as ours. They argue that we have had such wild success that we found ourselves in recession and that other countries are in not as bad a recession because they have not been as successful as us. That is a peculiar argument, even for the Government. As to recovery being "around the corner", I share the view recently expressed by chambers of commerce that the Government were "over-optimistic" in their belief that inflation has been beaten and that the end to the recession is in sight. The Chief Secretary today made the same comment about cumulative evidence. I refer him to a Greenwell Montagu bulletin that states that it can find few convincing signs that the recovery has yet begun. The Chief Secretary said that many organisations had claimed otherwise. Perhaps whichever Minister winds up will identify them.

In an address recently to the Institute of Directors, the Chancellor of the Exchequer drew attention—this was very honest of him—to his 12 years' continuous service in Government, five of them as a Treasury Minister. It is a welcome change for a member of the Government to admit some responsibility for the state of the economy. He also made interesting remarks about the difficulty of forecasting when recovery will come. He spoke of his sceptical attitude towards forecasts, and, with his experience, who can blame him? However, he admitted to having a lot of respect for data, and made particular reference to surveys of business and consumer attitudes.

It may have struck the Chancellor that there was a problem with that observation, and that perhaps he had launched yet another boomerang, because he hastily added that such surveys and data must be carefully interpreted. Although I read the Chancellor's speech with care, it was difficult to make out the points that he was trying to convey, but I will attempt to summarise them. The Chancellor said: Lagging indicators will go on signalling recession when the economy has begun to recover … Once these points are understood, it is possible to reconcile the notion that recovery is on the way with a continuing flow of gloomy statistics. He went on to comment on unemployment. It is increasingly clear that the Chancellor is arguing that forecasts are okay as long as they are favourable, but not if they are gloomy, and that the same is true of results. Apparently, therefore, we should ignore unemployment figures, but believe forecasts of recovery.

The Chancellor of the Exchequer decided yet again to fiddle with our inflationary expectations by making changes to value added tax. Only a few short weeks ago, Ministers stood at the Dispatch Box, one after the other, to tell the House that what mattered was not the headline rate of inflation but the underlying rate, leaving out mortgages and the poll tax. Now the Chancellor argues that the underlying rate is "utterly meaningless". Under pressure, he promised—in Committee, I believe—to take the underlying rate into account, along with a range of other indicators. But if he thinks that the underlying rate is fairly meaningless, it is also fairly meaningless for him to say that he will take it into account. He means that he will ignore it because it might reveal the risks that he has been running with the underlying rate of inflation while talking loudly about his great concern for it.

Mr. Quentin Davies (Stamford and Spalding)

Does the hon. Lady deny that unemployment is a lagging indicator, that it increases after falls in output, and that increases or reductions in unemployment follow, but do not precede, a revival in output?

Mrs. Beckett

There is something in what i:he hon. Gentleman says, but I do not recall him making the same point in 1979, when unemployment stood at 1 million. Today, the figure is 2 million, even after 30 changes to the way in which it is calculated. Nor did the hon. Gentleman make that comment when unemployment was falling.

The Chancellor wants to assume that Britain is enjoying a recovery, no matter what the indicators suggest. He cites unemployment precisely because he expects it to go on rising, but for how long? Perhaps the hon. Member for Stamford and Spalding (Mr. Davies) can tell the House. Will unemployment continue to increase for a year, or longer? It will certainly rise for some time to come, and at considerable cost to many of our constituents.

The Government's partial, self-selection of statistics created the problem in the first place. Just before the Budget, an economist with S.G. Warburg Securities, commenting on Government statistics produced at the time, said that the economy was much weaker than the Government thought at the time". That cast doubt on the policy of keeping interest rates so high for so long. Another indicator of the economy is the 70 per cent. increase in business failures in the first quarter of this year, which is the highest level for many years. Unemployment has shown a cumulative rise of almost half a million over the past year, and the figure for last month was the highest since the second world war. The Government will not listen to any point of view that they do not share. In the words of the song, they are not listening still; perhaps they never will.

Whatever the Government choose to hear, the people of this country have a right to learn some of the alarming evidence that Ministers discount. A recent analysis by Midland Montagu contrasted the comparisons that are continually being made between the current recession and that of the early 1980s. The actual results, which the Chancellor prefers, that are contributing to the developing economic pattern parallel exactly the downturn of the early 1980s. Sadly, the improvement is all in the forecasts. Perhaps it was after examining the same evidence that the chambers of commerce made their comment about the Government being over-optimistic, said that they do not expect a recovery until 1992, and warned that Britain is in a "deep recession" that no amount of talking will lead us out of.

The Engineering Employers Federation drew attention to the increased investment in manufacturing needed for a sustainable recovery, and to the requirement for a higher level of skills in the existing work force and among potential recruits. The federation asserts that, even in a recession, skills shortages are a matter of continuing concern.

Mr. Butterfill

Does the hon. Lady accept that if there is to be industrial investment, there must be savers whose money can be made available for such investment? If so, is it not curious that Labour proposes a tax on savings?

Mrs. Beckett

Our proposal is only to treat unearned income in the same way as earned income, which seems a fair change. Our intention is to impose a 9 per cent. charge, equivalent to that made in respect of national insurance contributions. For that reason, it will not be applied to the incomes of those who have retired—to pensioners.

Sir William Clark (Croydon, South)

I well understand the difference between earned income and unearned income—[Laughter.] I understand that the 9 per cent. charge will apply to salaried persons, but will someone who is well over the existing £3,000 on investment limit and earning a large salary also have to pay 9 per cent. on any excess income?

Mrs. Beckett

Indeed. On income from investments of about £30,000—which would result in income that exceeded £3,000—they would pay a charge of 9 per cent. on the extra income in just the same way as someone who earns that extra money would pay that charge. However, that does not arise from the case that I seek to make in this debate and so, if the hon. Gentleman does not mind, I shall not pursue it. The position is quite clear.

Sir William Clark

Does that mean that the highest rate of tax that can be levied on an individual is not 59 per cent. but 68 per cent. if that person has additional investment income?

Mrs. Beckett

That is ingenious, but no.

Mr. Quentin Davies

rose——

Mrs. Beckett

I shall not give way to the hon. Gentleman as I have already given way once to him.

Like the chambers of commerce, the Engineering Employers Federation suggests that there is unlikely to be any real recovery until at least mid-1992. The CBI's forecast some little time ago, with which I think that all the House is familiar, of a fall in investment of about 16 per cent., would take the level of manufacturing investment below the level that the Government inherited in 1979. Despite the background of the Government's claims for the economy, the Treasury Select Committee expressed the view that adverse international factors have been relatively unimportant in shaping the recession. The Governor of the Bank of England said in evidence to the Committee that the recession is "somewhat homegrown". Whatever the Prime Minister may argue, the Chancellor said in evidence to the Select Committee that there is not a worldwide recession as there was the first time round.

Against the background of those comments, I shall examine some of the evidence that those learned commentators may well have had in mind, especially since the Chancellor said in his speech to the Institute of Directors that we need to see our current difficulties in the context of what has been achieved since 1979—a view with which I whole-heartedly agree.

The Government make many extravagant claims for the growth that has been enjoyed in the 1980s, as if peak growth were enjoyed in every year of that decade. However, a quick canter through the results—the Chancellor has told us that he gives great credence to results—of what happened between 1979 and 1991 does not give quite the picture that the Government paint, especially if their claim is that Britain had a better performance in the 1980s relative to that of our competitors, which is what they said the other day.

Let us consider the rate of growth of gross domestic product per head between 1979 and 1991. In the European big four—Italy, Germany, France and the United Kingdom—we came fourth; in the Group of Seven, we came seventh; in the European Community 12, we came 10th, as we beat the Netherlands and Greece; in the Organisation for Economic Co-operation and Development countries in Europe, we came 16 out of 19; and in the OECD 24, we came 20th, and this time we managed to beat Iceland and New Zealand as well as the Netherlands and Greece. So much for our claims to startling relative success in the 1980s, during which—as the Economic Secretary admitted the other day—our growth rate was below the rate that we enjoyed in the much-abused 1970s, when we lacked the advantage of North sea oil.

Let us look a little nearer to the present day—at last year's results and at the signs of recession, although I think that the Prime Minister would prefer to call it weakening activity. There are some signs of recession in other English-speaking economies—in the United States, Canada and Australia—but not among our colleagues in the European Community, with whom we have to compete most directly after 1992. There are increasing signs of unemployment among those other economies but not among those with whom we must compete directly in Europe. In 1990, Britain had the slowest growth in GDP of all the OECD countries except Iceland. That shows our success in that decade and in the last year for which we have figures.

However, there must be something in the Government's optimism. I decided that I had better turn to the forecasts because the Chancellor said that sometimes it was all right to look at forecasts. Midland Montagu point out that the forecasts for 1991 which were given in the Budget represent a complete reversal of those given only four months ago in the Autumn Statement. The Budget Red Book shows a fall in total investment and the Government usually prefer that figure to the figure for manufacturing investment.

In terms of total investment, the Red Book shows the largest year-on-year decline in total investment in the economy since the year of the great depression in 1931–32—which is as revealing as it is alarming. That takes account of the measures in the Budget which are supposed to have done so much to improve our position.

The forecast shows that we shall have the slowest growth in GDP in 1991 of all OECD countries and the greatest decline in business investment, to which the Government are normally so wedded, in the OECD. The International Monetary Fund forecasts that the United Kingdom will have the lowest growth of all G7 economies for 1989, 1990 and 1991 and that, along with Canada, we are forecast to have a decline in growth in 1991.

What is especially worrying is that, apart from that forecast of decline in investment in the Red Book—10 per cent., which is bad enough—the results so far, taking the year from the first half of 1990 to the first half of 1991, are greater than the Red Book forecast, at more than 12 per cent.

That brings me to today's survey results from the CBI, to which the Chief Secretary referred. [Interruption.] I am not surprised that Treasury Ministers do not want to listen; I would not want to if I were them. Let us set the CBI's survey results in context. There is a slight increase in optimism. In other words, people are not quite as pessimistic as they were in January. That might have a little to do with the Gulf war, but let us be generous and say that it is all to do with the signs of recovery that the Government detect. Whatever the levels of overall optimism, the survey shows that indications for investment, training, innovation and employment are still deeply alarming. Expectations for investment are worse than they were when the last survey was published in January. Expectations for training and innovation are no better than they were when the last survey was published—in other words, a continuing, although not worsening, decline in investment in training and innovation is expected. The expectations of unemployment are worse than they were in January. Orders and industrial output are expected to fall.

In that context, it is especially alarming to note that the CBI tells us that the survey in January, although it was bad, understated the case and was too optimistic compared to the fall in orders that took place. No wonder that the CBI says—whatever the Chief Secretary says—that although the trend in output appears to be levelling out it is too early to speak of recovery and it will take a long time to recover this lost ground. That is what the Chief Secretary called firm evidence of a recovery. Let me remind the House that these are forecasts. Somewhere in all these figures for outturn, figures for results and the figures that I have just given for a variety of people's forecasts, the Government are finding the source of optimism that they so repeatedly preach to us all in the House.

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

They make it up.

Mrs. Beckett

I think that my hon. Friend is right.

It is hard to see what, other than a desperate attempt to obscure responsibility for the recession, fuels the optimism to which the Government lay claim. Since they admitted the existence of recession, late and grudgingly, they have been saying that it is nearly over. I shall consider the pattern of the Government's observations—one might call it the seven ages of a Treasury Minister.

First, the Government said that there was no recession and they got very shirty with people who said that there was, claiming that they were trying to talk us into one. That was the first stage, although the Prime Minister, when he was Chancellor, said that things would not be easy. In the second stage the Government began to admit to a weakening of activity around the time of the autumn statement. The third stage was when they admitted that the recession had arrived but that they hoped that it would be, in the Chancellor's words, "shallow and short-lived." The fourth stage came with the recent admissions that the recession has turned out to be deeper than the Government thought. I regard it as the fifth stage that the Prime Minister identifies the fact that other people are on their way into recession because they have not been as successful as we have for as long as we have, so they were not so lucky as we were to get into the recession as fast as we did. That bears no relation to any facts that I can discover. The sixth stage is that recovery is "around the corner", as the Chancellor says.

The Treasury and Civil Service Select Committee says that it detects at present the absence of any firm evidence that recovery is taking place. It is also concerned that recovery is so heavily dependent upon a revival of consumer confidence and consumer expenditure, which may falter if unemployment continues to rise. That is borne out by other comments. Midland Montagu says that the onus of proof lies on those who see signs of recovery and that the prime risk is on the other side. There is also a seventh stage, the other side of the hurricane—all the winds diminished, blissful calm beginning to appear but, on the other side of the eye, the winds beginning to rise again.

I have no doubt that the forecasts that the Government would most prefer to discount are those that suggest that after a time, with inflation low and interest rates lower than they have been, once the recovery is under way the balance of payments deficit will begin to deteriorate, inflation may well begin to deteriorate and pressure will come on interest rates again. The tragedy of all this is that even the recovery that the Government suggest, delicate though it is, is not a recovery led by investment or exports. The danger is that that recovery may well be shallow and short-lived, as the balance of payments constraint re-emerges.

Perhaps the most revealing as well as the most notable aspect of the Budget was the decision to raise between £4.5 billion and £5 billion through the increase in value added tax—revealing because it was a decision that had nothing whatever to do with long-term planning for the structure of local government, and nothing to do with long-term planning about what the balance should be between the moneys raised from local resources and from central Government, but everything to do with the timing of the election and the Government's desperate need to defuse the unpopularity of the poll tax. Between £4.5 billion and £5 billion is to be raised by means of this surcharge, but there will not be a single teacher, home help, cleaner or caretaker to show for it. On the debit side, yet again there is the risk of more inflationary own goals. With this Finance Bill, the Chancellor of the Exchequer is treading water. The only suggestion in the Bill that there is a long-term strategy behind what the Government are doing is their choice, when they decided to give some help to business, to focus on the rate of corporation tax rather than on allowances of one sort or another. It highlights the long-term direction set out by the Chancellor in his speech to the Adam Smith Institute—the long-term direction called for by bodies such as the Institute of Directors, which asked for cuts in the rate of taxes in order gradually to erode and allow for the disappearance of the welfare state. In that speech the Chancellor said: The need to reduce the size of the public sector remains at the top of the Government's agenda. It is only by keeping spending under control that we will be able to deliver the income tax cuts to which we are committed. Yet again I am pleased to see that Conservative Members share that view whole-heartedly, and yet again, as throughout the Government's period in office, we see their determination to use the resources that become available to cut the rate of income tax, although that distributes resources most heavily to those who need them least. I am mindful that the cumulative cuts that the Government have made in income tax mean that someone whose earnings amount to £70,000 a year has made £34,000 out of those cumulative income tax changes.

The pursuance of that policy and the increases in VAT and national insurance contributions have already led to an increase during this Government's period in office in the overall tax burden for an average family, with one wage earner and two children. The income tax cuts that they have made have been almost outweighed to a penny—certainly to a couple of pounds—by the increases in national insurance contributions and the effect of the freezing of child benefit. On top of that, we have had not only the increase in VAT but also the poll tax.

The Finance Bill will not do a great deal of harm, but it will not do much good, either. During the past few years, our economy has fallen into the hands of a group of joyriders. Like most joyriders, they grew more and more reckless as time went on and, as the excitement mounted, more and more convinced of their own skill and infallibility. Like so many joyriders, they have ended up in the ditch. Some of the casualties will never be the same again.

It is evident, from both the Budget and the Finance Bill, that to us will fall the task of getting the vehicle out of the ditch and back on the road. That job will have to be done before we can even assess the full extent of the damage. The Finance Bill shows that it will not be done by this Government. The sooner they move out of the driving seat and let us get on with the job, the better.

Several Hon. Members

rose

Madam Deputy Speaker (Miss Betty Boothroyd)

Order. A great many hon. Members wish to speak in the debate, so brief speeches would be very much appreciated.

5.15 pm

Sir William Clark (Croydon, South)

Following the speech of the hon. Member for Derby, South (Mrs. Beckett) one thing has been made quite clear—that the Labour party's top rate of tax would not exceed 59 per cent. for any individual. I am delighted that she confirmed that fact.

This was a good Budget. My right hon. and learned Friend the Chief Secretary was right to draw attention to the fact that, during the last few months, interest rates have come down from 15 to 12 per cent. Some of the forecasts—whether from the Confederation of British Industry or the various chambers of commerce—have overdone it. I do not know whether that was in an effort to stampede my right hon. Friend the Chancellor of the Exchequer into a precipitate reduction of interest rates. I am absolutely convinced that he is right to take the reduction of interest rates step by step and to do nothing drastic, which would set off a consumer boom and put us back to square one. The CBI has said today that the recession is flattening out. I agree with the Chancellor of the Exchequer that, after the second quarter of this year, we shall probably come out of it. Come the autumn and next year, the economy will be in very good shape.

Before I come to the points that I really want to make, there is one small question that I ought to raise. At the moment, farmers are having a fairly hard time. I cannot understand why the vehicle excise duty on tractors has been increased from £16 to £30. That increase is mistimed for the farming industry.

In an otherwise excellent Finance Bill, I believe that clause 29 is petty. I do not know whether my colleagues on the Treasury Bench realise that mobile telephones are now a business tool. Particularly those people who work away from head office find that they are essential. I am the chairman of a company that insists that those of its employees who do not work at head office should have a mobile telephone so that we can get hold of them.

I was encouraged by the remarks of my right hon. Friend the Prime Minister when he opened a factory in Worksop the week before last. Somebody tackled him about the value of mobile telephones. My right hon. Friend turned round to him and said, "I couldn't do my business without them." He is not alone. A lot of people in business need a mobile telephone, so this clause is very petty. It will produce £10 million, yet one is talking about a Budget amounting to well over £200 billion.

We are playing around with a business tool. Let us not forget that the United Kingdom leads the world in mobile communications. It would be wrong to tax it. If the employee repays the employer for any private use of the mobile telephone, the employee becomes exempt from the tax. How will employers check on how many private telephone calls have been made on a mobile telephone? If that is the logic used by the Government, why are they stopping there? Why not surcharge private calls made by people who work at desks? I hope that my right hon. and learned Friend will look again at the tax, because it really is nonsense.

If it were a matter of saving face, we could introduce self-certification. We have introduced it for the taxation of married couples. One's wife can certify that she is not liable to tax, and consequently the bank or building society must pay her interest gross. We have a precedent, so an employee could certify that he or she did not use the mobile telephone for more than 1 per cent. of phone calls.

Mr. Robert Sheldon (Ashton-under-Lyne)

Having read the clause dealing with mobile telephones, it is not clear that avoidance of the charge will be the easiest thing in the world, and does that not make it likely that £10 million could be an overestimate of the revenue to be raised?

Sir William Clark

I agree with the right hon. Gentleman. Although the Exchequer might raise £10 million in revenue, the tax puts a burden on business by making it necessary to check whether an employee is using a mobile telephone for private calls. If we must tax mobile telephones, we might as well tax private calls made by people who work at desks.

I was interested in the exchanges between my right hon. and learned Friend the Chief Secretary and my hon. Friend the Member for Brentwood and Ongar (Sir R. McCrindle). The Government must look again at clause 50. Despite the Government's statements, there is no question but that it is double taxation. If one has paid one's assessment for 1985–86, no more tax is payable for that year. However, more tax could be paid depending on the accounting date of the building society. If the building society's accounting year ends on 31 March, there is no tax to be paid, but if it ends on 30 September, tax would be charged not only on the full year 1985–86 but on another six months' interest. If the building society accounting year ended in May, there would be considerable extra tax to pay.

I have nothing to do with the Woolwich, but that building society won its case in the High Court in July 1986. The case went to the Court of Appeal in April 1988, and the Woolwich lost. Last October, the case was taken to the House of Lords, and the Woolwich won. If my right hon. and hon. Friends on the Treasury Bench cannot convince the highest court in the land that there is anything wrong, why was the Woolwich repaid £44 million? The money was repaid simply because the Law Lords said that it was double taxation and therefore should be repaid. An example of the anomalies and unfairnesses concerns the Leeds building society. Again I stress that I have no connection whatsoever with the Leeds. The Leeds and the Woolwich were working in harness, although the Woolwich brought the test case. Any lawyers in the House will know that, when there is a test case, anyone in similar circumstances benefits from that judgment. The Woolwich was repaid £44 million, but the Leeds remains £57 million out of pocket. That must be wrong, and the Government must look again at the matter.

My right hon. and learned Friend the Chief Secretary said that it would be a windfall for the building society but would not affect its members. I should have thought that, if the Leeds building society were to receive £57 million tomorrow, that money would go into its reserves. Those reserves do not stand idle; they are invested. All the money in a building society belongs to the 30 million investors, so there is no difference between the building society and the investors; they are one and the same, and all the money belongs to them.

Mr. Peter Bottomley

I agree with virtually everything that my hon. Friend has said, but he should make it clear that the House of Lords said that the subsequent regulations allowed for retrospection and therefore legalised the double taxation. The relief to the Woolwich turned on the rate of taxation, but the real issue is that Parliament did not expect to be imposing double taxation, yet the House of Lords said that it was double taxation. That is why the House of Commons has a rightful grumble, and that is why we want Treasury Ministers to think again.

Sir William Clark

I remind the House that counsel for the Government said in the House of Lords: Even if this amendment does impose double taxation, that is nothing to do with you because Parliament has willed it. My hon. Friend the Member for Eltham (Mr. Bottomley) is quite right. Parliament willed it, but it did so on the understanding that there was no double taxation. That is why we must go back and think again.

Mr. Tim Smith (Beaconsfield)

Is my hon. Friend aware that, when the Income Tax (Building Societies) Regulations 1986 that were made under the 1985 Finance Act were challenged by the Woolwich building society, the Government introduced a new clause at the Report stage of the 1986 Finance Bill. The matter was fully discussed and the Government said that it was not intended that there should be double taxation. The House of Lords has now found that Parliament approved double taxation by agreeing to that new clause, so we approved something that we understood would not arise. That is the cause of the present difficulties.

Sir William Clark

I am grateful to my hon. Friend for making that point so clearly.

The philosophy of the Conservative party has always been against retrospection. It is a one-off case, so it cannot be said that we thought the law applied in a certain way and we are now putting it right. Since the House of Lords said that the Woolwich must get its money back, I am absolutely certain that the Leeds and every other building society will do the same. I am sure that my right hon. and learned Friend the Chief Secretary will realise that I am not in favour of wasting Exchequer money, but when unfairness has cost £250 million, we must do something about it.

I regret this note of discord, but we should not be petty about mobile telephones or abandon the Conservative party's anathema to retrospective legislation. We have a strong economy and we must do all that we can to help businesses, both small and large, but we must always be fair to the taxpayer.

5.30 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

The right hon. Member for Croydon, South (Sir W. Clark) spoke about mobile telephones. It is rare that I agree with the right hon. Gentleman, but he made an important point. It will be a difficult tax to collect and, as one can see from reading the clause, it will be easy to avoid.

The Treasury and Civil Service Committee has again produced its report, and the House is grateful. I have just one comment on the unanimity of the Committee, which I welcome. The Committee can be powerful or influential only when it looks at the facts and comes to a decision based upon them. I am pleased to see that it has achieved nearly new records of unanimity, and I welcome that. It is important, and I look forward to that standard continuing.

On the Chief Secretary's arguments, I have been reading some of the economic debates of the 1920s and 1930s. They are remarkably similar to the arguments heard from the Treasury Bench today. There are many selective statistics, lots of clutching at straws and lots of hopes for recovery. That went on year after year. The Treasury Bench should look at those debates to see how the Government are copying so many of the errors of the past.

In his Budget speech, the Chancellor said: My central economic aim is to bring inflation down and keep it down."—[Official Report, 19 March 1991; Vol. 188, c. 163] I have heard that before. I went back to my valued Red Book of 1980. The medium-term financial strategy for that year said: The Government's objectives for the medium-term are to bring down the rate of inflation and to create conditions for a sustainable growth of output and employment. The only difference is that the events are separated by 12 years. That was why we had three years of unparalleled austerity. We assumed that that phase of the operation to reduce inflation had finished. We thought that the Government had won that limited objective. The right hon. Member for Shropshire, North (Mr. Biffen) told us of those three years of unparalleled austerity. I wonder whether anybody in the present Government will be equally straightforward and candid and tell us how many years of austerity we shall have to endure this time.

In 1979, the Government were confident that monetarism would solve the problem. They believed that that nonsense would be the solution. They were going to reduce public expenditure and so on. In fact, North sea oil provided the Government with their real assistance to overcome the problems of those years. As a result of their policy, the country suffered. Thirty per cent. of my industrial firms closed and many others suffered as well.

Twelve years later, the same problem confronts the Government as confronted them when they set out. Why is that? Inflation is still with us, but it is more severe in one respect. We may be in a slump rather than a recession. We are still not in balance in our external payments. Despite the enormous downturn the external payments position is still a major indictment of economic policy. What is to happen when there is some sort of recovery? If we cannot achieve balance of payments equilibrium now, when will we achieve it?

Some say that this is a slump. If it is not a slump, what are the circumstances in which one uses that word, or should it be excised from the English language? I speak to many industrialists, and their major concerns are credit control, insolvencies and so on. They are all increasing their employment in those areas and are watching carefully. They have daily figures to show how many people make payments and how long the payments are being delayed. The old certainty of payments, even from respectable firms, is no longer with us.

As my hon. Friend the Member for Derby, South (Mrs. Beckett) pointed out, it is easy to reduce inflation if there is a single target. One can deflate the economy by high interest rates and, for good measure, add a high exchange rate. One then reduces consumption and companies are destroyed indiscriminately, good and bad. Exports are hard to get with a high exchange rate and imports take advantage of that to compete with our own industries. However, inflation does come down as high interest rates restrict some forms of spending, although not all. Some individuals with high levels of savings profit from high interest rates.

What will happen when there is an upturn? What happens to our balance of payments? There will be an £8 billion deficit next year, and we must wonder where the exports will come from when manufacturers have been so badly damaged by a Government who gave them little consideration and even less assistance. The problem is compounded because, far from the boom being investment-led, as some unwise commentators and Treasury Ministers affirmed, it was consumption-led. The boom was in finance, credit and consumption, none of which helped our long-term trading performance.

The trouble with relying on interest rates is that some people gain and some lose. It is much harder to control the economy through interest rates alone now that so many people have such a high collateral in the houses that they occupy. So, in the middle of a slump, banks and finance houses are still anxiously trying to lend money to those with secure assets. We are paying the penalty of a housing boom fuelled and ignited by the former Prime Minister's dedication to absurdly lavish incentives to home ownership.

Coupled with that, the Conservative party's attitude to pay claims has been farcical. First, the Government said that it did not matter. They said that sterling M3 would take care of it and that controlling the money supply would remove money that might be used for pay increases. If companies paid high claims, they would be squeezed, and if they persisted, they would be eliminated by the operation of the iron hand of monetarism. So far did they believe that nonsense that they thought that they could raise VAT from 8 per cent. to 15 per cent. without affecting inflation. It is absurd even to consider that today, but those were the arguments used then. A year after coming to office, without the external trauma provoked by the oil price rises of 1973–74, the Government produced the self-inflicted retail prices index rate of 21.9 per cent. in May 1980.

Eventually, all Governments learn something, and monetarism dropped out of their agenda. They then resorted to exhortation—pleading with industry to restrain pay increases. Their friends in the City responded by awarding themselves the £1 million salaries that have been a feature of this Government. Finally, the Government took refuge in the embrace of the exchange rate mechanism. They are now seeking to discipline employees by threatening them with a fixed and unalterable exchange rate. As if that were not enough, some people are producing the bogey of an independent Bank of England.

I am not against fixed exchange rates. In the past few weeks, we have seen currencies varying by up to 15 per cent. and more, which can play havoc with a company's trading arrangements. When we had a fixed exchange rate up to the early 1970s, such a movement was considered catastrophic—a major devaluation, with all that that implied then. Now, I would wish to see fixed exchange rates that could be changed when the disparities were clear and consistent. I wish to see what I would call fixed but not immutable rates, as was the position in the late 1960s.

The Government made the country pay a terrible price by reducing inflation by a means that caused great unnecessary damage to our economy. Having done that, why did they squander the one gain that they had achieved? After three years of unparalleled austerity and the seven fat years of North sea oil, why did they not look to the industrial investment which could alone prepare us for the rigours of the seven lean years?

The truth is that they thought that our economic salvation lay in the City and its financial organisations. They are only dimly beginning to perceive that financial centres follow wealth creation, which comes mainly from manufacturing. That is why London became such a prominent financial centre; it rose on the backs of Manchester cotton and Birmingham metal industries. The enormous production of the United States created New York's financial centre, and Frankfurt and Tokyo have risen to challenge both older financial centres because of the dominance of manufacturing.

Financial skills are more easily transferable than manufacturing skills. That, more than any of the market operations, threatens the valuable role that is still played by our City institutions. The lesson is that manufacturing industry is the principal begetter of financial institutions. To assume that finance can exist on its own is a folly that only the Government have entertained.

What are the Government doing to help our industries? They have made some concessions in corporation tax. I remind them that, in many cases, the reduced tax does not compensate for the tax paid on inflationary profits. If inflation is 10 per cent., companies are taxed at 3.3 per cent. of the stock that they held at the end of their financial year. Inflation on corporation tax extracts that wrongful penalty from them. For many companies, the reduction in corporation tax, although welcome, will not compensate them for the tax imposed on them because of the Government's failure to control inflation.

The further failure of the Government has been to deal with the drying up of investment. There is no question but that investment is drying up—we can forget the past and the uncertain forms of investment that we had—because the Government did not raise capital allowances. Depreciation of 25 per cent. in the first year is nonsense for many forms of investment, and at a time of stringency they should have been increased. I should have wished capital allowances to be better targeted to manufacturing industry.

I should raise the difficulty of ensuring that people pay the correct amount of tax. The Treasury, quite rightly, and the Inland Revenue certainly, used to oppose the claiming of expenses incurred at work because they thought that it would open the floodgates. I understood that and defended it many times, but now the costs of travelling to and being in work are higher than before and are growing fast.

It would have been absurd for me, 20 or 30 years ago, to say that transport was a major cost of employment. Workers walked up the road to the mill or factory and that was it. They wore the same clothes and slipped back home for lunch. Many of my constituents travel 30 or 40 miles to work but receive no allowances for that. The clothes they wear must be a little better than in the past. They must eat in the canteen, and even a sandwich costs quite a lot. Women particularly, but many men as well, must consider the care of young children. Those major costs must be deducted from take-home pay. It is a serious matter and is becoming more so.

We used to tax investment income from capital at a higher rate. It was argued that it was right to do so, because it was a more secure form of income than earning a living by taking a job. The problem today is not the investment income surcharge but the charge on the individual who must travel to work. Somebody who has investment income pays only for the journey to deposit his money at the bank. The case for an investment income surcharge is made stronger today by the many expenses that are incurred in earning a living.

I welcome the changes in the Bill to excise duties. The retail prices index has been too prominent in keeping down duties on tobacco and alcohol. I would have preferred annual increases, at least to take account of inflation, rather than the Government, quite rightly, having now to try to make good those past lapses. An amendment like the Rooker-Wise amendment for personal allowances would be sensible for excise duties.

I am happy, too, about the move to tax car benefits in kind, but I find the mobile phone tax hard to understand. The wording of the Bill is quite peculiar, but the Standing Committee will have to unravel that.

A higher VAT rate of 17.5 per cent. means that the importance of the anomalies in the boundaries between 17.5 per cent. and zero rate will increase. There were problems when VAT was 8 per cent., such as the size of the hem of a skirt for clothing allowances. Such anomalies will increase, and the Minister responsible for VAT will be heavily occupied trying to defend them.

I welcome the provisions on mortgage interest relief and the PAYE quarterly payments scheme. VAT bad debt relief and the recognition of the role of child benefit are a move in the right direction.

The Government started with a plan for inflation, and they will end with a plan for inflation. In the meantime, they will regret those years when they fooled around. The next Government, which I hope will be a Labour Government, will look to industry, which will be the only wealth creator. That is the only way of sustaining a prosperous and thriving economy.

5.46 pm

Sir Peter Tapsell (East Lindsey)

I agreed with the emphasis that the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) placed on the importance of wealth creation. Having spent most of my working life in the City, I also agreed that in the long term the City will not maintain its important place in international finance unless we improve our wealth creation. We must create more capital more rapidly and spread it more widely.

In my lifetime, there has been an enormous improvement in our standard of living. Many more people own their own homes or are in the process of doing so and many more either have an occupational pension or are gaining entitlement to one than when I was young. Beyond that, amazingly few people have much disposable capital. Their capital is mainly locked up in their house or pension fund. It is extremely difficult, even with the considerable tax reductions made by the Government, for people who start without any money, as I did, to acquire capital.

One of the main differences between this country and the United States is that it is easier to acquire capital in the United States. Someone can arrive in the United States from a third-world country with no English or qualifications, but after 20 years will have acquired a certain amount of disposable capital. One meets such people all over the United States. We do not have nearly such a dynamic economy. One reason for that, apart from the national temperament, is capital gains tax.

I shall confine my brief remarks entirely to the capital gains tax aspect of the Finance Bill. I argue, as I have for a great many years, that we should abolish capital gains tax in the long term, although it may be necessary to have a short-term capital gains tax for, say, six or 12 months to make income tax avoidance difficult. People often forget that we have had a capital gains tax for only a short period of our fiscal history. Even Sir Stafford Cripps did not introduce a capital gains tax.

I was in at the start of it in a funny way because, when he was Chancellor, Mr. Selwyn Lloyd asked me to talk to him about bond washing. I was a stockbroker and he assumed that I would understand how bond washing was done although my firm never did it. He told me that he wanted to stop it. I went along to the Treasury and tried to explain how bond washing was carried out although, as I was cross-questioned by Selwyn Lloyd and his senior civil servants, it became clear to me that I did not really understand how it was done. Selwyn Lloyd introduced a short-term capital gains tax in the 1962 Budget—primarily to stop bond washing.

In 1960–61, Britain had just had a mini-boom. It was nothing like as big as the boom of 1987–88, but it was a mini-boom with a certain amount of speculative land activity and a good deal of bond washing, out of which some people were making large sums at the expense of the general taxpayer. That was why a Conservative Government introduced a short-term capital gains tax. It was not intended as a general tax; it was a special tax to clobber the spivs, which is why it was supported by the Conservative parliamentary party at the time, but with some misgivings. In 1965, the Labour Government turned it into a permanent capital gains tax, although Selwyn Lloyd's short-term capital gains tax was not repealed until the 1971 Budget. This country has had a permanent capital gains tax of 30 per cent. since 1965 and I have always though it a bad thing.

About 20 years ago, I remember asking Mr. Lee Kuan Yew, the Prime Minister of Singapore, how he accounted for the fact that his country, which had such an interventionist industrial policy and such high rates of income tax, had such a dynamic economy. He said that it was because Singapore did not have a capital gains tax. Last year in his economic report to Congress, President George Bush sent the same message—that if he was to make the United States economy more dynamic, he would like to see the CGT rate in the United States reduced from its present level of 28 per cent. He expressed the hope that he could get rid of it altogether.

I do not think that anybody who has ever considered capital gains tax in any advanced country has denied that it has a bad effect on entrepreneurial activity. It distorts all sorts of markets. It dissuades people from selling shares and other things in an attempt to avoid capital gains tax when, on normal economic criteria, they would think that it was right to do so. A great many people nowadays have second homes, but because the principal home is excluded from capital gains tax, elderly people defer selling their second home, thinking, "When I die, the second home will not attract any capital gains tax." Capital gains tax means that, over a huge range of activity, people take decisions on disposals not on the merits of the disposal or its timing, but primarily because of the tax considerations.

However, worse than all that is the appalling complexity of the tax which has worsened with every passing Budget. Governments are always tinkering with it. I have not checked, but I doubt whether there has been a single spring Finance Bill since 1965 in which capital gains tax has not been amended in an attempt to remove the anomalies that were created by previous amendments. This Finance Bill is no exception. The country's accountancy industry and tax lawyers spend a disproportionate amount of their time on capital gains tax. This Bill, for example, refers to overseas trusts, which have been legislated on in previous Finance Bills. People who become involved with overseas trusts do so primarily to avoid CGT.

The return to the Revenue in the yield from capital gains tax is wholly inadequate when compared with the damage that it does to the economy and with the amount of time that some of our top professional brains spend on it. According to this year's Red Book, the yield for the current financial year is expected to be £1.4 billion. That is quite a large sum, but only a small element in the Budget. Last year, the yield was £.1.9 billion. The yield has been decreasing steeply since CGT was indexed. The indexation of capital gains tax removed some of its considerable injustices because until the introduction of the 1982 and 1985 provisions, people were paying tax not on any real gain, but on the nominal gain of inflation. With inflation at 10 per cent. last year, one must deduct 10 per cent. from the rate of CGT. Obviously, therefore, the CGT yield is likely to come down unless capital values keep pace with the RPI.

When the Tory party was in opposition and I was a Front-Bench Opposition spokesman——

Mr. Robert Sheldon

And a very good one.

Sir Peter Tapsell

The right hon. Gentleman and I had many debates then.

At that time, the Tory team all agreed to get rid of capital gains tax. I was the only member of the team who thought that we should keep even a short-term capital gains tax. My right hon. Friends the Members for Finchley (Mrs. Thatcher) and for Blaby (Mr. Lawson), my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) and all the subsequent Chancellors of Conservative Administrations thought that it should be completely abolished. I am amazed that after 11 years of Conservative Government we have still not got rid of CGT. Since 1979, I have written to every Financial Secretary to the Treasury well before each Budget urging that we should get rid of it. They have always written back most sympathetically and taken me to one side in a corridor or bar and said, "Yes, what a good idea, but the Inland Revenue does not want to get rid of it." The Revenue does not want to get rid of it because CGT is regarded by it as an essential means of preventing people from turning income into capital and thus avoiding income tax.

Mr. Mellor ind

indicated assent.

Sir Peter Tapsell

I am glad that the Chief Secretary is confirming that. No doubt the Inland Revenue is still saying the same thing to him——

Mr. Mellor

At least it is consistent.

Sir Peter Tapsell

Yes, consistently wrong. There may be considerable strength in its argument that, without any capital gains tax, rich people with good professional advisers would try to avoid paying so much income tax and would try to turn as much as possible of their income into capital gains. Even if that is true—and it is true, up to a point—the fact is that capital gains tax has not done the prevention job for the Inland Revenue. If it had, it would not be necessary in Finance Bill after Finance Bill to pass special provisions that are separate from CGT to deal with the loopholes by which people seek to avoid income tax by turning income into capital gains and then seek to avoid that capital gains tax by moving into overseas trusts and other devices.

I hope that CGT will be abolished. As a result of my conversations with successive Financial Secretaries I thought that it would eventually be abolished, so I was astonished and dismayed to find that instead of the reduction to a rate of 20 per cent. which I urged, or abolition, in the Budget of 1988 my right hon. Friend the Member for Blaby increased the rate from 30 per cent. to 40 per cent. to link it to the top band of income tax. He thus introduced an entirely new principle into our fiscal system.

It had always been accepted by all Governments—going back to the time of Sir Stafford Northcote when we began discussing such matters—that income and capital were different and should be treated and taxed differently. With the apparent support of all members of my party, my right hon. Friend the Member for Blaby introduced the concept of treating capital and income in the same way and he increased the rate of CGT from 30 per cent. to 40 per cent. Given that we had earlier reduced the rate of income tax from 83 per cent. to 25 per cent., and 40 per cent., and indexed the CGT structure, that move to 40 per cent. would not have been so bad were it not for the establishment of that dangerous principle. Even in opposition, Labour Members now say openly that were they to take office they would increase the top rate of income tax to 50 per cent. and add a national insurance surcharge—as it were—9 per cent. So the top rate of tax would go straight from 40 per cent. to 59 per cent. We have not heard about it from them today or in their document, but I hope that we shall be told whether they would do the same with CGT.

Once we have accepted the principle that the rate of CGT is linked to the top income tax rate, there is a tremendous danger that, if income tax rates are increased to, say, 50 per cent., Labour would say that when the Conservative Government were in power they accepted the principle of parity between the two, so they have automatically increased CGT to the same level. If the rate of CGT was 50 per cent. or 59 per cent., we should have one of the highest—if not the highest—rate in the advanced world.

I cannot understand why my right hon. and hon. Friends are prepared to accept this situation. Many of them are far more enthusiastic than I about the wholly free operation of markets—it has always been my experience that the people who are most enthusiastic about the free operation of markets are those who have least practical experience of operating in them. I am a capitalist and I believe in free enterprise and in private savings. Over a 40-year period I managed, with the greatest difficulty, to acquire some savings and I should like other people to have the opportunity to do the same, but rather more quickly. If one believes in a free-enterprise capitalist economy, one must be hostile to CGT. I hope that on Report the Government will decide to abolish at least a long-term capital gains tax. If they are not prepared to do so, I hope that, for the political reasons that I have given, they will at least detach the rate of CGT from the rate of income tax and levy it at, say, 20 per cent. and make it clear that, as in the past, capital and income are different and must be treated separately.

6.3 pm

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

In his opening remarks, the Chief Secretary rightly said that there is an economic context for the debate, although his use of quotations to describe that context is slightly different from mine. I hope that we can reach agreement on the basic proposition that we are in the middle—or in the course—of a serious recession. I had better not say "middle" because that presumes that we know when the end will be. The recession is more serious than the

Government predicted, but as serious as the Treasury and Civil Service Select Committee predicted. Getting out of the recession will be a difficult task and will not necessarily be achieved quickly.

Paragraph 6 of the Treasury and Civil Service Select Committee's report states: Taking a longer period, the Treasury are now forecasting two half years of falling output; and output will now be 4.5 per cent. lower in the second half of 1991 than forecast for the same period just four months earlier. Clearly this is more than a relatively short-lived and shallow recession. The Government should stop pretending otherwise. They are in danger of being deceived by their own rhetoric. I understand why Governments confronted with elections try to make a story sound better than it is, but there are disadvantages to that. It has the effect of leading people to misunderstand the measures that might be needed and of making it more difficult for the Government to take those measures. For the Government to take some of the steps that we are urging on them might appear to be an admission of guilt on their part and an admission that things are worse than they have said. I should not want to put them in such a difficult position.

I make the same argument about inflation. As long as the Government pretend that it is not as bad as it is, they make it hard to persuade people of the importance of the measures necessary to deal with it. I shall return to that issue later.

The Chief Secretary quoted from the CBI survey and from the CBI's comments on the survey. I shall quote more fully the comments made by Mr. Wigglesworth, the chairman of the CBI's economic committee, which is responsible for the report. He said: Although the trend in output appears to be levelling out it is too early to speak of recovery. That is quite different from what the Chancellor has said. Mr. Wigglesworth continued: The survey shows that the intensity of the downturn is slackening and we may be approaching the turning point. The Government can reasonably claim that there is light at the end of the tunnel, but not that we have reached the turning point or that we have turned the corner.

All this language about turning the corner makes me think that what is at the back of the Chancellor's mind is the Noel Coward song which states: There are bad times just around the corner, There are dark clouds hurtling through the sky., And it's no good whining About a silver lining For we know from experience that they won't roll by. [HON. MEMBERS: "Sing it!"] If there are any more requests, I might sing. What we do know from experience is that the Government's forecasts about the recession and about inflation tend to be inadequate. They are repeatedly inadequate and the Select Committee's report contains some useful tables showing how far that is so.

I shall now deal with inflation. Language such as that used by the Prime Minister, who said that we have inflation "by the throat", also has a self-deceiving quality. We have not got inflation by the throat. The Government are making progress with headline inflation, but admit in their own forecast that underlying inflation will remain high and will be more than 7 per cent. even at the end of the year. I have listened to many lectures from Treasury Ministers about how deceptive the headline inflation figure is, especially with all the jiggery-pokery of the poll tax.

The Financial Secretary to the Treasury (Mr. Francis Maude)

If the hon. Gentleman is right and we are less successful in reducing inflation than we believe, why did he recommend this morning that we should loosen monetary policy by reducing interest rates?

Mr. Beith

Given the discipline of the exchange rate mechanism, I believe that it is now possible further to reduce interest rates while having an anti-inflationary policy. The Government also believe that, which is why they have made careful reductions of 0.5 per cent. at a time. I believe that they will make another reduction within the next three or four weeks.

Mr. Archy Kirkwood (Roxburgh and Berwickshire)

At the Scottish Tory party conference.

Mr. Beith

Most reductions in interest rates coincide with events such as debates in the House of Commons or party conferences, and the Scottish Conservative party conference seems a likely place.

It is possible to reduce interest rates now without threatening the anti-inflationary policy. It would not have been sensible to make a large and sudden reduction of, say, 2 per cent. to 3 per cent. in the weeks when our position in the ERM was uncertain. However, I am sure that Ministers will agree that the circumstances are now favourable for a reduction that would help us to deal with inflation.

Mr. Tim Smith

Is the hon. Gentleman saying that we can succeed by cutting interest rates and that inflation will still fall? He has just complained that underlying inflation is going to remain stubbornly high. Is he now saying that it will fall even if we cut interest rates?

Mr. Beith

The present level of interest rates is not necessary to assist in the battle against inflation. There will come a time when the Government will need to look to interest rate policy because of further inflationary pressures in the system. I am not sure whether the Government have recognised how difficult the situation might be when recovery begins. At the point of recovery it is difficult to maintain anti-inflationary policies and that is why we argued that it would be better to place responsibility for interest rate policy in the hands of a central bank with responsibility for price stability.

I was interested in the different responses of two Ministers on that subject. When I engaged in a discussion on the radio at lunchtime with the Secretary of State for Employment, he tried to dismiss the idea as ludicrous and one which no civilised country would adopt. Obviously he was totally unaware of the way in which Germany has operated for many years. When the Chancellor of the Exchequer appeared before the Treasury and Civil Service Select Committee, he was at pains not to take that view. He took what I can only describe as a holding position.

The Chairman of the Treasury and Civil Service Select Committee put the remarks of the Governor to the Chancellor, who responded to the Governor's view that a more independent role for the central bank would help in the battle against inflation by saying that countries differ in their practices in that respect. Some countries, he said, use a more independent central bank while others do not. Some have found that helpful in fighting inflation while others do not appear to need it. That was a perfectly respectable reply and one which is consistent with the Government in due course moving towards us on this policy, as they have with regard to several other policies, such as membership of the exchange rate mechanism. I suspect that there may be a rethink in the Treasury which has not been communicated to the Secretary of State for Employment, who does not seem to get on very well with the Treasury anyway. He was not very successful in getting a decent training programme out of the Treasury, so it would not be surprising if the Treasury had not told him about its thinking with regard to central bank independence.

It is striking that inflation is always reduced in advance of an election and that is clear if we consider the statistics over several years. However, it is not consistent with a sound anti-inflationary policy. Ministers have often told us that underlying inflation is important and that the headline figure is misleading. I cannot think of a better moment for the Government to act on their suggestion that we should have a new index of inflation. What better time could there be to devise a new index that took proper account of housing costs? It would have to do that; it could not omit all references to the effect of mortgage interest. If the Government were now to introduce such a new index, no one could accuse them of deliberately distorting the statistics in order to obtain a more favourable figure. The time is right for the Government to make an objective improvement in the way in which inflation is measured.

The time is also right for the Government to take steps to help the country with the consequences of the recession which they have caused and which stems from the mismanagement of the credit boom. The Government could invest in a significant training programme, and by that I do not mean the training relief to which the Chief Secretary to the Treasury referred. How he can possibly advance that as significant in the present context, I just do not know. It does not happen until 1992–93; it applies only to people who finance their own training; and it represents only £15 million of public investment in training. It has absolutely nothing to do with the scale of skills shortages which industry is now experiencing and the contribution that training could make to solving that problem.

I am surprised that the Government's traditional desire to see the unemployment statistics improved has not led to more expenditure on training. When budgets for training were first cut significantly and Ministers were asked in the Treasury and Civil Service Select Committee to explain why that had happened, we were told that it was because unemployment had fallen. That was a strange view of training, which is necessary whether people are employed or unemployed. The recession calls for a major improvement in training.

Fiscal policy must also play a more important part in dealing with the recession. The Government have accepted in the Budget and in what they have told the Treasury and Civil Service Select Committee that automatic stabilisers are an important way in which fiscal policy contributes to handling a recession. The Select Committee records its appreciation that the Government made that point clear because it has tended to be obscured in the past. However, there is further scope in the measures, that I have described for a policy actively to encourage the country out of recession without taking inflationary measures, and training and investment in transport are part of those measures. Present circumstances also allow a further interest rate cut, which would help to handle the problems of the recession.

Why do we not have a draft Finance Bill? Would not it be more sensible for measures of this detail to be produced in draft form for widespread discussion instead of being pushed into a concentrated process that does not permit anything like the detailed consideration that it deserves? The Government tested the waters on this with a number of tax measures in last year's Finance Bill and that of the previous year. Why not introduce a draft Finance Bill system? Why not have a draft Budget? There are relatively few Budget measures which cannot be discussed over a period of time and which are so market-sensitive that they can be announced only overnight in a dramatic Budget day announcement. Much of the Bill's contents could have been discussed over a longer period.

The Chief Secretary to the Treasury made great play of the fact that the Government have abolished six taxes. He was going for the George Bush award for how well one can stick to one's promise of no new taxes. The Government who claim that they are abolishing taxes have also raised VAT by 2.5 per cent. They also gave us the poll tax, they hope to give us the council tax after three more years of the poll tax and they have also introduced the 50 per cent. port privatisation tax. That is a long string of new taxes for a Government who claim not to like taxes.

I liked the way in which the Chief Secretary introduced the VAT increase. He said that it was a reasonable step to take in the circumstances "in which we found ourselves"—circumstances in which they found themselves? The Government created the circumstances. They invented the poll tax and they created the mess. They then found themselves, as though by accident, in circumstances from which the only escape from the catastrophe wished upon them from somewhere else was to slap 2.5 per cent. on VAT with all the consequences for families, charities, businesses and the retail trade. What a hopeless alibi. The Chief Secretary would have demolished that alibi in his Bar days if it had been advanced by a common pickpocket.

There were some simple alternatives. The Government were right to conclude that they had to do something about the ludicrously high rates of poll tax, but they had left it too late even to introduce the relatively straightforward mechanism of local income tax for the coming year. They could have transferred the cost to national income tax which would have been a fairer way of raising the money. I am surprised that the Government did not do that. Indeed, some Conservative Members would have preferred that step. As it is, the Government have left charities with an extra burden of £33 million a year in additional VAT. The Chief Secretary refers to the reliefs for charities in the Bill. There are some reliefs, but when the Bill was drafted no one thought that an extra £33 million would be taken from charities as a result of a separate increase in VAT. The Chief Secretary must reconsider the treatment of charities in the Bill and attempt to compensate for that serious increase.

I remind Treasury Ministers that they have a responsibility for the Inland Revenue. While we are talking about new taxes and the administration of taxes, perhaps we should bear in mind the fact that one of the problems that they will have with the council tax will lie with the Inland Revenue. Ministers have been saying that there will not be many appeals under the procedures recommended for the council tax and that everybody will be happy with the band into which they are put. I do not think that that is true at all. Indeed, doubts about it are already apparent in the hasty but now abandoned reconsideration of whether to have nine bands instead of seven.

I hope that Ministers will remember that there are now 650,000 outstanding appeals on business rates with which the system has not yet been able to cope. There are even 30,000 appeals arising from the old rating system with which valuation officers and the appeals machinery have still not been able to deal. That is more than a year after we have finished with the rating system, and there are 30,000 outstanding appeals. The Inland Revenue is in for a very interesting time if the council tax ever sees the light of day.

Mr. Roger King

The hon. Gentleman has criticised the new system of council tax, the valuation of properties and the appeals procedure. His party wants to introduce a local income tax. As he will appreciate, incomes are often not strictly related to the year that has just passed or to the year that will come, because of various claims and other incomes that must be assessed. How many appeals does the hon. Gentleman think a local income tax would create?

Mr. Beith

The local income tax system would not create any more appeals than income tax itself creates, because appeals do not arise over the level of the tax. They arise over the liability of the individual. Appeals would therefore arise from the basic national income tax that an individual was paying, whether or not a local income tax figure was added to that. It would make no difference to the appeals machinery.

I challenged the Chief Secretary on the uniform business rate and the enormous additional burden on business. In reply, he said that it is much better than having a lot of local councils, some of which imposed high increases in rates which hit the business community in their areas. He has imposed on business across the whole country from Bath to Berwick-upon-Tweed—it is noticed in both places, particularly the former—an increase in the business rate which is more than twice the level of inflation which he now says we shall experience this year. He complained about local authorities charging 40 per cent. or 50 per cent. more than inflation. He will charge more than twice what he now believes inflation will be, and significantly more than he was predicting it would be when the rate was fixed at 10.9 per cent., which is the highest level by which the Government were permitted to increase the business rate.

Mr. Watts

Will the hon. Gentleman give way?

Mr. Beith

I shall not give way any more because time is running out and I was hoping to make some brief comments before concluding my remarks.

As hon. Members have said, another matter of concern is clause 50. The retrospective and double taxation aspects of it are of such concern that they should have been discussed on the Floor of the House and not upstairs in Committee, and I shall vote accordingly. Nobody consulted us on whether clause 50 should be taken on the Floor of the House or in Committee. I hope that the hon. Member for Eltham (Mr. Bottomley) will insist on his motion that it be taken on the Floor of the House and the Government could still easily concede that.

There are omissions from the Bill too numerous to mention. For example, I refer to the environmental taxes, which were hinted at in the White Paper; the relief for child care, about which there was much discussion before the Budget and for which we pressed when we discussed the two previous Finance Bills; and the abolition of tax relief for private medical insurance, which would have enabled at least some funds to go indirectly into a health service in which job losses are taking place. These would have been welcome features of the Bill.

There are useful matters in the Bill—for example, the restriction of mortgage interest relief to the basic rate, the action on company cars and the VAT threshold increase. They are welcome features. However, I have the feeling that the Bill was conceived as one which contained a great many matters that could easily be dropped at the last minute if there were to be a sudden general election and an agreed version of the Bill could have been quickly brought forward. I should have welcomed that. I would much rather go round the country in the June sunshine, urging people to vote Liberal Democrat, than sit in a Committee Room considering the details of the Bill, as we are now certain to do. I see no sign of that June election taking place.

6.23 pm

Mr. Terence L. Higgins (Worthing)

The hon. Member for Berwick-upon-Tweed (Mr. Beith) may have an opportunity to go around in the June sunshine during a general election, but it will be in June next year rather than in June this year.

Traditionally, the Second Reading debate on the Finance Bill is wide ranging. It always presents the Chief Secretary of the day with a difficult task because he has an obligation to refer in some detail to the individual provisions of the Bill while setting the framework within which the Bill is introduced. My right hon. and learned Friend hit a good balance, and showed a remarkable grasp in response to the detailed interventions to which he was subjected. The House should be grateful to my right hon. and learned Friend for the situation described in paragraph 92 of the Treasury and Civil Service Committee report, which brings up to date the contributions that have been received by the Government or have been promised to the Government in response to the appeal for other countries to help to finance the war in the Gulf and the efforts that we made there. To a considerable extent, that is a reflection of the effort that my right hon. and learned Friend the Chief Secretary has put into those difficult negotiations. I am grateful also for his kind remarks about the Committee's report, which helped to put some of the press comments about it into perspective.

The centrepiece of the Budget is the increase in VAT, with the corresponding decrease in the community charge—the switch from local to central Government taxation. The House will know from my speech in the debate on the Budget that I should have liked to go further and abolish local taxation altogether. However, that is clearly a move in the right direction. The community charge was an improvement on the rates and, in turn, the council tax will be an improvement on the community charge. We are going in the right direction. Therefore, I very much welcome the proposals. Nonetheless, the measure will raise only about I I per cent. of local government finance. At some stage, we must consider whether the task that that tax will perform is sensible. Nonetheless, the central part of the Budget in that respect is right, and I welcome it.

The Treasury Select Committee report puts the Finance Bill in perspective. Of course, as we rightly point out, we have a recession which is more serious than the Treasury anticipated. We want to be quite clear about the causes of the recession. As the evidence from the Governor of the Bank of England makes clear, it is a reflection of the action that the Government have needed to take because inflation took off following the stock exchange crash of 1987. It is common ground that there was a misjudgment at that time. The present Prime Minister and the present Chancellor accept that there was an error of judgment at that time, against a background of very faulty statistics.

he point that must be made strongly is that inflation and the subsequent recession would have been a great deal worse if the Government had accepted the views that the Opposition put forward at that time. I have looked carefully at the record. It is quite apparent from the speeches by the shadow Chancellor—the right hon. and learned Member for Monklands, East (Mr. Smith)—the hon. Member for Dagenham (Mr. Gould), and a number of others that they were advocating a massive fiscal stimulus on the one hand and reductions in interest rates on the other hand. Having gone through that record, I was rather surprised only a few weeks ago to hear, on the Walden programme, the shadow Chancellor say: There was a problem following the crash. The great error of the Conservative party was not having lower interest rates at that time. The right hon. and learned Gentleman still does not understand that he was wrong then, that he is wrong now, and that, if we had done what he suggested, the recession would be a great deal worse. I do not know whether it is a Scottish legal expression—it is a legal expression otherwise—but the shadow Chancellor is estopped from the kind of criticism that he has made. He should recognise that and come clean.

I now refer to the report of the Treasury Select Committee. I was somewhat surprised by the headlines that accompanied some press reports on it because it was mixed up with the conference of the Institute of Directors and some comments that were made there. The report contains a number of criticisms, to which I shall refer in a moment. The Institute of Directors was being a little unfair in some respects. In his conference speech, which I thought was very good, my right hon. Friend the Chancellor pointed out that he had accepted virtually every recommendation that the institute had made in its Budget representations. That being the case, the criticism was rather surprising.

The Treasury Select Committee is particularly critical about forecasts. We point out that, at this time last year, we drew attention to the fact that the history of these matters shows that it is always difficult to detect turning points in the economy. The figures show that the effect, whether downward or upward, has always been under-estimated in the official forecasts. The Committee says that the errors in the forecasts have become worse and worse in successive economic cycles. At the time of the autumn statement, we said that, in our opinion, the Treasury forecasts were wrong. That view has certainly been vindicated by subsequent events, as is evidenced by the facts set out in the Red Book.

The Chancellor and his team are working under a severe handicap with forecasts. As to whether there is a Budget surplus or a Budget deficit, leading to either a public sector debt repayment or a public sector borrowing requirement, the official forecast, based on experience, is that the margin of error will be £5.75 million in either direction. That is an enormous margin of error. Repeating the corny analogy that I used the other day, I shall say simply that the Chancellor is trying to drive a car with an enormous amount of play in the steering—verging on one side to inflation and on the other side to unemployment. There is little clear guidance as to what is happening. The Committee is right to suggest that there should be an inquiry into the forecasting processes, in addition to the existing one concerning the improvement of statistics. We have a difficult and dangerous situation. In the context of the economic cost of the problems of managing the economy on the basis of the present forecasts, the cost of such an inquiry would be insignificant. The Opposition would simply veer off in the direction of inflation. They would drive straight off the road at an accelerating pace. We, on the other hand, say that we have got to get the steering right.

We need quarterly, rather than half-yearly, forecasts. Everyone else produces quarterly forecasts. Indeed, for some it is a monthly process. Given the variation between the situation of last autumn and the current situation, we ought to have had an interim forecast. The expenditure that the production of such forecasts would involve would be worthwhile. The Committee has been addressing this real problem.

The Government's overall strategy operates within the exchange rate mechanism of the European monetary system. The Chancellor is reducing interest rates as inflation comes down. In our report, we point out that the RPI forecast may well prove to be pessimistic. In other words, the rate may well come down even faster than the Government are forecasting, and, at any rate, to 4 per cent. by the end of the year. Of course, the underlying rate is a more difficult matter. It is particularly dependent on wage settlements, and here the public sector has an important role to play in bringing down the general level. We are not keen on staged settlements, which may well turn out to be examples of putting off the evil day. In this connection, the Institute of Directors has an important role to play. We do not know whether the foreign exchange markets will put more emphasis on the RPI or on the underlying rate of inflation, but I am sure that my right hon. and learned Friend is right to say that we do not want interest rates to be cut prematurely, and then raised again. That would be the worst possible course for business confidence. Thus, my right hon. Friend must be cautious.

I welcome the fact that, in response to the Committee's earlier reports, the Treasury has said categorically that it accepts the role of the automatic stabilisers. If, as a result of increased unemployment benefit during a recession, or falling revenue and smaller profits, the deficit increases or the surplus decreases, the Government will not now take that into account. In other words, they will allow the stabilisers to work. A few days ago, there were press reports to the effect that if expenditure on unemployment benefit would increase, there would have to be corresponding savings elswhere. That is not my understanding of Government policy.

Mr. Mellor

indicated assent.

Mr. Higgins

I am glad to see that my right hon. and learned Friend agrees. I presume that the writer of the press article was living in the past. Automatic stabilisers have an important role to play. The Committee makes some specific remarks about whether the automatic effect is at the desirable level. In paragraph 26, we suggest that some modification might be appropriate.

It is clear that the Government's objective is to achieve a balanced budget over the medium term. However, they fully accept that, over the cycle, there may well have to be a surplus in some years and a deficit in others. That is entirely appropriate. The Government's policy on interest rates, combined with the effects of the stabilisers and of fiscal policy, which has shown a substantial move into deficit I believe—that the foreign exchange markets realise that, as the Treasury Select Committee says, this is a sensible reaction to the present economic situation—gives us reason to believe that we may look for an upturn.

The Committee's report is, of course, based on the evidence that it received. That is the purpose of Committees of this House. Reflection on the facts is an important component of the influence on our report, as is the evidence that we received. Clearly, we do not yet see clear evidence of an upturn. As has been pointed out, the unemployment figures are a lagging indicator. The policy as now enunciated is significantly different from the policy of six or nine months ago. That applies both to fiscal policy and to interest rates. I believe that the Government are now on the right course. If we can achieve some improvement in forecasting and in a number of other factors, the Committee will have fulfilled a useful function by keeping the Government on the right lines and ensuring that the recession is shorter than would otherwise have been the case. I welcomed the Government's acceptance of a number of the Committee's recommendations, and I look forward to their accepting even more in the future.

6.37 pm

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

The unpopularity of the poll tax has diverted attention from the Government's failure with the economy. No hon. Member, recalling to what extent the Government were responsible for the 1980–81 recession, could really have expected that the country would ever again be called upon to go through all that. Then there was great talk about the need to shake out surplus labour in order to produce a leaner and fitter industry. That recession cleared my constituency of its industry. When I became the constituency's Member of Parliament, it was regarded as the most industrial area in western Europe. Now it has only one firm of any size and several smaller single entrepreneurial ventures-to become businesses, we hope, but that is a matter about which I shall say something in a few minutes.

We are now doing it all over again, and it is still not working. Manufacturing output is plummeting, investment is collapsing and unemployment registered a record rise last month. But, disturbingly—here I reflect the experience of my own constituents—by comparison with 1980–81, more of the assets that are now being brought into receivership appear to have real value, as distinct from a scrap value. Again, I shall say more later.

Although cuts in corporation tax will undoubtedly produce an increase in investment by the mid-1990s, could not the Chancellor have chosen other measures-such as investment allowances—if he wished to produce a surge in investment in the short term? Surely that is what hon. Members on both sides of the House see as our greatest need. The Retail Consortium welcomes the downward trend in interest costs but believes that further sustained cuts are needed.

How fragile demand has become was brought home to us yesterday by the shock announcement of layoffs by Marks and Spencer. Some hon. Gentlemen from both sides of the House—I was one of them—visited the corporate headquarters of Marks and Spencer in Baker street only last week. We know what its problem is—lack of demand.

The Budget decision to finance a reduction in poll tax bills by increasing VAT to 17.5 per cent. was clearly done with a cynical eye on the RPI, but that political manipulation of VAT will have far-reaching consequences and will place, for example, those involved in the bloodstock industry in the United Kingdom, following the arrival of the single market in 1993, at a tremendous disadvantage with their European partners, and in particular with the Irish and the French. It is an important matter which will need to be pursued in Committee, presumably on the Floor of the House. The increase in VAT presents the most serious threat to racecourse revenues and to thoroughbred breeding, and even calls into question the future of Tattersalls and Doncaster bloodstock sales. The Chief Secretary's confirmation that the Minister of State will receive a deputation early next week is very welcome.

Despite the findings of the latest CBI survey, to which the Chief Secretary referred, Britain's business leaders have severely criticised the Government's economic record. Although a handful of companies in specialist or niche markets are doing well, the majority of members of the engineering employers' association of Sheffield, as I reminded the House earlier this afternoon, according to its April quarterly business trends survey, distributed only yesterday, arc finding the recession worse than that of the early 1980s. Last week, the president of the Association of British Chambers of Commerce publicly declared the Chancellor to be too optimistic. The Chancellor himself may now be of the same mind in view of recent utterances.

As for inflation, according to almost every ministerial speech, it is being sent packing. On the short-term outlook for the headline inflation rate, Ministers must be on fairly solid ground, but the broadest inflation measure, the gross domestic product deflator, is another matter. Falling it certainly is, but, in the words of the chairman of the Conservative party, it is not "plummeting like a stone". Nor do the latest producer-price figures support the Prime Minister's claim that the Government have inflation "by the throat".

Indeed, the Nomura Research Institute, in a new analysis, suggests that economic recovery will bring with it the speedy return of Britain's inflation and current account problems. It will not be easy for the Government to stimulate the economy at home on the one hand and on the other achieve purchasing power parity abroad, while at the same time arriving at a convenient election date. Nowadays, however, it is no longer possible to blame the trade unions for most of that. Strikes remain at a very low level, and the number of days lost in January was the lowest for any month in 41 years.

Nor is it hard to see who the pacemakers in the pay league have been in recent years. A recent survey for the CBI found that directors' salaries are rising by an average of 14 per cent. and have outstripped those of other employees for more than five years.

The Association of British Chambers of Commerce has conducted a survey of 7,000 businesses in 15 regions. It finds that all regions are suffering, with London, the west midlands and Yorkshire and Humberside being the worst hit. With the permission of hon. Members, I should like to dwell on my own region of Yorkshire and Humberside. The recession is tightening its grip on the region, despite its contribution to Britain's export drive—27.9 per cent. of its GDP, as recognised last week in the Queen's birthday accolade to industry. The 1980s saw the loss of almost a quarter of Yorkshire's manufacturing jobs, yet Government preferential aid to the region's industry is less than 6 per cent. of the total for the entire United Kingdom. EC funding in 1987–88 was eight times domestic funding.

As Yorkshire industry struggles to haul itself out of the pre-war era—its prime task now—thousands of small businesses are threatened by insolvency, according to the chairman of Sheffield enterprise agency. The old staples in Yorkshire, part of the cradle of our industrial society, are bent on the vital task of regeneration. Small businesses have been set up by skilled engineers and ex-coal miners in south Yorkshire and by Asian entrepreneurs elsewhere in the region, notably in Bradford and Kirklees. All promise to make substantial contributions to the local economies. However, interest rates are the trigger that have produced the slide into recession and that are pushing them into insolvency, thus threatening the existence of that fertile seedbed which is so vital to our future.

In Sheffield, it has been evident for some time that there is a clear need for a strong proactive policy to regenerate the local economy. That is the city's main task. Thus, it has diversified from its steel-producing roots to adapt to changing times and technology.

The city has also entered into a unique partnership between business and the community. Instead of rebuilding the past, the city is concentrating on using Sheffield's strengths to create a new culture, but it is choking in the present business climate. Its £2 billion redevelopment programme is being hit harder and harder by the recession. The number of projects delayed and abandoned is rising, piling on the misery for firms involved in the construction and development industries.

Sheffield is within the major conurbation of South Yorkshire, along with Barnsley, Doncaster and Rotherham. The area may still be regarded by those who have not visited it in recent years as a traditional manufacturing region, but it is increasingly attractive as a cost-effective location for service, financial and administrative business. But it needs a different financial regime from that set out in the Bill.

Mr. Mans

Can the hon. Gentleman tell us what the effect of the unified business rate is on his city?

Mr. Duffy

Of course, that is one problem that small businesses are trying to shoulder. I receive more complaints about that than about most problems now facing small business men.

Mr. Jonathan Sayeed (Bristol, East)

It is not as bad as it was.

Mr. Duffy

It is still burdensome. I have found in reaction to the Budget that there is still the same concern not only about the uniform business rate but about corporation tax, despite the changes. There will be no flags out in Sheffield on those two counts.

We all appreciate the need to control inflation. We do not minimise the task facing the Government, and we wish them well. It has to be mastered, but is it enough to rely solely on narrow, deflationary policies and to put the whole burden on the unemployed and the small business man? We need a broader range of policies: credit controls as well as lower interest rates, a greater emphasis on education and training, a modernisation of our infrastructure and greater investment in manufacturing. Above all, we need the involvement of both sides of industry if we are to make any headway towards low inflation and also a low unemployment society.

6.50 pm

Mr. Jonathan Sayeed (Bristol, East)

I quite often follow the hon. Member for Sheffield, Attercliffe (Mr. Duffy), usually in shipping debates, which is one of the subjects that he did not mention today. I hope to be allowed to remedy that situation and that he will be able to support my words. However, I would like to pick up one thing that the hon. Gentleman said. My understanding was that in Sheffield the uniform business rate had meant a reduction in costs from the old rating system. Of course, as we all know, corporation tax has gone down dramatically. We are delighted to ensure that rates and costs to businesses continue to fall. There is much to commend in this Finance Bill: lower corporation tax, relief on bad debts, help for charities, a boost for training, increased benefits for the needy and, above all, the continuation of a move from direct to indirect taxation. That is what encourages us all to plan for the future; that promotes investment, effort, thrift and enterprise and discourages conspicuous consumption. After all, we all want a nation that thinks of its future, and it is about the future, in particular the future of the British shipping industry, that I intend to speak today.

Shipping is one of the major invisible earners in the country. It contributes, together with other maritime-related industries, more than £5 billion a year to our balance of payments. It provides training and skilled employment and is essential for the defence of the realm.

These facts are accepted by the Government. It was, after all, the Government who set up the joint working party of the industry, together with the Ministries of Transport and Defence, the Foreign and Commonwealth Office, the Department of Trade and Industry and the Treasury. It was this group which categorised British shipping as "a vital national asset" in economic and in defence terms.

Nor is that point lost on the House. My early-day motion 500, entitled "Merchant Navy", called upon the Government to take immediate and positive action to first ensure that the British fleet is strengthened by appropriate stimulation of investment in modern tonnage and second encourage the recruitment, training and employment of British seafarers. It attracted 356 signatures, 166 of which came from the Conservative Benches, and with very good reason. The United Kingdom-based fleet has declined by 90 per cent. in the past 10 years; it is one tenth of what it was a decade ago and the average age of what is left is greater than the world average. At the same time and within the same period, just 10 years, the number of British seafarers has fallen by two thirds.

The continued contraction of the British fleet is a direct result of the nature of the competition that it faces-a competition which enjoys special advantages beyond normal commercial competitiveness. The two most important of these special advantages, those which are pertinent to today's debate, are the cost of investment and the cost of employing British crews.

Major competitors—Germany, Denmark, Norway and many others—employ schemes to encourage investment in ships. Direct investment grants, soft loans, accelerated depreciation arrangements, special tax breaks, low or nil corporation tax—these and others all make the capital costs of France, Norway, Liberia, Denmark, Greece, Germany, Finland, Sweden and the Netherlands lower than ours. Nor can we match their crew costs. While the greatest competition inevitably comes from countries where labour is cheaper than in western Europe, other western nations—Denmark, Sweden, Belgium, Greece, the Netherlands and Portugal—have acted. They have introduced schemes, including exempting seafarers from income tax and national insurance payments, to reduce the disincentive of employing their own nationals.

None of this is new. The industry, employers and employees, and many on both sides of the House, have expressed their concern over many years. What is new is the way in which the joint working party has given new urgency to the central question—what is to be done?

The answer has been identified by the industry. It has proposed specific fiscal measures which would, first, stimulate investment and fleet renewal and, secondly, encourage the continued employment of British seamen.

One conclusion of the joint working party was the following: The UK's fleet is ageing…The overall level of investment by British companies is below that necessary to maintain the fleet at present levels. With 75 per cent. of our ships requiring replacement by the year 2000, a major programme of fleet renewal is urgently necessary. First-year allowances on a temporary basis for, say, five years would meet that objective; and the cost would be nothing unless there were new investment, and then it would be only in terms of the deferment of corporation tax on profitable enterprises.

The benefit to British ship-owning companies would be considerable. By improving cash flow in the early years of acquisition when the financial burden is at its heaviest, this, allied to other measures, would turn a declining industry into one which within 10 years could contribute £10 billion a year to our balance of payments.

The other prerequisite for reversing our maritime decline is the need to remove the disincentive to employ British seafarers. In his Budget speech my right hon. Friend the Chancellor said: I recognise that there is a strategic case for measures to encourage shipping companies to draw their crews from seamen in the United Kingdom, who would be willing and able to serve in time of war."—[Official Report, 19 March 1991; Vol. 188, c. 173.] Regrettably, and I believe inadvertently, the only measure that was introduced, clause 43, will do nothing of the sort. It will not reduce the cost of employing British crews; it will harm British companies which employ the two thirds of British seafarers who will not benefit and who will therefore be tempted away from their current employment to serve in deep-sea ships which, given the decline of our own fleet, are likely to be foreign-owned and operated.

In order that the objectives that my right hon. Friend has enunciated may be fulfilled, it is essential that the cost of employing British seafarers be reduced. Merchant seamen should be afforded relief from income tax in a way that enables the employer to retain the earnings which would otherwise be remitted to the Inland Revenue.

What would that cost be? It would be some £30 million in a full year in the short term, but the benefits in training, employment and the security of our nation would undoubtedly be considerable. There are precedents for these measures in the Netherlands, Denmark, Sweden, Belgium and Greece.

I believe that not to follow such precedents would demonstrate a shortsighted, short-term, blinkered approach which would be uncharacteristic of a Conservative Chancellor. We have seen that, as the upper bands of personal tax are reduced, tax revenues from the same percentile increase. Similarly, more ships and more men paying less will produce more revenue than fewer ships and fewer men paying more. The precedent and the principle are clear.

Some hon. Members may ask what is so special about British shipping that it needs and deserves special assistance. Others may suggest that we should reduce the intervention of other countries which places us at such a disadvantage. That is a fair question and an understandable comment to which I shall endeavour to give a clear answer and response.

What makes British shipping unique is its importance to this nation's wealth and security, allied to the fact that ships, by their nature, are mobile and will seek out the most favourable fiscal and commercial environment.

These measures are not without precedent in Britain. Some hon. Members may remember that companies in enterprise zones have enjoyed such first-year allowance provisions for some years. The Government have been prepared to take action to safeguard other major generators of invisibles, such as the stock exchange, which last year was exempted from stamp duty on paperless share transactions at a cost of some £800 million in a full year. As for subsidies enjoyed by our competitors, the Government and industry joint working party concluded: The prospects for eliminating subsidies in other countries in the near future are not encouraging. As every hon. Member will understand, that is Ministry-speak for, "By the time it happens—if it happens—there will be no British ships or British seafarers."

An ancestor of my right hon. Friend the Chancellor was Arthur Anderson, who founded P and.O With his Shetland ancestry, my right hon. Friend should understand the importance of the sea to this nation. He must know that the country faces the risk of the near-total loss of the United Kingdom-registered fleet. Other countries that share our free market philosophy have decided that it is not a risk that they can afford and have taken remedial action. Their fleets are reviving and beginning to prosper. Unless the Government reach the same conclusions, we shall rue the day that we stood idle and watched our maritime heritage, power and commerce disappear before our eyes.

Over the past 10 years, the British Merchant Navy has declined by 9 per cent. a year—there is only 10 per cent. left. The industry's needs are clear. The palliatives of Government have failed. The early-day motion has made clear the will of the House. It is time for the Government to act as the industry proposes and as the House requires.

7.3 pm

Mr. Denzil Davies (Llanelli)

The hon. Member for Bristol, East (Mr. Sayeed) makes a powerful case for British merchant shipping with which most of us would agree, as the early-day motion shows. Unfortunately, the Conservative Government will not listen to him. This is another great British industry that has been run down by the right-wing market philosophy of the past 12 years.

The Second Reading debate on the Finance Bill is unusual because it combines a debate on the clauses and a general economic debate on the development of the economy from the presentation of the Budget until now. The Chief Secretary to the Treasury spent most of his speech on economic matters.

My hon. Friend the Member for Derby, South (Mrs. Beckett) referred to clause 12. Like many Labour Members, I deplore the increase in VAT to 17.5 per cent. I do so for many reasons. It reduces the local element in local taxation to 11 or 12 per cent. That makes a mockery of local democracy. It creates a "gearing" problem—to use the vogue word—and gives the Government an excuse to maintain capping on local government expenditure.

There is also a central Government problem. I do not wish to indulge in the debate about hypothecation. Clearly this is not strictly hypothecation. It seems that the 2.5 per cent. proceeds on VAT are almost like the judge's salary and the European Community's budget expenditure—a charge on the Consolidated Fund. I do not know how Governments will deal with it and whether it will reduce their flexibility.

My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said that 17.5 per cent. was too high. We should move to more positive rates of VAT. A single positive rate of about 14 per cent.—even 15 per cent. was too high—could be justified. A rate of 17.5 per cent. falls heavily on many disadvantaged groups, including charities, disabled people and churches. I remember as a Treasury Minister, when the rate was lower, replying to letter after letter about the problem of repairing church roofs. Churches collect considerable amounts to repair church roofs, but then face VAT bills. If we move to higher rates, we must have an intermediate rate between zero and 17.5 per cent.

The Government are attempting to convince people that things are getting better. We had the usual bluster from the Chief Secretary. The Prime Minister and the Chancellor try to put a brave face on matters. We hear about lights at the end of tunnels, corners being turned, bottoming-out and turning points—various clichés are trotted out. They are a sure sign that the Government are not sure of themselves and are not confident about their assertions.

After 12 years of Tory Government, the underlying state of the economy is dire. A few percentage points off the retail prices index and a few percentage points off interest rates—although welcome—will not make much difference to the problems facing the British economy. Over the past 12 years, Britain has become a nation of consumers. The Government have never worried about production. Their philosophy is consumption. Goods must be bought—it does not matter where they come from. The drug must be found—it does not matter who the maker or the pusher is. It does not matter what it costs—it must be paid for.

The best sign of the dire state of our economy remains the balance of payments—not the fact that the Government do not like the state of the economy. There are those, like Conservative Members, who do not want to hear about the balance of payments. As Chancellor, the right hon. Member for Blaby (Mr. Lawson) told us year in, year out, from one debate to another, that it did not matter. When eventually it mattered, he said, "It matters only if we cannot finance it." The right hon. Gentleman proceeded to finance it with high interest rates and the consequent recession from which we suffer now.

Devotees of the Samuel Brittan column in the Financial Times will have noticed that from week to week the respected writer hankers for a common European currency. One reason is that, as he tells us, the balance of payments figures will completely disappear—like the bits of paper that went down the tube in George Orwell's "1984". The figure may disappear, but the underlying causes will remain. South Dakota and California have a common currency. They do not issue balance of payments figures, but South Dakota is probably the poorest state in the Union and California the richest—and any balance of payments figures that they issued would reflect that. Whether or not such figures are produced, nothing changes.

Over the past 10 years, the Tory culture has been that consumers and consumerism are king. That was brought home to me when I re-read an article in the Financial Times, published a day after the latest trade figures were released, under the byline of a Mr. Peter Marsh, who is a member of the paper's economic staff. The headline was: "Trade gap may be start of recovery." I found that strange, but thought that it might be deliberate. The article began: "Britain's current account deficit widened last month,"—which was correct—"which is a sign that the country's battered economy may soon begin a recovery." I thought how odd that statement was. I would have said the opposite and that it was a sign of the country's battered economy becoming more battered. I do not blame Mr. Marsh. He is probably a child of the 80s and of Thatcherism and consumerism—under which, if consumption increases, it is thought that the economy improves, and if consumption falls, the economy is battered. For those who hold that belief, it does not matter whether the goods come from Pwllheli, Ashton-under-Lyne, Sheffield, or from abroad—to them, that is a secondary consideration.

The Treasury forecast a £6 billion trade deficit in manufactured goods in The coming year which is half the figure for last year. The Red Book makes it clear that that is only because there is a recession. Otherwise, I suspect that the deficit would be nearer £12 billion. As interest rates fall again, as apparently they will, the deficit will increase, growing nearer to £12 billion.

Britain cannot call itself an industrial nation any longer. It is a service nation. Britain's percentage share of total EC manufacturing output is down to 15 per cent., lower than France and Italy—which are both of comparable size but without our industrial manufacturing tradition—and substantially lower than Germany, whose share is about 50 per cent.

Consumption is not the only reason for the state of the British economy. This country has many efficient industries, and several have grown more efficient over the past 10 years, but there are not enough of them and Britain cannot simply up production when demand requires, so it is met from abroad.

The problem lies not only with manufacturing industry. Britain's balance of trade deficit in food has doubled over the last 12 years of Conservative government. Last year, the figure was £6 billion, and because demand for food is probably less elastic, it is likely to be the same for the coming year. There was a time when that would not matter, because we could just about cover our food trade deficit with our surplus in manufacturing industry—as we did in 1979. But those days have gone, and I do not expect that we shall see another surplus for at least 10 years.

It is a sad commentary on 12 years of Conservative government that we enter the 1990s with a substantial trade deficit in not only manufactured goods but food, and unable fully to produce all the food that we need to come anywhere near satisfying the demands of the British population.

From 1985 onwards, Britain's trade deficits were masked by its energy surplus which, in 1985, reached a high point of £8 billion. Effectively, it was an oil surplus. It has fallen year by year, and I doubt whether there will be an energy surplus this year, any more than there was last. It has been lost for reasons that we all understand.

Britain already has substantial manufacturing and food trade deficits, and there is a possibility that it will incur an energy deficit, too. The situation in respect of oil will be neutral, one way or another. Britain cannot look forward to the surpluses that it has enjoyed over the past few years. There may be a coal deficit because pit closures may make it necessary to import more coal. The existing small gas deficit may increase as other countries export their product to Britain to break its monopoly, and the French will no doubt be pouring their nuclear-generated electricity into the national grid, as they do already and are entitled to do. As French capacity increases, they will drive down the price to take an even larger share of the British market. We may therefore have an energy trade deficit of any thing from £2 billion to £4 billion over the next 10 years.

Britain enters the 1990s with a potential trade deficit of £20 billion in respect of manufactured goods, food and energy. Who will pay for it? As the right hon. Member for Blaby said, if the deficit can be paid for, all will be well. Where are Britain's invisible exports? We found them again last year, when they were valued at about £5 billion, and took the form of interest, profits and dividends. However, that revenue is subject to the vagaries of the market, interest rates, and other factors. Let us not forget the payment that we make to the EC and to what used to be called the British Army of the Rhine. We could still be left with an annual deficit of about £16 billion over the next four or five years.

The service industries cannot cover that deficit, because they are consumers. Nor can property companies, which put up the marvellous buildings and shopping malls that have mushroomed all round the country over the past 10 years. Will the distribution industry, which puts all the foreign goods into those shopping malls, pay for that deficit? Of course not—it is concerned with increasing consumerism. Nor will pension funds pay, because they spend most of their time trying to beat inflation, and they are concerned with consumerism, too.

The City does not contribute very much, despite the fact that it likes to think that it does. Stockbrokers and banks contribute very little to Britain's balance of payments. There is a powerful lobby to persuade the central European bank, which the Liberals love so much, to make its base in London. I do not know why. We already have plenty of banks. There are far too many of them, and another one will not produce anything, or help to reduce Britain's balance of payments deficit.

If the Government look to the future, perhaps they can explain how Britain will pay for the enormous deficits in manufacturing goods, food, and energy that I mentioned. Those deficits will partly be met by invisibles, but the balance will be paid for, if "paid" is the right word, by low growth and high unemployment, interest rates, and inflation. I suggest to the House that an economy that cannot produce is prone to high inflation, as different groups try to get as much as they can and to beat the system because production is not up to it. That will be paid for by cuts in public expenditure and a rundown in welfare services as more and more has to be spent on unemployment and debt repayments as a result of high interest rates.

That is the distressing scenario for Britain in the 1990s unless something drastic is done immediately. The Government cannot do anything about it as they have created the problem. Only a Labour Government can make a start on that difficult task.

7.20 pm

Mr. John Watts (Slough)

I am grateful to the right hon. Member for Llanelli (Mr. Davies) for expressing so clearly his opposition to the measures taken in the Budget to reduce the burden on local taxpayers. I believe that he said that it made a mockery of local government to raise such a small proportion of the cost from local taxation. I am also grateful to him because he helped to dispel some of the cloud of confusion left by the remarks of his hon. Friend the Member for Derby, South (Mrs. Beckett).

The hon. Lady and the hon. Member for Berwick-upon-Tweed (Mr. Beith) criticised two of the ways in which taxes are raised to pay for local government—the uniform business rate and the decision to put an extra 2.5 per cent. on VAT to shift the burden. Their accord on such matters must have brought back fond memories of the halcyon days of the Lib-Lab pact, when a lame duck Labour Government looked to cuckoos in the nest for support.

It is perfectly reasonable for members of Opposition parties to criticise Government measures. However, at the end of the remarks of the hon. Member for Derby, South I was left unclear as to what proportion of the cost of local services she thought should fall on business rate payers. I assume that, if she is critical of the level of the uniform business rate now, she is hinting to the House that it is Labour party policy that a smaller proportion of the cost of local services should be borne by business rates. However, at the end of her speech she was running short of time and was unable to give way to me when I sought to intervene. Perhaps one of her colleagues could clarify that matter now or in the winding-up speech, because it is of considerable importance to businesses and for the economy as a whole.

I should have asked the same question of the hon. Member for Berwick-upon-Tweed if he were in his place, or of another member of his party if there were a Liberal present in the Chamber, but I suspect that it matters little whether the House and the country know the views of the Liberal party on the appropriate proportion of costs to be borne by business rates. I suspect that, after the next general election, the Liberal Bench will be as empty as it is for our deliberations this evening.

The hon. Member for Derby, South also criticised the decision to increase VAT to reduce the burden of the community charge, and it is necessary to be clear about that. I understand her to be saying that my constituents—whose community charge has been reduced this year from £330 a head to £190—should not have that benefit but should be paying more. I assume that she was arguing, as was the right hon. Member for Llanelli, that it is appropriate for local tax payers to bear a greater proportion of the cost.

If the hon. Member for Derby, South were in her place, no doubt she would swiftly rise and tell me that a Labour Government would not have introduced the community charge in the first place, so the need would not arise. Whatever the nature of the local tax used to raise revenue, its burden falls on the local tax payer, and it is important that my constituents and those of my right hon. and hon. Friends know by the end of this debate what proportion of the cost of local services the Labour party feels should fall on the local domestic taxpayer.

If it is not in favour of that shift—I believe that the hon. Lady said that it would be £4 billion or £5 billion extra without achieving a single teacher—I take it to mean that Labour believes that, if more money is to be made available to local government, it should have been spent on extending services rather than on reducing the burden to the local taxpayer.

How much does the Labour party believe that local taxpayers should bear to pay for the total cost of local services? I believe that the Labour party proposes, as a first step, that we should return to the unreformed domestic rate system. My constituents will know that, in the last year of domestic rates—1989–90—the average rate bill in Slough was £500. They will also know that the increase in precepts and expenditure since then would add another 38 per cent., taking the average to roughly £700.

If the Labour party is against measures which reduce the burden falling on local taxpayers, it is offering my constituents in Slough, as a first step, a return to paying £700 per household on average in domestic rates, compared with £380 in community charge for a couple or, under the proposals of the Secretary of State for the Environment, a council tax of £357 for an average-sized property. I hope that the Labour party will spell that out. If it does, I know which options my constituents will back.

In his opening remarks, my right hon. and learned Friend the Chief Secretary to the Treasury rightfully took credit on behalf of the Government for having abolished six taxes. No doubt that inspired my hon. Friend the Member for East Lindsey (Sir P. Tapsell) to suggest another one—capital gains tax—that he thought should be added to the list. He acknowledged that that would be a fairly costly measure to add to this year's Budget—at a cost of £1.4 billion. I doubt whether he will be surprised not to receive a favourable response to his representations this year.

I have another suggestion to put to my right hon. and hon. Friends on the Treasury Bench—one that would cost them less, perhaps about £2 million but no more. In 1982, bingo duty was extended to working men's clubs and similar non-profit-making members' clubs and voluntary organisations. Its introduction was to prevent unfair competition with commercial bingo operators and not as a means of raising revenue. Ever since that duty was imposed in 1982, the Working Men's Club and Institutes Union and other clubs which are associated with it through the Committee of Registered Clubs Association—including the British Legion, Liberal clubs, Labour clubs, and, although they are not in CORCA, Conservative clubs—have campaigned for the abolition of that impost.

As the joint chairman of the parliamentary group for non-profit-making members' clubs, I have often been vocal in the Finance Bill Committee in advocating that case. As Murphy's law always applies, it was during one year that I did not serve on that Committee that my right hon. Friend the Member for St. Albans (Mr. Lilley), then Financial Secretary, conceded a substantial rise in the threshold at which clubs were required to pay the duty. Perhaps it was not Murphy's law: perhaps it was the absence of my persuasion that led him to do so. I hope that that was not the case, as I would not wish the argument to fail because of my advocacy today.

Raising the threshold was a welcome relief to many clubs which had been on the margin of liability to pay the tax, and the clubs are grateful for that. However, the case for abolition remains as strong as ever. The argument, to put it concisely, is that the original reason for the introduction of the tax—to prevent unfair competition with commercial bingo operators—is no longer valid. When the case was put and accepted in 1989 for the threshold to be raised, no objection was made by the Bingo Association of Great Britain. The.association made it very clear that it wished to raise no such objection.

When representations were made earlier this year to Treasury Ministers, the clubs movement also informed the Bingo Association of Great Britain what it intended to do and asked whether it had any objections. In reply, the association wrote to Customs and Excise and said: We have been requested not to oppose the abolition of this duty for the clubs, and we want to make it clear that we do not want to be cited as an objector to this change and in no way do we wish to be seen at this stage as an adverse influence on the CIU's case. That should put to bed once and for all any suggestion that the maintenance of this duty is justifiable because of the need to protect commercial operators from unfair competition. If the trade body of the commercial bingo operators does not seek to argue that case, I do not think that Customs and Excise or the Treasury should seek to argue it any further on its behalf.

There is a powerful reason why abolition of the duty is required for non-profit-making members' clubs—and not merely further increases in the threshold at which they have to pay tax. The problem is that even those clubs that do not have to pay tax need to maintain all the records that would be required if they were paying tax in order to be able to prove to Customs and Excise that they are not liable to pay it.

The effect of this on the literally thousands of volunteers who run these clubs up and down the country is a very considerable additional work load. It is imposed not on people who are paid to do the job but on volunteers from among our constituents, who give of their free time to serve these clubs that play such an important role in the life of our local communities. Whatever increases in the threshold may be made from time to time, that administrative burden continues to fall on all clubs where bingo is ever played.

I urge my colleagues on the Treasury Bench, therefore, to look closely at the submission that has been made and to add bingo duty for non-profit-making members.' clubs to the roll of honour of unnecessary and unhappy taxes that the Government have so far succeeded in abolishing.

7.33 pm

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

A few hundred yards from where I live in Hackney lies Ridley road market, a famous east end market. We can get everything at Ridley road—fruit, veg, clothes, freshly baked bagels, West Indian sugar cane. We also have our share of con men. I put it to the House that this country's economy is being run by a bunch of little better than con men. Boring and grey suited they may be, but they have standards of honesty and probity that would embarrass the average east end street trader.

As a member of the Treasury and Civil Service Select Committee, under the distinguished chairmanship of the right hon. Member for Worthing (Mr. Higgins), I have had the opportunity to observe this Government's dishonesty at first hand. The chairmanship of the right hon. Member for Worthing has been so scrupulously honest that the members of the Committee are worried that his honesty may stand in the way of him becoming Sir Terence.

I wish to point to three of the most recent Government cons that provide the background to the Finance Bill. They are the bogus nature of the official statistics; the Government's misleading claims about the consequences of the VAT switch; and finally, and sadly, the way that they have conned innocent right-wingers in their own party about Europe. I shall come later to the touching plight of these innocent, blameless, harmless little Englanders and right-wingers. First, let me deal with the bogus Government statistics.

The Treasury and Civil Service Select Committee has been agonising for some time about Government forecasts. In 1988, we said that there were a number of serious doubts about autumn statement forecasts. At first, we thought that it was just the statistics, so we said, again in 1988, that the Treasury's ability to come to any rigorous judgment about the economy is now severely circumscribed by the unsatisfactory state of the official statistics. In 1989, we pleaded with the Government to take urgent action to improve the quality and reliability of official statistics. In 1990, we said that margins of error of the magnitude in the Government's forecasts present a serious problem in relation to the management of the economy.

All along, we thought that the problem with the Government's forecasts was merely the statistics, but enter, in 1991, at one of our sessions of evidence on the subject, Mr. C. J. Mowl—grade 3, economic forecasts and analysis, Treasury. Our Chairman put to Mr. Mowl what I believe he imagined to be a helpful question. He said: The Shadow Chancellor on the floor of the House has made considerable reference to what he describes as 'the Chancellor's forecasts' and indeed 'the Chancellor's previous forecasts'. Can you tell us to what extent, if any extent, Ministers have been responsible for any of the figures? Mr. Mowl blinked, exposed as he was to the unaccustomed sunlight, and burbled. He talked about the confidentiality of advice to Ministers, about a large element of judgment and about the process of discussion. Finally, he said: The forecast produced can be described as both the Treasury forecast and the Chancellor's forecast and the Government's forecast. It is a collective view. That is strange wording. The right hon. Member for Worthing tried again. He said: But my previous understanding was that when the official forecast is produced and published Ministers do not look at a particular figure. He asked whether he was correct. He went on to say: It certainly used to be the position. With the Red Books which I was responsible for issuing, I certainly would not have dreamt of altering any of the official forecasts. The Treasury officials hummed and hah-ed, but it was clear from that session of evidence that what is happening with the Government forecast is that the judgment of Ministers with no economic background is being used to tamper with the statistics.

That is the basis for the recommendation in our report, which has been largely overlooked, that the Treasury should make full forecasts four times a year, and that the results should not be modified by Ministers. The reason why the forecasts have been so consistently out is that the statistics have been modified by Ministers—in my view, with political aims in mind. That is why the forecasts systematically failed to spot the recession, why they systematically underestimated its seriousness and why they are consistently wrong about inflation. There is one common factor in the errors in the forecasts: they are always in favour of the Government.

Mr. Higgins

The hon. Lady is sliding from saying whether there is any political input in the forecasts into saying whether there is any political input in the statistics. It is important to make that distinction. My clear understanding, as we have heard frequently in evidence from the head of the Central Statistical Office, is that there is no question whatsoever of Ministers altering the statistics in any way. It is the case, as we understand it, that there may be to some extent a change in the forecasts, but that has happened under the Governments of all political parties in recent years, although it used not to happen some years ago.

Ms. Abbott

I am grateful to the right hon. Member for clarifying my point. I am not suggesting that there has been political interference in the statistics; I am stating that it has been proven that there has been political interference in the forecasts. They are forecasts that have been written on the back of an envelope, and they are not worth the paper on which they are written. The errors in those forecasts are consistently in favour of the Government. Year by year, the credibility of those inaccurate and misleading forecasts slides down the drain.

The second great con of the Government's economic thinking which is enshrined in the Finance Bill is that switching a proportion of the poll tax to an increase in VAT will hit the rich harder than the poor. The Chief Secretary to the Treasury was reduced to quoting Guardian editorials to support that proposition, but Guardian editorials can be wrong. In the 1980s, Guardian editorials supported the SDP, and where is that party now?

Although people who have millions of pounds to spend will pay more in VAT than people who have to watch every penny, as most of my constituents do, the Government's own statistics show that, proportionately, VAT hits the poor harder than the rich. The Government's statistical service publication "Economic Trends" conclusively gives the lie to the bogus claims that we heard from the Chief Secretary. It shows that, as a proportion of disposable income, VAT takes much more from the poor than from the rich—almost twice as much. On average VAT takes about 7.3 per cent. of an average person's disposable income.

Mr. Mans

Bearing in mind what she says, am I to assume that the hon. Lady would like VAT reduced?

Ms. Abbott

My purpose this evening is not to give a comprehensive analysis of the Government's economic errors, but merely to point out three particular spivvy bogus cons that have been put forward by the Treasury. If the hon. Gentleman will allow me, I shall continue with my speech, as I am aware that many other hon. Members wish to speak.

The Government's publication "Economic Trends" points out that the bottom 10 per cent. of the population, the poorest of the poor, who are well represented in my constituency of Hackney, the poorest constituency in the country, pay 9.2 per cent. of their disposable income in VAT. However, the richest 10 per cent., who are represented by the Economic Secretary to the Treasury and by the right hon. Member for Worthing, pay only 5.6 per cent. of their disposable income in VAT. Proportionately, VAT takes almost twice as much from the disposable income of the poor as it does from that of the rich. The reason is obvious. Just like the poll tax, VAT takes no account of income. In swapping part of the poll tax for a hike in VAT, the Government have simply swapped one flat-rate tax for another.

The Economic Secretary to the Treasury (Mr. John Maples)

The figures that the hon. Lady has used need to be explained properly, because they do not add up. What she says about the people at the top of the income scale is true, because rich people save much more of their income. However, what she says about the rest of the income scale is not true, because the income and expenditure figures on which those statistics are based are taken from the family expenditure survey, in which people say that they spend much more than they earn. Their spending figures are based on a figure about 40 per cent. higher than what they declare as their income, so if one is taken as a percentage of the other, the figure is bound to be distorted. If the hon. Lady examines the basis of that, she will find that it is true and that the family expenditure survey shows that people in the bottom two deciles of income have expenditure 40 per cent. higher than their incomes.

Ms. Abbott

I was talking not about expenditure but about disposable income. What I said about disposable income can be found in the text of the Treasury and Civil Service Committee report on the Budget. Everyone pays the same VAT on a packet of cigarettes or children's sweets, whether they are the Duke of Westminster or his dustman. Despite the exemptions and the zero ratings, according to the Government's own publication, VAT hits the poor harder than the rich. In economic jargon, VAT is less regressive than the late unlamented poll tax, but to say that VAT hits the poor less is like saying that being in prison is less inconvenient than being hanged. It is a regressive tax if one considers income. [Laughter.] Conservative Members may giggle, but at a time of rising unemployment, they are more concerned about taxes on car phones than the plight of the people of this country. People will take note of that and express their opinions in the next general election.

I would not like to leave the subject of the VAT switch without mentioning the cost of the poll tax. There has been a great deal of to-ing and fro-ing across the Floor of the House about what the poll tax has cost. Let me put on record the Treasury's own figures. The poll tax has cost British taxpayers £370 million in preparation costs, and the cost of collecting the poll tax over and above what it would have cost to collect the rates is £302 million. Those figures were not cooked up by the Labour party in Walworth road: they are the Treasury's own figures. The poll tax has cost the people of Britain unnecessary expenditure in the region of £672 million. How many nurses at Guy's or operations in Bradford could that have funded? That is what the Government's political spite and economic adventurism have cost the country.

The third economic fraud that the Government have perpetrated on the British people concerns Europe. They are trying to con not only the people and the Treasury and Civil Service Committee but their own little Englander, "wogs begin at Calais" right-wingers, who have had the wool pulled over their eyes. The Select Committee recently visited Brussels to discuss European matters and economic and monetary union. Everyone in Europe except a few neanderthal right-wingers on the Conservative Back Benches knows that economic and monetary union is a moving train and Britain is most firmly on it.

The opinion in Brussels is that there will be a single European currency by the year 2000. There is no real sign that the Government are trying to derail that process. British people are being backed into a single European currency by a Government who wish to avoid debate because they wish to avoid the venom of their own Back Benchers.

Mr. Charles Wardle (Bexhill and Battle)

The hon. Lady and I are both members of the Treasury Select Committee, and I enjoyed the trip to Brussels. Given what she says she saw at the European Commission, does she favour a single European currency?

Ms. Abbott

I do not claim to have the economic expertise of many Conservative Members; I claim merely to be a proponent of honesty and openness in government. My charge is that the Government are dishonest and are not open about the progress towards economic and monetary union because they do not wish to tangle with the neanderthals on their own Back Benches.

Finally, the media tell us that the Government consist of quiet, grey, boring men. I put it to the House that they are quiet, grey, boring con men. Their figures are bogus, their forecasts are bogus and, above all, their claims of economic competence are bogus. My constituents are being crucified by a combination of high interest rates, record unemployment and record bankruptcies, yet Conservative Members are concerned only with a tax on car phones.

The Government have misled the country with talk of a short, shallow recession, but the Prime Minister's hold on power will prove short and shallow as soon as there is a general election—which, for the good of the country, cannot come too soon. The country has had enough of grey-suited con men. They would be chased out of Ridley road market, and they should be chased out of power.

7.49 pm

Mr. William Powell (Corby)

I must tell that doughty lady, the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott), that honesty in politics includes declaring where one stands on the fundamental issues of the day. It is not enough merely to analyse, perhaps mistakenly, the position as one perceives it. One must tell the House whether one is in favour of the moving train of economic and monetary union. It also helps to have a clear idea of where the Labour party stands on VAT, local taxation and so on. We have had no convincing answers on any of those matters today.

I want to give my hon. Friend the Economic Secretary some words of comfort about the progress of economic recovery. From several sectors, my right hon. and hon. Friends on the Treasury Bench have received a buffeting about the state of the economy and whether any recovery is under way. Right hon. and hon. Members know very well that the core town of my constituency has, from the mid-1980s, been one of the principal boom towns. However, by early autumn last year, new investment had virtually ground to a halt. The last new capital construction programmes started in October 1990 and there was nothing until February 1991. Since then, there has been a growing volume of new factory starts and new capital investment for the service industry and the manufacturing industry. There has been new inward investment into the United Kingdom.

I am not saying that that is typical of the country as a whole. My constituency was always going to be the last to be hit by the recession and the first to emerge from it and there are clear signs that it is now beginning to emerge. Of course, there has been a rise in unemployment and I have no doubt that there will be some further bad news on employment. However, as I drive around my constituency several times each week, I see new capital investment in plant and machinery and clear signs that genuine job creation is under way again. It is extremely likely that the surge of economic activity that has been taking place during the spring will spread into my neighbouring constituency, that of my right hon. Friend the Prime Minister, and much further afield.

I welcome the liberalisation of the tax regime for friendly societies. A great deal has been said in Standing Committee and in the Chamber about friendly societies. I welcome the fact that the Government have made a modest change to the tax regime and I look forward to the introduction—I hope as soon as possible in the next Session—of the much wider range of reforms for friendly societies that has been envisaged since the consultation paper of about two years ago. I know that good progress is under way.

In his speech in the Budget debate, which was unfortunately wrecked by his unnecessary and gratuitous last two paragraphs, my right hon. Friend the Member for Blaby (Mr. Lawson) said some interesting things about the structure of VAT. The thrust of his remarks was that the two rates of VAT—zero and 17.5 per cent.—cover too wide a band. Those comments have been echoed by the right hon. Members for Ashton-under-Lyne (Mr. Sheldon) and for Llanelli (Mr. Davies). The comments of my right hon. Friend the Member for Blaby about the current structure of VAT were wise. I believe that there should be other rates. The system that has existed since 1972, of which my right hon. Friend the Member for Worthing (Mr. Higgins) was the midwife if not the father, has served its time. Given the changing conditions and changing European circumstances, we shall have to have a much more fundamental look at different rates of VAT.

The House knows of my interest over a number of years in the village hall movement. In the past, the Government have been helpful, but there is no doubt that this year they are not being as helpful as they have been because of the increase in VAT from 15 to 17.5 per cent. That affects all charities, but I choose to put my remarks in the context of village halls because of my interest in them.

I want to reinforce the remarks made by the hon. Member for Sheffield, Attercliffe (Mr. Duffy) about the bloodstock industry. There is no doubt that unless some changes are made to the VAT regime, the bloodstock industry, which is important for exports and employment, will find itself seriously disadvantaged as compared to France and Ireland, which are our natural competitors in that industry. I know that my hon. Friend the Minister of State has in her constituency one of the foremost studs in the world in which stands, among others, the great stallion Nashwan. She will be aware from her constituency experience of how important the bloodstock industry can be.

Much has been said about economic forecasts. I commend to right hon. and hon. Members a different source of forecast from those quoted this evening. I suspect that not enough right hon. and hon. Members read The Racing Post. It has a much better record of forecasting than many of the highly paid research institutes and other bodies which are constantly telling us what might be happening in the economy in the future. I am glad that my hon. Friend the Minister of State has entered the Chamber. I hope that she will take time to study a page in The Racing Post today which deals with VAT and bloodstock. As I have said, it is an important matter. I shall not go into detail but the learned commentator, Mr. Wright, analyses carefully and precisely how the bloodstock industry will be greatly disadvantaged by the new regime that will come into operation in 1993 unless my hon. Friend the Minister of State and representatives of the bloodstock industry are able to find a satisfactory way to ensure that this important industry, dealing with high quality stock, is not disadvantaged.

One sector of the economy is extremely important for wealth creation. I was interested in the speech made by my hon. Friend the Member for East Lindsey (Sir P. Tapsell) in which he advocated the abolition of capital gains tax. He put it in the context of the great difficulty facing British people in acquiring disposable wealth. He said that he was a famous exception to the rule that it is virtually impossible in this country for people with nothing to create wealth. That is in contrast to what might happen in the United States.

In the happy days of old, when Lord Rees of Goytre was the Chief Secretary to the Treasury, he pointed to the distinguished record of my right hon. Friend the Member for Blaby in abolishing taxes and asked Conservative Members which taxes they would like to see abolished. I have never been in any doubt that my answer is income tax. The prospect of income tax being abolished is even more remote than the prospect of capital gains tax being abolished. However, I must bear in mind that it was my political hero, the younger Pitt, who introduced the awful income tax, and we have had to live with it ever since.

I should like to see that abolition not only of income tax and capital gains tax but of inheritance tax, which has a great impact on family businesses. Family enterprises and businesses are responsible for an important part of wealth creation. No economy will succeed without a thriving family business sector. Some of the most successful European economies have no large industry but have such a thriving sector.

Immense efforts have been made in the past decade to increase small and medium businesses, which include family businesses. The evidence shows that, under the Government, no more family businesses have been created than there were in 1979—we must do more to correct that—because the fiscal regime that they face, despite the improvements that have been made since 1979, is remarkably unattractive. Too much economic policy is aimed at quoted companies, but 52 per cent. of the population is employed by the unquoted sector.

The inheritance tax regime is extraordinarily unattractive to the unquoted sector. In Britain, inheritance tax is 40 per cent., compared with an average top rate of 27.5 per cent. in 16 other European countries. The British threshold is £128,000, which is lower than in any other Organisation for Economic Co-operation and Development country, apart from Denmark, Greece and Norway. The British higher rate is levied on smaller estates than in virtually every other industrialised country. In Germany, the rate of 35 per cent., which of course is lower than the British rate, is not levied on an estate worth less than DM100 million. At DM2.95 to the pound, that is £34 million, or 265 times as much as the British rate.

Inheritance tax almost always must be paid from the active assets of the company. In other words, the company has to be sold, and it is usually sold not to other family businesses but to quoted companies, which often extinguish competition rather than enhance the company's assets.

One of the advantages of family businesses is that they tend to take a long-term view rather than the short-term view of reacting to today's share price and tomorrow's profit forecast. Often, those profit forecasts are made by unreliable journals that are produced at high cost rather than more reliable journals such as The Racing Post. Hon. Members will learn much by turning their attention to real professional forecasters rather than the highly paid people who produce bogus forecasts.

I make a plea that the Government reconsider the tax regime for unquoted companies. This is a matter of much importance. If inheritance tax cannot be abolished, I should prefer the introduction of 100 per cent. business property relief. Such relief should apply to the commercial sector and could be extended to farms. The annual cost would be not the £2 million that my hon. Friend the Member for Slough (Mr. Watts) mentioned in relation to bingo, but £20 million, as suggested by Treasury Ministers. The incentive for wealth creation and for the opportunities that even the right hon. Member for Llanelli mentioned would be much enhanced. I ask Treasury Ministers, please, to think again because much more can be done. The threshold for estate inheritance tax has not been fully indexed.

Mr. Quentin Davies

Does my hon. Friend agree that if the heirs to a company—who are saddled with a substantial inheritance tax burden—decide not to sell the company, they must invariably borrow against the assets of the company, thereby burdening it with substantial debt and increasing its future risks? That burden of debt effectively becomes a charge on the company's cash flow. Resources that might otherwise be available for business investment are channelled through the Inland Revenue to Government expenditure. Is not that a most economically destructive process?

Mr. Powell

My hon. Friend and neighbour the Member for Stamford and Spalding (Mr. Davies) is correct.

My final point relates to employee share ownership plans. I see that my hon. Friend the Member for Esher (Mr. Taylor), who has played a considerable part in ESOPs, is here. ESOPs are excellent news for quoted companies or for unquoted companies that intend to become quoted, but they hold no attraction for the long-term family business. Many long-term family businesses would like to be able to offer their employees incentives, but there is an inherent contradiction between their need to keep the share valuation low and the desire of employees to increase it. I am not trying to undermine what my hon. Friend the Member for Esher has been working for, which has been accepted by Treasury Ministers in the past two years. Means to enable employees of long-term family businesses to have share participation schemes that do not undermine the fundamental balance of a company that, because of inheritance tax, wishes to keep the value of its shares to the minimum have been suggested to my right hon. Friend the Chancellor. A gap has opened up in employee share participation schemes for one important sector of the economy, and I ask my hon. Friends on the Treasury Bench to resolve it as quickly as possible.

Several Hon. Members

rose——

Mr. Deputy Speaker (Mr. Harold Walker)

Order. I remind the House of the earlier appeal for brief speeches.

8.8 pm

Mr. Peter Hain (Neath)

On 4 April, the people of Neath delivered their verdict on the Budget and the Finance Bill. The Conservative party's vote collapsed and its candidate barely saved his deposit. There is contempt in my constituency for the incompetence and arrogance of the policies of the Chancellor and of the previous Prime Minister.

People are most offended by the dreadful short-termism of the Government—the short-termism of a Chancellor as he rearranges the deckchairs while the ship of state sinks beneath the economic seas. The short-termism of the United Kingdom's financial system means that share levels and dividends soar while manufacturing investment collapses. Yet again, British industry trails behind that of our economic competitors.

The success that has been claimed by the Government is a mirage. The British economy is committing hara-kiri. Since 1979, consumption has increased by 40 per cent. after allowing for inflation, but the production of the British industries that produce those consumer goods has increased by only 7.8 per cent. In other words, our consumption has increased five times more than the production of our consumer industries.

At the same time, consumer credit has soared to a staggering £52 billion, which is five times what it was in 1979. Under a Government who preach good housekeeping, it is extraordinary to find that staggering burden of personal debt. Equally astonishing is the amount of corporate debt, which has now reached £27 billion, much of it financing the avaricious thirst for dividends and the free-loading of company directors which characterises our industry today. In money terms, dividends have tripled since 1979 while investment has barely remained stagnant. This is a society living on tick, led by a Government living on borrowed time.

As my right hon. Friend the Member for Llanelli (Mr. Davies) described so graphically, our trade position is catastrophic The report of the Treasury and Civil Service Select Committee warned that any recovery from the current recession, whenever it occurs, will turn our huge current account deficit into a mega deficit as Britain's insatiable appetite for imports is let rip.

The people of south Wales cannot understand the crazy logic of a Government who are determined to close every coal pit in south Wales while imports soar to record levels, with 15 million tonnes of coal being imported every year. That has a dreadful impact on our balance of payments deficit and a huge social cost in terms of unemployment and its effect on the communities round those pits. That strategy makes sense only to yuppie accountants in the City of London, not to anybody living in Wales. We in Wales look with amazement at the brazen cheek of Ministers who spend their time in the House claiming success while the real economy collapses around our communities. As the Welsh Chamber of Commerce reported only last week, the recession in Wales is deepening, not only in the manufacturing sector where employment has fallen by over 20 per cent. since 1979, but in the flagship of this Government's economic policy, the service sector. We have not only had record closures and business failures, but the Confederation of British Industry in Wales reports that two out of three firms are currently working below capacity. That is some recovery from the recession.

The Government are washing their hands of Welsh industry, having cut the real value of regional preferential assistance to Wales by 57 per cent. since the early 1980s. That has happened at the very time when regional investment and support such as long-term loan finance and the backing for research and development were urgently needed to boost our industry to prepare it for the cold winds of European competition.

The local economy of Neath has been shattered. Unemployment is up 33 per cent. on a year ago. The figure for March 1991 was 2,400, but, according to the unemployment unit, the real figure is probably 3,612 because the unit estimates the number of people out of work on the pre-1982 basis—that is, on the basis used before the Government started fiddling the official unemployment figures. That means desperation for the families that have been put out of work. There is also desperation for those seeking work and who are offered jobs paying £80 or £90 a week, which is barely enough to raise them above the standard of living of the many people who have to subsist on benefits. If the Chancellor could not live on £80 or £90 per week, how can he expect my constituents in Neath to take jobs that provide that level of income? Why do not the Government support a statutory minimum wage such as exists in many of our competitor countries in Europe, which are far more successful economically than we are?

Mr. Mans

The hon. Gentleman has just mentioned a minimum wage. Would the introduction of a minimum wage increase or decrease unemployment in his constituency?

Mr. Hain

I rely on the analysis of the National Institute of Economic and Social Research, which shows that the Labour party's policy for a statutory minimum wage would increase unemployment by perhaps 4,000, which is almost insignificant, but even that——

Mr. Mans

Would it increase unemployment in the hon. Gentleman's constituency by 4,000?

Mr. Hain

Be sensible. It would increase unemployment by 4,000 across the country. I repeat that comparable European countries that have a statutory minimum wage are far more successful than we are.

Neath borough council has intervened in a way that would not attract the Government's approval. It has established five factory sites with starter units. Until recently, there have been long waiting lists for the starter units, which have proved successful, but 29 of the 134 units are now empty. That is an indictment of the Government's policy.

Unemployment is increasing across Wales and has now broken the 100,000 barrier. On 16 May, when the voters of Monmouth go to the polls, that increase in unemployment will again be at a record level and I am confident that those voters will exhibit their protest against the Government's policies by returning a Labour Member of Parliament. Every working day in Wales, four struggling small businesses go to the wall. The number of employment training places in west Wales has been halved during the past year. Young people and women returners who urgently need training if they are to get decent jobs now face a hopeless situation. I recently visited Kenyons, a successful company in the town of Pontardawe making refrigeration equipment which it exports successfully. Its managing director described the frustration that it faces because it wants to train people and has places for them, yet its funding has been reduced because of the Government's cuts in employment training. That is what is happening at a time when our skills base is collapsing. Apprenticeships are no longer advertised in south Wales on their previous scale.

In addition, our infrastructure is decaying. How can the Government talk about wanting to make further cuts in income tax when they cannot invest in decent roads? There is a missing link in my constituency between Aberdulais and Glyn-neath because the A465 has not been built and there are no plans to build it despite the fact that it would be a much-needed improvement to the local infrastructure and would therefore increase employment opportunities. How can the Government claim to support local industry in Wales when they are unwilling to fund the infrastructure investment in transport which is so desperately needed?

That is the dreadful impact of the Government's policies, but they also have tragic domestic effects. In 1990, actions at Neath county court for mortgage repossessions increased by 45 per cent. from 276 to 401, causing misery to local families. Across the country, one in five people now lives in poverty, which is a higher proportion than in any other European Community country. The 25p increase in child benefit for the second, third and fourth children in a family which is proposed in the Bill is, frankly, insulting. It will not buy more than a packet of crisps. Many of my constituents have said that they feel like sending a packet of crisps a week to the Chancellor to show the contempt with which they view that child benefit increase. The failure to uprate child benefit fully in line with the retail prices index has robbed families in Wales of a total of £48.19 million. That is the sum of money that the Government owe families in Wales and we expect them to repay it.

VAT has already been mentioned and I read an interesting exchange in the Select Committee's report involving my hon. Friend the Member for Hackney, North and Stoke Newington (Ms. Abbott). People in Neath who are on low incomes are hit harder than are rich people by VAT. That fact is borne out in the Government's figures in "Economic Trends" for March 1991 which show that the poorest households pay 11.5 per cent. of their disposable income in VAT compared with the richest which pay half—6.2 per cent. As disposable income in Wales is much lower than the average across the country, people in south Wales have been hit hardest by the increase in VAT, especially those in the valleys in Neath.

The Chief Secretary to the Treasury said that an acceptable way to solve the problems was to put extra duty on petrol and especially on leaded petrol. I understand that argument and I sympathise with him from a green point of view. However, families in the valleys and especially in Neath cannot rely on public transport because there are hardly any buses—the service has been cut to ribbons by Government deregulation and by cuts in local authority provision. They rely on cars and have therefore been hit especially hard by the increases in petrol prices and in VAT.

I wish to deal with tax cuts. In the infamous Budget of 1988 there were tax cuts for the rich made by a Chancellor who was then called "unassailable" and who is now unmentionable. According to the Treasury's own figures, the average earner in Neath has benefited since 1988 from a reduction of only £150 in his or her income tax, whereas over that same period a Minister has benefited from a reduction of £2,540. Those figures give the lie to claims about income tax cuts—they were for the rich.

In my constituency old-age pensioners who may be surviving on a small miner's pension may receive an increase in their pensions, but it is then taken away through an increase in income tax. By every measure, the Government's claims of success are a failure or a fraud and the sooner the Government go to the country so that we can elect a Labour Government to build a strong and modern economy, the better.

8.21 pm

Mr. Ian Taylor (Esher)

The speech of the hon. Member for Neath (Mr. Hain) underlines—or perhaps defines—the meaning of the saying that economics is a dismal science. His speech was dismal from beginning to end and it was not even accurate when he tried to deal with serious issues.

The hon. Gentleman has clearly not read the report of the Treasury and Civil Service Select Committee, which is explicit about the effects of VAT. Paragraphs 95 to 102, which are worth reading, include the comment: As VAT is a tax on expenditure, it is more appropriate to assess its progressivity in relation to expenditure rather than income. On that basis, VAT is clearly progressive".

Ms. Abbott

rose——

Mr. Taylor

I am just warming up. I shall willingly give way if I may be allowed to finish my paragraph.

The Opposition disapprove of the community charge, but even on their terms, and on the basis of indirect tax where there is an element that could be regressive, VAT is clearly less regressive than the proportion of the community charge—the £140—that has been reduced by transfer to VAT. Therefore, as the Select Committee's report states——

Mr. Battle

rose——

Ms. Abbott

rose——

Mr. Taylor

I shall give way to the hon. Lady.

Ms. Abbott

The hon. Gentleman has made my point, but it bears repetition. Considered as a proportion of disposable income, VAT is clearly regressive.

Mr. Taylor

I said that the community charge to which the Opposition are opposed is more regressive even on that basis, as the Select Committee's report notes. VAT is an expenditure tax and in expenditure terms it is progressive.

The hon. Member for Neath mentioned a minimum wage. If the Labour party wishes to talk seriously, rather than making party propaganda, about a minimum wage, they should state what its impact would be on British industry and on services within the economy, such as the health service. The introduction of a minimum wage in the health service could cost up to £500 million. Nearly 18 hospitals a year would have to close to fund that proposal. If we are talking about economic difficulties, we should bear in mind that a Labour Government would grind British industry into ruination if they imposed costs that it could never hope to recoup in the market place. They would also severely damage our public services.

The Labour party talks happily about raising taxation without assessing what the buoyancy of the tax would be at the higher levels. It can give no firm idea about how it would fund its programme. In an interview on television on Sunday, the Leader of the Opposition made it clear that in key areas such as the national health service there would be no more cash.

My hon. Friend the Member for Norfolk, South-West (Mrs. Shephard) is now in her seat. I am sure that when the reports of the debate are read, it will not be our speeches that are noted, but the hunt for the Norfolk stud that my hon. Friend the Member for Corby (Mr. Powell) so eloquently launched, and information about the relief that might be available. The importance of that to my hon. Friend the Member for Norfolk, South-West will occupy the long weekends to come.

I had intended to launch an attack on a friend of mine, Professor Tim Congdon, but I was disarmed by his invitation to his 40th birthday party, which is taking place now and where I should be happy to be. However, I must take him to task for being a co-signatory of a recent letter to The Times which criticised Government policy on the exchange rate mechanism. In rather panic-stricken terms, the letter urged a sudden reduction in interest rates regardless of what had happened to the exchange rate. The letter has not stood the test of time, even though it appeared only a matter of weeks ago.

It is significant that this evening no one has queried the ERM, the rate at which we entered or the fact that it has introduced some stability into business relationships and exports pricing; nor has anyone queried the fact that entry into the ERM has had a genuine impact as a discipline to reduce inflation. It is also significant that the National Westminster bank's leaflet, "UK Economic Outlook", which is dated 19 April 1991, states: Entry into the ERM can now be seen clearly to be a success, and very few in industry and commerce would wish us to change that policy … There have been no significant or serious complaints about the pound being over-valued against continental currencies. It is heartening when we get such information from economists in the City. We know that the Government were right to take us into the ERM in October last year. Despite the cavilling of Opposition Front Bench spokesmen about the rate at which we entered and about other aspects of our entry, they welcome the overall idea.

The Government's policy was correct and those of us who supported our entry have been justified in our assertion that within the mechanism, for any fall in inflation, there would be the possibility of a faster fall in interest rates than would otherwise be the case. That is because the deflationary worry that has always been created for holders of sterling is gradually removed as the Government's firm commitment to hold to the exchange rate discipline has been realised. In time, that would enable the differential margin between interest rates here and those in Germany to narrow. As it narrows, British interest rates will fall disproportionately faster and could drop well below 10 per cent., depending on how far inflation falls. Some forecasts are of a headline rate of inflation of below 4 per cent. this year. That prospect is important for British industry because inflation creates difficulties for British industry. A 1 per cent. fall in the rate of inflation could well save British industry up to £5 billion, according to figures issued by the CBI.

The Government's thrust to bear down on inflation, which is reinforced in the Budget, is absolutely correct. Given that the exchange rate mechanism is a vital discipline in achieving that objective, the Government were absolutely right to enter it and correct not to panic over the past few months in the face of advice from my friends like Professor Congdon.

Mr. George J. Buckley (Hemsworth)

The hon. Member for Esher (Mr. Taylor) has acclaimed the Government's entry into the exchange rate mechanism for reducing interest rates and inflation. Why did the Government not take advice from the former Chancellor of the Exchequer, the right hon. Member for Blaby (Mr. Lawson), who recommended entry to the ERM three years earlier? Why did the Government not do that then if it is the criterion for bringing the Government on to a more even economic level?

Mr. Taylor

The hon. Member has made a good intervention. I have always believed that we should have entered the exchange rate mechanism earlier and my view in that respect is on the record. However, that is not the point. We are not dealing with theory, we are dealing with the real world. The Government took the initiative last October. Sadly for the hon. Member for Hemsworth (Mr. Buckley), those on the Opposition Front Bench decided that, although in theory they were in favour of joining the ERM, they did not like the discipline. They wanted us to enter at a much lower level. That would have stored up inflation because, if we had dropped in at too low a central rate, we all know that a depreciating pound imports inflation into our economy. I admit that I have been a long-term believer in the ERM discipline.

There are many aspects to the Budget, and I support the overall thrust of bearing down on inflation which it enshrines. When we consider the Finance Bill, we will consider detailed measures. I want to pay tribute to the Government for the measures that have been introduced to help industry and it is to the Government's credit that they have tried to meet some of industry's worries about cash flow. The changes in corporation tax treatment and rates have been welcomed by industry. Smaller businesses are grateful for the changes in corporation tax, VAT and PAYE which apply to them and those changes will be a significant encouragement.

However, I want to make a point about industry not to the Government, but to the banks. I am perturbed by stories that I am beginning to hear from people in business. Although companies are grateful for some of the Government's reliefs and for recognition of their cash flow problems, there are signs that the banks are beginning to try to restore their profit accounts by applying higher than necessary premiums over base rate, particularly for smaller companies that are borrowing. I want to draw attention to that fact publicly, because it is a worrying development.

The banks were charging 2 per cent. or 2.5 per cent. over base rate for smaller corporate clients. I hear now that they are beginning to charge much in excess of that. That means that the benefits of the fall in interest rates are not necessarily being passed through to smaller companies with the desirable speed. Given that the Government are doing their bit to control the economy for the benefit of business, the banks have a duty to take a more long-term view. I would welcome some banks stating publicly that they are not trying to restore their profit and loss accounts at the expense of British industry.

An important objective of the Budget lies in the pattern of diversification of private investment. In this country there has in the past been a welcome priority in personal investment on housing. I am in no way against a high proportion of personal investment in private housing which people are proud to own. Sixty-seven per cent. of the population now own their own house, and that is a significant percentage. Although it is socially welcome that people own their own houses, that seems to store up a resistance to the problems of inflation. If there is a disproportionate interest in house prices, there is a disproportionate interest in inflation. Therefore, I welcome the Government's realisation that the traditional tax relief for house purchases may need to be reviewed. There is a small, but welcome, start in removing relief on mortgages at the top rate.

Mr. Paul Boateng (Brent, South)

What next?

Mr. Taylor

I believe that capital gains tax is too high; my hon. Friend the Member for East Lindsey (Sir P. Tapsell) made that point most strongly. One of the big distortions in capital gains tax is the fact that one's house is almost uniquely free of capital gains tax. In removing that relief, which I am not advocating—[HON. MEMBERS: "Oh, no."] I am sensitive to political winds just like Opposition Members. However, some matters must be considered closely and it might be time to consider ways of assisting other forms of investment through the tax system to run more equally alongside housing.

I have been a long-term advocate of employee share ownership. That is a natural extension of people's interests in assets. What could be more in their interests than an asset in the company for which they work? My hon. Friend the Member for Corby was kind enough to say that I had worked on this point for some time. I believe that it is an important thrust of Government to enable everyone to have access to capital and the income that derives from the ownership of capital. Employee share ownership is a vital and necessary part of that and I do not believe that we have even begun to see the long-term implications of such ownership.

I welcome the measures in the Budget and the incentive for management to have all employee share schemes in place. I can see many implications for company personal equity plan schemes and I welcome them. By themselves those measures are just the start of the revolution. I hope that we will go much farther and in Committee I will want to consider the more boring and technical matters which hold back the development of employee share ownership.

The widening of the access to capital is very important. The Government have shown that they are prepared to act and that there should be a shift in traditional reliefs for homes and pensions into new forms of private investment, so that the savings can be properly balanced and perhaps be more resistant to inflationary factors that so often afflict this country as soon as we appear to be releasing tight monetary policies that are necessary to force down inflation. Having succeeded in forcing inflation down, we do not want to find that it is pushed upwards again simply because people are borrowing against their houses as happened in 1987 and 1988.

I believe that many other technical factors will be raised in Committee. I was going to refer in detail to the comments made by my hon. Friend the Member for Corby about employee share ownership, but I will save that for another time.

Mr. Buckley

Will the hon. Gentleman give way?

Mr. Taylor

I am conscious of the time, and I have already given way to the hon. Gentleman, so I shall not do so again.

There is an omission from the Budget, and that is the problem that is afflicting the Lloyd's insurance market. That problem is of considerable importance because Lloyd's is a major invisible export earner. It is important also because many of the names that are the bedrock of Lloyd's are facing cash calls on current years. I have no interest to declare. I am not a member or a name of Lloyd's, but I am concerned about the implications for that institution.

Perhaps we should consider some form of tax relief on current-year cash calls, and possibly even enabling members of Lloyd's, and the syndicates in particular, to build up tax deductible catastrophe reserves, even if it means that the special reserves that currently exist are removed as a quid pro quo. I ask Treasury Ministers to consider that point because I am concerned that we are at the beginning of a crisis. If that crisis afflicts Lloyd's, one of the great British industries could be seriously damaged, and competition would mean that business would go elsewhere.

Overall, it is an excellent Budget which pushes forward the battle against inflation and provides incentives for people who wish to get access to capital. I look forward to serving on the Committee.

8.40 pm

Mr. Tom Pendry (Stalybridge and Hyde)

I welcome the opportunity of participating in this debate, not least because it gives the Financial Secretary an opportunity to reply to some of the points that I made on the Budget. I am relieved that he is present, because, although the Minister of State took notes on the previous occasion, he must have had difficulty reading her notes, because he did not reply to the points that I raised. I wish especially to obtain some information on the proposed foundation on sports and arts. Anybody who listened to the Chancellor's speech on 19 March would reasonably assume that such a measure would be included in the Bill. The Chancellor said: On the understanding that all the main pools companies agree to participate and that the full amount would be passed on to a new trust established on satisfactory terms, I would be willing to reduce pool betting duty a final time—from 40 per cent. to 37½ per cent.—[Official Report, 19 March 1991; Vol. 188, c. 175.] However, in the Bill there is no mention of a reduction of pool betting duty. The Financial Secretary must come clean and tell the House why that is the case. Is it because two of the three main pools companies have not decided to participate? Is it that the Government have failed to arrive at satisfactory terms for the proposed new foundation? With hindsight, the Financial Secretary might be advised to reply, as I have asked a series of parliamentary questions, the replies to which forced the Chief Secretary and his colleagues to reveal the shameful muddle upon muddle and shady deal upon shady deal that have continued to surround this sorry affair.

Indeed, there are only two possible solutions to the conundrum that the proposal has thrown up—either the Government have been guilty of the most crass incompetence and negligence, or they are guilty of embarking on a comprehensive strategy of deceit and duplicity. The Government can dodge the issue no longer. The Financial Secretary must come clean and tell the House of which of those two sins the Government are guilty. The Dispatch Box could become a confessional box when the Financial Secretary replies.

I am sure that the whole House will wish to know of the lack of progress to date of that wonder scheme. Certainly, I suspect that the Minister for Sport might welcome some further information—poor chap, he has once again been sidelined. It is getting to be a habit of the Government to treat their Ministers for Sport in that shabby way. As a result, the Minister found himself only last Tuesday at a press conference having to invent a fairy-tale figure of £75 million for the amount that will be generated by the proposed scheme, as opposed to the £60 million that everybody else has been told by the Treasury. He admitted to me in a written answer yesterday that the extra £15 million could come about only as a result of increased pools betting turnover.

The Minister for Sport might know something that we do not know—certainly the Treasury does not know—about prospects for the pools industry. However, he might care to reflect on the fact which the Financial Secretary must confirm or deny tonight, that to raise that extra revenue the pools companies' turnover would need to reach £1 billion for the current 12-month period, as opposed to the £800 million that current estimates suggest. In normal circumstances, such a growth would take five years to materialise. That is hardly the most commanding and informed performance from the hon. Member for South Ribble (Mr. Atkins), but, given his shoddy treatment at the hands of his Treasury colleagues, perhaps we should make allowances for him. After all, the Government have revealed to me that he and his officials were kept in the dark about plans for the foundation and were excluded from any discussions surrounding its creation. Indeed, he was not even granted the courtesy of an official on-the-record meeting with his colleagues from the Treasury until last Wednesday. Perhaps the Financial Secretary might care to tell the House the reason for that disgraceful snub of his colleague.

While he is about it, the Financial Secretary might care to explain plainly and simply to the 21 million adults and 7 million children who take part in sport and recreation in Britain why the Chancellor has seen fit to embark on a reckless and foolhardy gamble with the funding of that important part of their lives. The sorry tale that has been told to me by Ministers through parliamentary answers—or perhaps non-answers—is of a Chancellor who allowed himself, after just one meeting 11 days before his Budget statement, to be bounced by one pools company into an agreement to set up a body to channel funds out of our cash-starved national game, football, when they are urgently needed to provide the level of supporter safety and comfort required by Lord Justice Taylor's final report, and place it as a stake on a non-runner, the proposed foundation for sport and the arts.

That body does not exist at present, nor is its eventual appearance a certainty, as in the past there has been an agreement between the English and Scottish Football Leagues and the Pools Promoters Association that any reduction in the football pool betting duty can take place only with the leagues' consent and that two fifths of that reduction must go to the leagues. However, that is not the case for this scheme. I understand that both the leagues are taking legal advice, and it may well be that there will be a court case as a result.

The Financial Secretary must confirm whether he knows of those developments and state why the Government agreed to a scheme fraught with such uncertainty. Is it simply that the Government were not sufficiently au fait with the matter to realise that possible danger? Either way, the Government have been guilty of either recklessness or incompetence.

As the House knows, the round of talks takes place months before the Budget statement itself. Had the Chancellor acted responsibly and not dived into the scheme only 11 days before making his Budget statement, he would have had time to think through and consider all the possible snags that the proposal might encounter and which now endanger the scheme. Instead, we are left with delays, uncertainty and suspicion surrounding the feasibility of the scheme. Whatever the Government's view might be, it is clear from press reports that the other two pools companies which it is proposed should finance the foundation have severe reservations about the scheme. That is no wonder, bearing in mind that the first that they knew about the scheme for which they would have to supply millions of pounds was when, along with the rest of the nation, they saw the Chancellor's statement on television.

The Chief Secretary confirmed in a letter to me on 17 April that the Government took a conscious decision not to inform the minority pools companies of the proposal, despite the fact that all three companies will need to be closely involved in setting up the new trust. What sort of shambles is that? How do the Government intend to secure close involvement from those companies when the Government have been guilty of the most disgraceful deceit towards them? Moreover, even supposing that their co-operation is forthcoming, how can any progress be made when, as told to me in written answers, the Government have not the slightest idea who will comprise the new body's membership, the ratio of funding to sport and the arts, how its operations are to be monitored, controlled or audited, or how many people will be needed to staff and administer it.

As the Government have said that this foundation will be in place by the start, in August, of the next football season, will the Minister revise that target? It is obvious that, given these problems, there is not the slightest chance of this new body's getting off the ground by then. No doubt the Minister for Sport is aware that the Government's reputation in sporting circles is currently all too low, and rapidly sinking. Who can be surprised at that when people saw their hopes raised, in the run-up to the Budget, by widely spread hints from the Minister for Sport that the Government would take some action to relieve sports' national governing bodies of the scandalous burden of corporation tax, only to see the promise replaced by this pig-in-a-poke scheme?

I know that the Rugby Football Union views the Government's actions with disdain. It has written to me staying that not only will its corporation tax bill continue to be about £500,000 each year, on top of a rates bill of £130,000, but that, as a result of the Government's VAT/poll tax bribe, it will have to find £80,000 in addition to the estimated £300,000 that it had to pay in VAT last year, as it is too late to increase published ticket prices. Mr. Dudley Wood, secretary of the RFU, has told me that all this money would have been spent on the development of youth rugby and on making up for the decline in team games in schools. Instead, he comments, I must say we have fared pretty badly. I suppose we are a soft touch. Unfortunately, behind all the surface hype about a so-called sports-mad Cabinet and Prime Minister, that is the reality of sport and the present Government. Sport is seen by them as a soft touch. This has gone on for far too long and it must stop now.

As one immediate step, to which the Minister must give his backing tonight, the Government could offer full and unequivocal backing to Britain's Olympic bid, which I, as a Greater Manchester Member of Parliament, am proud to say is once again to be led by the north-west. The Government could take that step through the removal of corporation tax from the British Olympic Association. Last year the Minister received a deputation on this very point. Ironically, the British Olympic Association is a victim of responding to the Government's urging that it take account of the increased competition for private funds from registered charities and the arts, and of adapting its fund-raising techniques to make greater use of corporate sponsorship agreements.

The result has been a rise, one fifth to four fifths since 1979, in the proportion of the association's income that is subject to tax. The association has written to me saying that the Budget has left it very disappointed … as the time is really now running out before the next Olympic Games. Unless there is immediate action from the Government, the BOA's £5 million appeal for the 1992 Olympics will be encumbered by a tax bill of £1.5 million for the preceding four years.

The time for clever words and evasion from the Government is over. Both sport and the arts deserve proper funding. Whether the funds come from a national lottery or from some other source, the Government have a responsibility to see that they are made available. During the Budget debate, I asked for replies to very specific questions. Those replies were not forthcoming and, despite my writing to the Chief Secretary, I still await them. That will not do. Our sportsmen and sportswomen deserve better, our Olympic athletes deserve better and the House deserves better. I hope that the Minister will come up with some concrete replies this evening.

8.53 pm

Mr. Charles Wardle (Bexhill and Battle)

Like my right hon. and hon. Friends who have spoken already, I welcome the Bill. In particular, I welcome the realistic approach of my right hon. Friend the Chancellor towards the current recession, which will prove to be considerably shorter than, a few months ago, it threatened to be because of the firm anti-inflationary stance that has been adopted by my right hon. Friend.

In the Budget, with a general election not so very far away, my right hon. Friend might have been tempted to open the economic throttle to a certain extent in order to mask the downturn over the short term, but he did not do so. Unlike Opposition Members, who advocated a large and instant cut in interest rates, my right hon. Friend wisely stuck to his anti-inflationary guns, and there are already signs in some order books that his policy is paying off. He knows that the only way to greater competitiveness and renewed growth is the maintenance of a tight fiscal policy and high interest rates until there is clear evidence of a consistent downward trend in the headline rate of inflation. In the Budget, he gave that clear message. He warned employers and employees that extravagant pay settlements would exacerbate the situation, and achieve nothing else.

Over the past 18 months, I have not always been at one with Treasury forecasts. In November 1989, I challenged the assumption that the worst scenario for 1990 would be two quarters of zero growth. I also questioned the forecast trend for the surplus on invisibles, and last autumn I expressed concern that the spending plans of some Departments might make the underlying rate of inflation a tougher nut to crack this year. Those reservations have been very largely dispelled by the realism now being displayed in the fight against inflation. That is the cornerstone for the recovery from recession and for renewed growth.

During the rest of this year, the headline rate of inflation will fall, and interest rates will be reduced to some extent, so long as German monetary policy does not pull the rest of the European Community in the opposite direction. The divergent attitudes of the United States and Germany at the G7 meeting over the weekend do not help those who wish to make short-term predictions about interest rates, but the United Kingdom rates will be lower in the months ahead, and the recession will bottom out. It will begin to bottom out in the second half of 1991.

There are already some signs that this is beginning to happen. In coming to that conclusion, I do not make use of any econometric model; I simply talk to people and ask them what is going on at the factory gates, what order books and retail sales look like. Consumer demand will recover somewhat in the summer, and order books will begin to look firmer. In the south and the midlands, the momentum will certainly take some time to gather, particularly in service industries and, of course, in capital goods industries, but the corner will shortly be turned.

Those who measure the recession by the announcements of job losses ignore the delays between a company's decision to cut jobs and the news of those redundancies being made public. For example, ICI heralded its jobs losses weeks ago, but they will take time to work through. Similarly, Marks and Spencer, which announced a reduction of 1.4 per cent. in staff numbers, did so only after a six-month study of the implications. Job losses are likely to continue to be announced well after demand has shown the first signs of recovery.

Against the background of firm anti-inflationary resolve and an appropriate degree of cautious optimism about trade over the next six to 12 months, my right hon. Friend has announced a variety of measures to help business and individuals. In the limited time available to me, I should like to refer to two reforms and then, finally, to turn to the tax treatment of company cars.

I welcome the removal of £140 from the headline community charge and its transfer to VAT. It is a pragmatic solution to a problem which beset a theoretically sensible and fair tax that has nonetheless been dogged by nightmarish difficulties of implementation. The move should be broadly neutral and will bear less heavily on those on low incomes.

I especially welcome the abolition of mortgate interest relief at the higher rate of income tax. I raised the subject in Committee on the Finance Act 1988 and have raised it regularly since. A Conservative party whose policy is to target help on those in greatest need should not offer home-buying inducements to those who are sufficiently well off to pay the higher rate of income tax. It was an inefficient, inflationary and expensive use of taxpayers' resources. I congratulate my right hon. Friend, who will no longer have to put up with my broaching the subject with him.

As to company cars and VAT, I have long argued in the House and in Committee against the lenient treatment of the company car as a benefit in kind. It has been a tax anomaly that served neither the Exchequer nor the automotive industry well. I am pleased that the anomaly is largely being removed, but another problem arises.

Since the Budget, many companies have felt that it would make sense to pay an employee increased remuneration in place of providing that employee with a car. Some employers are keen to move in that direction by offering the employee a choice of a higher salary or a car. However, such choice appears to give rise to VAT problems in that the Customs and Excise are insisting that VAT must be imposed on the cash forgone if a car is chosen. The technical basis for that approach is unclear, but such treatment is inconsistent with my right hon. Friend's declared aim of removing the tax and national insurance differentials between cash remuneration and the provision of a car. I hope that my right hon. and hon. Friends on the Treasury Bench will look into the matter and confirm that there is no VAT penalty where an employer decides to offer the choice of a higher salary or a new car.

9 pm

Mr. Mike Watson (Glasgow, Central)

I want to address my remarks to the most contentious aspect of the Budget, the increase in VAT, despite the fact that the media would have us believe that the tax on mobile phones was worthy of most coverage. Only a small proportion of the people have access to or need mobile phones, yet the increase in VAT hits every man and woman, no matter how old or how poor, when purchasing a VAT-rated item. Surely that goes against the grain for a Government who claim that cutting taxation is one of their main achievements.

We should not be surprised about the increase in VAT, because one of the first actions of the 1979 Conservative Government was to increase VAT from 8 per cent. to 15 per cent. Now the Government of tax cuts have admitted that VAT is making up an increasing proportion of revenue. In 1990–91, revenue received through VAT was 55 per cent. of the amount raised in income tax. In the current year, that will rise to 60 per cent.

Of course, it has to be recognised that the VAT increase was a fig leaf for the Government's understandable embarrassment about the disastrous poll tax. The hon. Member for Bexhill and Battle (Mr. Wardle) said that it was a good idea which could not be implemented, but that ignores the facts. It was not popular from the north to the south of the country, and particularly in Scotland, where we had to put up with it a year before anyone else. It was unsaleable to anyone in any part of the United Kingdom.

The regressive poll tax has been replaced by a still more regressive measure. The 20 per cent. minimum poll tax payment which everyone was required to make has no comparison in VAT. No matter how poor a person is, he still pays 100 per cent. of the 2.5 per cent. increase in VAT. There is nowhere to hide. VAT does not take account of an individual's ability to pay. That has to be recognised.

A typical family now pays 5 per cent. of its income in VAT, compared to 2.8 per cent. in 1979 before the Conservatives' election victory. Because of the increase of 2.5 per cent., the proportion of income paid in VAT in the coming year will be 5.8 per cent. So much for tax cuts, and that despite the fact——

Mr. Mans

Am I to take it from what the hon. Gentleman has said that he advocates the removal of the 2.5 per cent. increase in VAT?

Mr. Watson

Yes, I do. I think that it was a mistake. As I said, it was a fig leaf for the Government, and it will not be popular. As was said earlier in the debate, VAT is an expenditure tax rather than an income tax, yet it is increasing the percentage of an individual's income that is paid in tax. The only reason that the poorest in society are not hit harder by VAT is that they can often afford little more than the basics, which are zero-rated. That is some escape for them, but not a means of escape that anyone would take willingly.

The Government should not imagine that the people of Scotland, Wales and England will be fooled by the apparently generous cut of £140 in poll tax. They did not highlight in their announcement the fact that many people will not get a reduction of anything like £140. In Scotland, for instance, only 2.2 million of the 3.8 million due to pay poll tax will get the full reduction of £140. A massive 1.6 million will not qualify, because they were due to pay a lesser amount in terms of poll tax. So the £140 payment is a smokescreen. It will apply to some people; it will certainly not apply to many others.

Leaving that not unimportant point aside, the people will not be fooled. It is not as if the Government can now say that the poll tax has been abolished and they have introduced a council tax, whatever form that may eventually take. The people will not forget the poll tax, because they will not be allowed to forget it. Every time they make a purchase of a VAT-rated item, they will be paying a 2.5 per cent. poll tax surcharge. That will stick in people's minds, and it will stick in people's pockets.

A different, although also important, aspect of the VAT increase which I do not think has been covered in the debate so far is the heavy additional burden that will be placed on charities. The rise from 15 per cent. to 17.5 per cent. means an additional £33 million a year cost for charities in the United Kingdom. Before the Budget, the Charities Tax Reform Group had petitioned the Chancellor on behalf of the major charities with a means of reducing the VAT burden on charities. Not only was that ignored, but the Chancellor introduced measures which mean that charities are now much worse off. A sum of £250 million is now the total irrecoverable VAT bill facing charities in the United Kingdom.

It has to be understood that that additional £33 million is money which must be taken from the many worthwhile causes for which charities raise their money. When people give to charities, they do not believe that they are putting a 10p, 50p or £1 coin in the tin to pay for increased VAT payments. In return, the Government's so-called concessions to charities in the Budget amount to a miserly £5 million, a mere one seventh of the additional cost caused by VAT rising to 17.5 per cent.

This takes place against the backdrop of a reduction in voluntary income to charities. With the recession at the moment, it is hardly surprising that people are able to give less, and charities are suffering. The VAT increase as a result of this Budget will make that situation even more difficult. Even with the advent some three years ago of the payroll giving scheme, a total of only around £16 million has found its way to charities in the intervening period.

Doubtless that scheme will produce more over the years, as will gift aid perhaps, but that takes time, and that is the key to my argument. While time for such schemes to become established is necessary, increases in taxation, and particularly this VAT increase, take immediate effect. Charities have no chance to plan; there is no phasing-in period, no room and no time for charities to adjust.

As for the effect on the average family, the Government have misread, or more likely simply ignored, the results at that level of the increase in VAT.

I believe that the Government must take steps to reduce the effects of the blunt instrument that VAT inevitably is. I hope that they will use the Committee stage of the Bill to do so.

9.7 pm

Mr. Quentin Davies (Stamford and Spalding)

This debate is taking place against a background of the concern of the House at the present state of the British economy. We find ourselves now at a particularly unfavourable moment in the trade cycle, but I am afraid that it is a fact of economic life that there always will be trade cycles. It follows from this that there will be times when we are at the bottom rather than the top of the trade cycle. If the Labour party has not yet focused on that fact and digested it, it has not really got to first base in terms of understanding the requirements of economic management. Given that there will always be trade cycles, the key thing that the electorate expect of a Government is that they will know how to manage the economy at whatever stage of the trade cycle the country may be.

Here there is a very considerable contrast between what the Government are offering the country—I am quite convinced that we are broadly on the right lines—and what the Opposition are offering. I find some of the Labour party's remedies for dealing with our present economic situation bizarre, to say the least.

I shall give four examples, the first being interest rates. It is common ground in the House that the economy was overheating in 1988 and 1989. Britain had a tremendous boom which was not enjoyed by other members of the European Community, and advantages flowed from it. It was clear that measures had to be taken to reduce borrowing and increase saving. There is only one way to ensure that people save more and borrow less—increase the cost of borrowing and the return from saving. That means increasing interest rates, which is what the Government did.

Every time the Government increased base rates in 1988, 1989 and 1990, the Labour party opposed the increase. The Labour party was not willing to take the necessary measures. Had we taken its advice, the overheating would have continued and inflation would have been about 20 per cent., as it was under the Labour Government. The measures needed—whether we had decided to take them or whether they were forced on us by the international community and our creditors through a sterling crisis, as happened in 1975 and 1976—would have been even more savage, and the recession would have been deeper than the present recession.

Labour Members are attached to a second aspect of the Labour party's policies. They believe that an effective remedy for the British economy would be increased taxation—for example, income tax. We have dwelt on the considerable economic damage that would be done by increasing the income tax paid by higher earners, who tend to add the greatest value per head to the economy, for obvious reasons, and are internationally mobile. The damage that would be done is clear.

My hon. Friend the Member for East Lindsey (Sir P. Tapsell) did not receive a reply to his question. He asked whether, if the higher rate of income tax was increased to 59 per cent.—as it would be under a Labour Government—the rate of capital gains tax would be increased to the same level. Conservative Members have a responsibility to continue asking that pertinent question until we get a reply. If the answer is no and we would keep capital gains tax at 40 per cent. while allowing the higher rate of income tax to increase to 59 per cent., the problems associated with bond washing, roll-up schemes and people converting income into capital gains would arise. The neutrality of the tax system which has been established by the Government would be destroyed.

If we did as the Labour party intends and increased capital gains tax to 59 per cent., we would end up with the highest rate of capital gains tax in the western world. The reduction in after-tax returns to investors would have a crippling effect, and an enormous amount of investment would be forgone. There would be almost no venture capital investment with such a penal capital gains tax.

Thirdly, Labour Members have advocated a training tax. That is superficially attractive. Companies would be told that, unless they spent a certain proportion of their turnover or wages bill on training, they would forfeit to the Government the difference between training spend and the threshold, and the money would be used to provide training.

I wonder whether the Labour party has begun to think through the consequences. There would be enormous waste. Any firm that decided on purely commercial criteria to spend less than the threshold amount on training would have an incentive to spend the difference on anything that could be called training, however bogus.

Precedents have been set in other countries. I know from my experience of running a subsidiary of a British merchant bank in France of the system that operates there. Unless I spent 1 per cent. of my wage bill on so-called training, I had to pay the difference between that and my actual training spend to the French Government. As there was no inducement to ensure that money was spent wisely, once I decided what needed to be spent on training in the interests of the business, if someone wanted to learn Spanish or even knitting, I did not mind because the money was lost to the company anyway.

Such a training tax is a recipe for wasting valuable company resources. It is based on characteristic Labour prejudice and its belief that politicians and bureaucrats can second-guess business decisions and should decide appropriate training levels. It is absurd for central Government to try to assess what is appropriate across the board—for all business sectors, for all time.

Fourthly, the greatest folly of all is the concept of a minimum wage, which would of course increase unemployment. If one increases the price of any commodity, one also reduces demand for it. We could argue all night about the extent of the job losses that would result from a minimum wage, if it were ever implemented—but let there be no doubt that the figure would be substantial, with estimates varying between 750,000 and 1 million.

A minimum wage would also serve to increase inflation by increasing labour costs at the lower end of the wage scale and the knock-on effect that it would have on wage rates and pay demands throughout the economy. A minimum wage would be of no benefit to those at the lower end of the pay scale whom it was designed to benefit, because they would lose family credit entitlement.

Given the present state of the economy, it takes considerable genius to devise a system which would increase unemployment and inflation—two evils that the Government are currently addressing—and which would offer no benefit to the very sector of the community that it was designed to help. It is a form of genius in which the Labour party appears to specialise.

9.17 pm

Mr. Keith Mans (Wyre)

I congratulate the hon. Member for Glasgow, Central (Mr. Watson) on being honest in expressing his views on the increase in value added tax. Some Opposition Members—notably the hon. Members for Derby, South (Mrs. Beckett) and for Hackney, North and Stoke Newington (Ms. Abbott)—said that VAT is a regressive tax that affects the poor most of all. However, when it came to whether Labour would get rid of it, those hon. Members were less than honest in what they said. As was pointed out by one or two of my hon. Friends, they dithered—in the same way as the Leader of the Opposition is dithering over whether to commit Labour to abolishing VAT.

The shift from local to indirect taxation was a fundamental part of my right hon. Friend's Budget, and it is one of which. I thoroughly approve. I go along also with my right hon. Friend the Member for Worthing (Mr. Higgins) in believing that it is a pity that the Government did not go all the way and got rid of local taxation—at least until such time as they decide on a new structure for local government.

I am pleased that the Government went as far as they did, but hope that we will take on board the consequences. There is now a high level of gearing in terms of the way in which local tax works on local expenditure. It brings in only 11 per cent. of total local revenue, which means that just a small percentage increase in the tax could make for a large increase in the amount of money that people must pay. At least it is capped and I suggest that it will have to be capped at a relatively low level. That is the main difference between our suggestions for local government finance and those of the Opposition. Their fair rates proposal has no top limit, and no capping. It is rather odd that they are suggesting certain limits on central Government taxation and expenditure, but that they are not suggesting any capping for local government expenditure. That is a fundamental flaw in their economic programme.

Another aspect of the Finance Bill is the excellent help that it gives to worker share ownership plans and to profit-related pay. As many hon. Members know, I have encouraged that subject for a number of years, together with my hon. Friend the Member for Esher (Mr. Taylor). It is certainly encouraging that we are moving in the direction of allowing employees to take a fuller part in the operation of their companies. Profit-related pay improves productivity, cuts costs and improves job security. I hope that, at times when profits are not as great as they have been, directors and top managers will incur a cut in their profit-related pay.

This Budget is undoubtedly good for business, but there is still a lot to do, especially as regards the environment. However, I sincerely hope that that aspect of the Budget can be dealt with in Committee.

9.21 pm

Mr. Chris Smith (Islington, South and Finsbury)

We must always examine a Finance Bill in relation to the economic circumstances from which it arises, for it is against that background that it may best be judged. Tonight and in Committee it will be our argument that the Bill miserably fails to measure up to the desperately needed measures required by the economy. We are in a deep recession and no amount of hype from the Chancellor, the Chief Secretary or Conservative Members will hide that fact.

That argument has formed a large part of our debate this evening. My hon. Friend the Member for Sheffield, Attercliffe (Mr. Duffy) spoke eloquently of the fact that engineers in his constituency are finding this recession even worse than the recession of 1980. My right hon. Friend the Member for Llanelli (Mr. Davies) talked about the great British industries which were being run down by the market ideologies of the past 12 years.

My hon. Friends the Members for Neath (Mr. Hain) and for Hackney, North and Stoke Newington (Ms. Abbott) spoke about important issues—how our economic circumstances are affecting their constituents.

Other important matters have been mentioned today. My hon. Friend the Member for Stalybridge and Hyde (Mr. Pendry) drew attention to the crucial question of what will happen to the proposed foundation for sport and the arts. My hon. Friend the Member for Glasgow, Central (Mr. Watson) spoke about the impact of measures in the Bill, especially upon people with low incomes. Perhaps most perceptive of all was my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), who contributes to our debates on the Finance Bill each year and who spoke about the Government's false optimism which parallels, almost precisely, what occurred in the 1920s.

The bare facts of our economic condition are incontestable. Since the right hon. Member for Huntingdon (Mr. Major) became Chancellor, 500,000 people have lost their jobs. Last month's rise in unemployment was the highest since records began. Every day, 100 businesses go bust in Britain and 3,000 people lose their jobs. The Chancellor has forecast that growth will fall by 2 per cent. this year. Meanwhile, growth in Germany is 4.5 per cent. and in France it is 1.8 per cent. Let us have no nonsense from the Government about international factors being the cause of the recession. Even the Treasury and Civil Service Select Committee did not buy that argument.

Worst of all, investment as a whole is set to fall this year by nearly 10 per cent. and manufacturing investment is set to fall even further. Investment does not seem really to matter to the Chancellor. It is, in his words of yesterday, "a lagging indicator." Nothing could more clearly demonstrate the blinkered economic vision of this Government. Far from being a lagging indicator, investment is the key future indicator of economic performance. According to the CBI's industrial trends survey, which has been widely quoted by the Government today, the chairman of the CBI's economic situation committee, Mr. David Wigglesworth, makes that point. He says: Investment in plant and machinery is still being cut heavily and this can only reduce the capacity of firms to respond when demand recovers. It was precisely the lack of capacity to respond to demand that created the problems of the mid-1980s and led to the recession that we now face. To write off investment as an indicator behind the present trend ignores the fact that it is a crucial determining factor of the future trend. The Chancellor would do well to recognise that fact.

Mr. Butterfill

As the hon. Gentleman seems to regard investment as such an important factor, can he say what his party would do to encourage it? We have heard that the Labour party would put a tax on savings which, in turn, would have an effect on investment. More particularly, if we look at the unincorporated sector, his proposals for a 59 per cent. tax rate mean that the risk-reward ratio for the unincorporated sector would be absolutely diabolical.

Mr. Smith

I shall turn shortly to the corporate tax allowance measures and the reform of the business expansion scheme which we propose, since they deal with precisely the point as to how we should encourage investment in a far more effective way than the Government propose in the Bill.

When the Chancellor tells us that recovery is just around the corner and when the Chief Secretary speaks—as he did even today—about what he calls the transformation of the British economy, they are talking nonsense, and I think that they know it. All the figures for output, investment, job vacancies, bankruptcies, growth and unemployment reveal that our economy is in deep trouble. Both we and the British people will not accept any attempts by the Government to talk their way out of the morass that they themselves have created.

Remember, these were the people who told us a year ago that there would be no recession and who said, a few months ago, that, yes, there would be a recession but that it would be relatively shallow and short-lived. We did not believe them then. We do not believe them now when they say that recovery is coming, and coming soon. I wish, for the sake of millions of people and of thousands of firms, that it were true. Sadly, it is not.

There is one other myth that we must lay to rest. The Chief Secretary talked with astonishing pride of the Government's record on growth during the 1980s. He called it a success story. Let us get the figures perfectly clear. Average growth between 1979 and 1990 was 1.75 per cent. a year. That is the lowest figure achieved by any Government in this country since the second world war. Average growth, incidentally, under the 1974 to 1979 Labour Government was 2 per cent.

Mr. Sayeed

Can the hon. Gentleman give comparative figures for 1982 up to the present day?

Mr. Smith

By asking that question the hon. Gentleman reveals precisely the fallacy in the figures that are constantly trotted out by the Government. Of course, they ask us to look at their performance during the period from when the first recession that they created was finishing until the second recession was beginning, ignoring the periods of negative growth before and afterwards which must also be included in the equation. If the Chief Secretary believes that the worst performance since the war is a success story, he had better think again.

How does the Finance Bill measure up against a background of recession, rising unemployment and negative growth? Our opinion is that it measures up pretty poorly. There are some measures that we welcome. Last year we argued strongly for VAT relief on bad debts at one year rather than two years. Even after further consideration in last year's Finance Bill the Government rejected it. We welcome their repentance now.

For many years now we have been arguing for mortgage interest relief to be available only at the standard rate of tax. The Chief Secretary has recognised belatedly that it is fair to give the same rate of relief to all taxpayers. So why did the Government reject our proposal last year and the year before and why did the present Prime Minister tell the Welsh Tories last July how strongly he condemned Labour for meddling by making precisely that proposal? Again, we welcome the Government's repentance.

One item that was in the Budget but is not specifically included in the Bill is the increase in child benefit. It is long overdue and it is not enough. It involves a miserly 25p for the second and subsequent children, but at least it breaks the freeze and we welcome that repentance, too.

However, we have one question. The Government saved £360 million by freezing the married couple's allowance. They used only £220 million of that saving for the change in child benefit. Why did not they use the whole lot?

Although we welcome some items in the Budget and the Bill, many others are either iniquitous or inadequate or both. Of course, a general relief on corporation tax rates will be welcomed by some businesses, although not all, but it is better than nothing. It does not add up to a so-called Budget for business and will fail entirely to achieve what is most desperately needed—a motor to get investment going again.

That is why before the Budget we proposed a system of enhanced first-year capital allowances for investment in manufacturing industry to help give a kick start to the purchase of new plant, machinery and technology and the carrying out of research. That would have done far more in a far more focused way than anything in the Finance Bill. That is why we also proposed a complete change in the business expansion scheme to attract private funds into new enterprises, especially in the regions. Yet the Bill leaves the business expansion scheme precisely where it was before—a tax haven for the rich that is used almost entirely for investment in private rented property.

I now turn to the miserable measure proposed in the Bill for training enhancement. Any recognition of training needs by a Government who have lopped £350 million off employment training and £300 million off youth training in the past two years is welcome, but what a wasted opportunity it is. We have been given a miserly scheme, hedged about with restrictions, which will cost the Exchequer only £15 million in a full year and will not come in for another year in any case. We could have had a proper recognition of the training needs of industry and a training programme led by Government initiative but drawing on the real enthusiasm to deliver in many industries. We proposed such a programme, but all that we got was £15 million in two years' time. That is hardly a good answer to our underskilled position in the world economic league.

Mr. Ian Taylor

The hon. Gentleman is making a series of interesting expenditure commitments for a putative Labour Government. How do they fit in with the stated priorities of his colleague, the right hon. and learned Member for Monklands, East (Mr. Smith), and the statement on Sunday by the Labour party leader that there is no more cash?

Mr. Smith

Clearly, the hon. Gentleman has not examined properly the proposals that we made in advance of the Budget. We set out clearly and in a costed fashion the measures that we recommended, including a major package of proposals on training, and we set out how we would go about funding them. The hon. Gentleman should examine his facts a little more carefully before intervening again.

Mr. Mans

Will the hon. Gentleman give way?

Mr. Smith

I have only five more minutes and I must get on.

The centrepiece of the Budget and the Bill is the increase in VAT from 15 per cent. to 17.5 per cent. in order to get the Government off the poll tax hook. In a phrase that the Chief Secretary will come to regret, he said—I think that I am quoting him correctly—"In the circumstances in which we found ourselves, this was an appropriate step." Found themselves? Who dreamed up the poll tax? Who voted it through and imposed it on the British people? Who, even now, have offered no word of apology for the unfairness, administrative chaos, hardship and grotesque waste of public money that the poll tax fiasco has caused? The answer is the Government, including the Chief Secretary. The blame for the poll tax and for the shift in taxation to mitigate its electoral impact will lie fairly and squarely with the Government. The VAT increase is putting up prices, making people worse off and fuelling the underlying rate of inflation. The Government have made the wrong choice in their desperation to get rid of the poll tax liability that they created.

There is precious little in the Budget for the environment. The Government have taken some steps to bring company car taxation more into line with the proper value of the benefit. However, there is still no satisfactory distinction in the tax system between a car provided as a perk and one that is an essential tool of the trade. Where are the imaginative measures that could have been taken? We proposed an increase in the differential between leaded and unleaded petrol, an incentive for the fitting of catalytic converters, incentives for the purchase of environmentally sensitive products and the carrying out of home improvements, a graded scale of vehicle excise duty to encourage the use of smaller cars and a levy on landfill waste disposal. Such a programme of measures could have used the taxation system to help the environment. The Government have totally failed to take up that challenge.

The Bill fails to take up the challenges facing our economy. It will do virtually nothing to help lift us out of recession. It will do precious little for families with children. It will do hardly anything for the environment. The Government started with a recession and are ending with a recession with an irresponsible short-term boom in the middle. They have failed the economy, as does the Bill. It is time for a Labour Government to start the recovery.

9.39 pm

The Financial Secretary to the Treasury (Mr. Francis Maude)

The Budget will, this year alone, make available to business three quarters of a billion pounds by not taxing it to the extent that it would have been taxed without the changes in the Bill. That decision was taken because we know that businesses are going through a difficult period. The recession will not go on for ever. We can speculate endlessly about when it will end, but we know that it certainly will end, and that when it does, British business will be well placed to grow in the 1990s as it did in the 1980s.

The hon. Member for Derby, South (Mrs. Beckett) seemed to forget that the debate was on the Finance Bill. She sent her researchers scurrying to find every bad statistic and every chance remark made by a commentator to construct a dreary litany of gloom. There was no good news that could not be rubbished and no bad news that could not be magnified. Sadly, she neglected the Bill and its important contribution to stimulating and encouraging recovery.

We listened with interest to the hon. Member for Berwick-upon-Tweed (Mr. Beith), who maintained a curious combination of contentions—that inflation was out of control but that we should relax monetary policy by cutting interest rates. He seems to have become a late convert to the "Monklands law" that, whatever the interest rate, it should be lower. I am sure that the right hon. and learned Member for Monklands, East (Mr. Smith) is pleased to have a convert. It is important to be aware of the priority that the hon. Gentleman attaches to the reduction and control of inflation.

The debate, as always, attracted many important and serious speeches. One thinks particularly of my right hon. Friend the Member for Worthing (Mr. Higgins), whose Committee has done such important work on the subject. He made, as usual, a speech of great authority, to which we listened with great respect.

The hon. Member for Stalybridge and Hyde (Mr. Pendry) made a series of extraordinary allegations that will surprise my hon. Friend the Minister for Sport when he reads them in Hansard. He made several points; I regret that I did not answer them earlier, so perhaps I shall deal with a few of them now. Consultations are being held on the creation of the foundation for sport and the arts. It was always clear that we would contribute only if all three pools promoters participated, if the foundation was established on acceptable terms and if all the duty cut was passed to the foundation. He asked why the Bill does not cut the duty. That will appear as a new clause in Committee, with other Budget proposals that were not ready for inclusion when the Bill was published. I am sure that my right hon. and learned Friend the Chief Secretary will deal in detail with any further questions from the hon. Gentleman.

I am sorry that I missed the speech of my hon. Friend the Member for Corby (Mr. Powell), but I have seen a note of it. He mentioned inheritance tax and the possibility of 100 per cent. relief for businesses, which I have discussed with him previously. Already, 50 per cent. relief is available for substantial holdings in unquoted companies, which means an effective rate of 20 per cent. That compares well with regimes in other countries. Help is available in paying inheritance tax, such as payment over 10 years with interest-free instalments.

My hon. Friends the Members for Esher (Mr. Taylor) and for Wyre (Mr. Mans) spoke of the proposals to encourage the use of employee share schemes. I am grateful for their support. The proposals will take this important process further, which is to be widely welcomed. I am sorry that it was not more widely welcomed by Opposition Members, who I would have thought would favour workers having the opportunity of being encouraged to participate directly in the success of the enterprises for which they work.

My hon. Friends the Members for Stamford and Spalding (Mr. Davies) and for Bexhill and Battle (Mr. Wardle) made important and serious speeches. They both have considerable experience in the commercial world, which benefits their contributions and our debates.

My right hon.Friend the Member for Croydon, South (Sir W. Clark) referred to clause 50 and my hon. Friend the Member for Eltham (Mr. Bottomley) mentioned it in an intervention. I know that several of my right hon. and hon. Friends have expressed concern about its provisions. We have listened seriously to what they have said about this difficult and technical set of issues. No doubt they can be thoroughly explored in Committee and I look forward to my right hon. and hon. Friends' contributions to those debates. I believe that the measure is right. It does not involve any double taxation and it is not retrospective. It simply remedies a technical defect and without it there would be a return to the building societies' general funds—not to the investors or depositors on whose interest the tax was levied in the first place—of the tax that properly should have been paid and properly was paid. I repeat that, without the provisions, there would be a capricious return of that tax to the building societies, which would reflect, at random, the point in the financial year at which their accounting year ended.

Sir William Clark

In view of the interest in clause 50 among my hon. Friends and the importance of retrospection and double taxation, would it not be a good idea if that clause were discussed on the Floor of the House rather than upstairs in Committee?

Mr. Maude

I hear what my right hon. Friend says. As he knows, such matters tend to be discussed through what are delicately known as "the usual channels" and no doubt they will be discussed in that way. Nevertheless, we are very much aware of the concern about this. The case for proceeding with clause 50 is powerful and we have considered it extremely carefully. I look forward to the opportunity of continuing the task of persuading my right hon. Friend that it is right.

Mr. Peter Bottomley

I do not want to dispute what my hon. Friend has said because he has much of the Finance Bill to cover in the next 14 minutes, but may I refer other hon. Members to the House of Lords judgments, because there is at least a point of argument about whether everything that their Lordships have said has been accepted by my hon. Friend?

Mr. Maude

My hon. Friend makes the point that there are disputed matters. There is plenty of scope for argument, and I look forward to pursuing the subject with my right hon. and hon. Friends—or rather my hon. Friend the Economic Secretary is looking forward to pursing this matter in Committee. Comes the hour, comes the man, and I am sure that my hon. Friend the Economic Secretary will deal persuasively with this point in Committee.

My right hon. Friend the Member for Croydon, South also referred to mobile telephones. I know of his concern about what he describes as a petty measure. I do not believe that it is petty. The private benefit of a portable telephone that is provided by an employer is already chargeable to tax but, at the moment, if it is to be properly accounted for, the employer has to keep detailed fiddly records, and that is a burden upon him. The introduction of a simple scale charge, at a modest level that would reflect only slight private use of the portable telephone, is a simplifying measure that will make life easier for employers. There has been a great deal of misrepresentation about the effect of this measure, but I believe that it is right. It is also right that we should extend it to car phones.

Sir William Clark

Why should my hon. Friend suggest placing extra administrative burdens on small business men because of some private use, when mobile telephones produce about £10 million for the Exchequer? Surely that is administrative nonsense.

Mr. Maude

The point I was making was that the introduction of a simple scale charge would reduce the burden on small businesses because if there is a private benefit from the use of a portable phone, that is already chargeable to tax and already required to be accounted for in detail to the Inland Revenue. That seems burdensome; it would be simpler and better to replace it with a straightforward and modest scale charge.

My hon. Friend the Member for East Lindsey (Sir P. Tapsell) raised the issue of capital gains tax in general terms. I am not one of the Financial Secretaries who has had the benefit of a conversation about that with him, but I look forward to doing so and to pursuing the points that he argued so persuasively.

My hon. Friend the Member for Bristol, East (Mr. Sayeed) talked about shipping. I know that there is concern about that, but as my right hon. Friend the Chancellor said in the Budget statement, there are limits to the extent to which the tax system can be skewed towards the special needs of a particular industry. It is worth saying that ships already receive capital allowances of 25 per cent. a year, which gives nearly full relief over seven to eight years. That compares with the average economic life of a ship—bought new—of 15 to 20 years, so the present regime already gives more relief more quickly against tax than would be the case if there were a straightforward allowance for commercial depreciation. The most important help that we can give the shipping industry is to foster business generally. Shipping will benefit from many of the other measures contained in the Budget, especially the cut in the main corporation tax rate.

Mr. Sayeed

Does my hon. Friend accept that our position is extremely poor vis-à-vis those countries with whom we must compete if we are to have an effective merchant marine because our competitors have much better capital allowance systems?

Mr. Maude

There are different capital tax regimes and corporation tax regimes in different countries and that will always be the case. As a result of the Budget, we now have a corporation tax regime that will give us the lowest tax rate of any country in the European Community—indeed, of any country in the Group of Seven. That is a massive advantage to British business, including shipping. We should emphasise the great benefits that will flow from that system.

Many of the contributions from the Opposition referred to investment. It is important, but it is not an end in itself—it is a means to increase productivity and to improve business. However, sometimes the Opposition talk as though investment were intrinsically desirable and as though one measured the success of an economy by the increase in the amount of investment. The economy did not grow to the extent that it did in the 1980s merely because there were record levels of investment; it grew because productivity increased, because industrial relations improved and because innovation increased. One can sometimes make too much of the influence of Governments on investment. Tinkering via investment, subsidies or other means to alter the relationship between the cost of capital and the rate of return on investment has noticeably failed. Those are not my words, but those of the right hon. and learned Member for Monklands, East, in a speech that he made about five years ago. I think that he was right. He made the perceptive point that what matters is the real commercial rate of return on investment, not the artificial rate of return that is created by tax incentives and by subsidies. I am sorry that he has regressed from that position to the point where he and the Labour party now argue for increased capital allowances for industry, and for a tax credit for additional research and development. At one point, it seemed that the Labour party had accepted the Government's approach to corporation tax and it is sad that the right hon. and learned Gentleman has apparently not learnt the lesson but has regressed to previous heresies.

This evening, we have heard much about what the Labour party would not like to see. We have heard less about Opposition Members do want. We know that they want to spend more public money because they have said so. That is a plausible claim and we believe that part of what they say because the Labour party has always spent more money when it has been in government. However, it is less clear where that money will come from.

Oddly enough, the Labour party's documents do not throw much light——

Mr. Allan Rogers (Rhondda)

Which documents?

Mr. Maude

I will show where the information comes from if that will help the hon. Member for Rhondda (Mr. Rogers) because he will not get the information from Opposition Front-Bench spokesmen.

The Opposition claim that they will raise £1 billion by tackling offshore trusts. That is a spendid idea, but there are two snags. The first is that we are already doing that, and the second is that it will raise not £1 billion, but less than £100 million. There is no pot of gold there. What is the Opposition's next wheeze? "Opportunity Britain" states that there is £5 billion in uncollected taxes, enough to pay for the entire backlog of school repairs and rebuilding. Once again that is a pot of gold and a windfall of £5 billion just waiting to be scooped in. However, there is one problem That money does not stay uncollected. It is the amount of tax which, by the end of the Inland Revenue accounting year, happens not to have been collected. Nearly all of it is collected soon afterwards, much of it with interest added. Bang goes another pot of gold and with it bang goes Labour's programme for school repairs and rebuilding.

Mr. Alfred Morris (Manchester, Wythenshawe)

With regard to collecting taxes, the Financial Secretary to the Treasury is aware of the vitally important cancer research at the Paterson institute in south Manchester and I use the word "vitally" in its literal sense. Is he aware that the institute faces a VAT bill of £1.2 million on its voluntary funded work and that that will now increase to £1.4 million? Is there nothing that he can do to help?

Mr. Maude

The right hon. Gentleman raised that matter at Treasury questions a few days ago. I explained then that there are limits on the extent to which exemptions can be given under European Community law. There are already tax reliefs worth £800 million a year to charities, of which £150 million are reliefs on VAT. However, there are limits to the extent to which they can be extended. We understand what the right hon. Gentleman has said, and no doubt my hon. Friend the Minister of State will consider the point.

Where else will the money come from to pay for Labour's spending programme? "Opportunity Britain" states: We will increase the Inland Revenue staffing and introduce tougher tax laws thus raising substantial extra income for public services. That is the key. This brave new programme for "Opportunity Britain" is not just a tax collection programme; it is a job creation scheme. The brave new programme means more tax men and more staff for the Inland Revenue.

What about those tougher tax laws? What tax laws? Are all tax laws to be made a bit tougher or are some to be made a lot tougher? Which tax laws? How much extra income? From whom? What on? Who pays? How much and who collects it? Where are the answers to those questions?

What are the Opposition going to do about VAT? Apparently, the Opposition now accept the increase in VAT that we are introducing this year. However, I recall that when my right hon. Friend the Chancellor of the Exchequer introduced his Budget, the Leader of the Opposition claimed that that was not a fair way to collect additional taxation. Does that view still stand? Would the Opposition reverse the increase? If so, where are they going to get the extra money? If they are not going to reverse it, why did the Leader of the Opposition say that it was unfair? Either they propose to leave in place something that they believe to be unfair or they believe that it is fair and the Leader of the Opposition has got it wrong. If he got it wrong, he should apologise. Which is it? Where are the answers? When it comes to taxes, the answer is always the same—"Tax the rich". That is what they always claim to do. They think that somehow the British public will accept that there is a painless way to raise all the extra tax.

We know what they have done. We do not need to look at the crystal ball; we can read it in the books. All Labour Governments have increased the basic rate of tax—the rate of tax that every taxpayer pays—and yet all Labour Governments have claimed in opposition that they would increase tax only on the rich. We need only to look at the history books. In the 1960s, the Labour Government increased the basic rate of tax by 2½ per cent. In the 1970s, they increased it by 5 per cent. Had they told the electorate that? No, of course they had not. They were very coy about it. The British people know what they propose to do. The British people know that a Labour Government, like Labour councils, mean high spending and high taxes. They have had it once, they have had it several times, and they do not want it again. That is why they will continue to return a Conservative Government.

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

The House divided: Ayes 310, Noes 209.

Division No. 132]	[10 pm
AYES
Adley, Robert	Bright, Graham
Aitken, Jonathan	Brown, Michael (Brigg & Cl't's)
Alison, Rt Hon Michael	Browne, John (Winchester)
Allason, Rupert	Bruce, Ian (Dorset South)
Amess, David	Buchanan-Smith, Rt Hon Alick
Amos, Alan	Buck, Sir Antony
Arbuthnot, James	Burns, Simon
Arnold, Jacques (Gravesham)	Butterfill, John
Arnold, Sir Thomas	Carlisle, John, (Luton N)
Ashby, David	Carlisle, Kenneth (Lincoln)
Aspinwall, Jack	Carrington, Matthew
Atkinson, David	Carttiss, Michael
Baker, Rt Hon K. (Mole Valley)	Cartwright, John
Baker, Nicholas (Dorset N)	Cash, William
Baldry, Tony	Chalker, Rt Hon Mrs Lynda
Banks, Robert (Harrogate)	Channon, Rt Hon Paul
Batiste, Spencer	Chapman, Sydney
Beaumont-Dark, Anthony	Chope, Christopher
Bellingham, Henry	Churchill, Mr
Bendall, Vivian	Clark, Rt Hon Alan (Plymouth)
Bennett, Nicholas (Pembroke)	Clark, Rt Hon Sir William
Benyon, W.	Clarke, Rt Hon K. (Rushcliffe)
Bevan, David Gilroy	Colvin, Michael
Biffen, Rt Hon John	Coombs, Anthony (Wyre F'rest)
Blackburn, Dr John G.	Coombs, Simon (Swindon)
Blaker, Rt Hon Sir Peter	Cope, Rt Hon John
Body, Sir Richard	Cormack, Patrick
Bonsor, Sir Nicholas	Couchman, James
Boscawen, Hon Robert	Cran, James
Boswell, Tim	Currie, Mrs Edwina
Bottomley, Peter	Curry, David
Bottomley, Mrs Virginia	Davies, Q. (Stamf'd & Spald'g)
Bowden, A. (Brighton K'pto'n)	Davis, David (Boothferry)
Bowden, Gerald (Dulwich)	Day, Stephen
Bowis, John	Devlin, Tim
Boyson, Rt Hon Dr Sir Rhodes	Dicks, Terry
Braine, Rt Hon Sir Bernard	Dorrell, Stephen
Brandon-Bravo, Martin	Douglas-Hamilton, Lord James
Brazier, Julian	Dover, Den

Dunn, Bob	Knight, Dame Jill (Edgbaston)
Durant, Sir Anthony	Knowles, Michael
Dykes, Hugh	Knox, David
Emery, Sir Peter	Lang, Rt Hon Ian
Evans, David (Welwyn Hatf'd)	Latham, Michael
Evennett, David	Lawrence, Ivan
Fairbairn, Sir Nicholas	Lee, John (Pendle)
Fallon, Michael	Leigh, Edward (Gainsbor'gh)
Favell, Tony	Lester, Jim (Broxtowe)
Fenner, Dame Peggy	Lilley, Rt Hon Peter
Fishburn, John Dudley	Lloyd, Sir Ian (Havant)
Fookes, Dame Janet	Lord, Michael
Forsyth, Michael (Stirling)	Luce, Rt Hon Sir Richard
Fowler, Rt Hon Sir Norman	Lyell, Rt Hon Sir Nicholas
Fox, Sir Marcus	McCrindle, Sir Robert
Freeman, Roger	MacGregor, Rt Hon John
French, Douglas	MacKay, Andrew (E Berkshire)
Fry, Peter	Maclean, David
Gardiner, Sir George	McNair-Wilson, Sir Patrick
Gill, Christopher	Madel, David
Gilmour, Rt Hon Sir Ian	Major, Rt Hon John
Glyn, Dr Sir Alan	Malins, Humfrey
Goodhart, Sir Philip	Mans, Keith
Goodlad, Alastair	Maples, John
Goodson-Wickes, Dr Charles	Marlow, Tony
Gorman, Mrs Teresa	Marshall, John (Hendon S)
Gorst, John	Martin, David (Portsmouth S)
Grant, Sir Anthony (CambsSW)	Mates, Michael
Greenway, Harry (Ealing N)	Maude, Hon Francis
Greenway, John (Ryedale)	Mellor, Rt Hon David
Gregory, Conal	Meyer, Sir Anthony
Griffiths, Sir Eldon (Bury St E')	Miller, Sir Hal
Griffiths, Peter (Portsmouth N)	Mills, Iain
Grist, Ian	Miscampbell, Norman
Ground, Patrick	Mitchell, Andrew (Gedling)
Grylls, Michael	Moate. Roger
Hague, William	Monro, Sir Hector
Hamilton, Neil (Tatton)	Montgomery, Sir Fergus
Hampson, Dr Keith	Moore, Rt Hon John
Hannam, John	Morris, M (N'hampton S)
Hargreaves, A. (B'ham H'll Gr')	Morrison, Sir Charles
Hargreaves, Ken (Hyndburn)	Morrison, Rt Hon Sir Peter
Harris, David	Moss, Malcolm
Haselhurst, Alan	Mudd, David
Hawkins. Christopher	Neale, Sir Gerrard
Hayes, Jerry	Needham, Richard
Hayward, Robert	Nelson, Anthony
Heseltine, Rt Hon Michael	Neubert, Sir Michael
Hicks, Mrs Maureen (Wolv' NE)	Nicholls, Patrick
Hicks, Robert (Cornwall SE)	Nicholson, David (Taunton)
Higgins, Rt Hon Terence L.	Nicholson, Emma (Devon West)
Hill, James	Norris, Steve
Hind, Kenneth	Onslow, Rt Hon Cranley
Hogg, Hon Douglas (Gr'th'm)	Page, Richard
Holt, Richard	Paice, James
Hordern, Sir Peter	Patnick, Irvine
Howard, Rt Hon Michael	Patten, Rt Hon Chris (Bath)
Howarth, Alan (Straf'd-on-A)	Patten, Rt Hon John
Howarth, G. (Cannock & B'wd)	Pattie, Rt Hon Sir Geoffrey
Howe, Rt Hon Sir Geoffrey	Peacock, Mrs Elizabeth
Howell, Rt Hon David (G'dford)	Porter, Barry (Wirral S)
Howell, Ralph (North Norfolk)	Porter, David (Waveney)
Hunt, Rt Hon David	Portillo, Michael
Hunt, Sir John (Ravensbourne)	Powell, William (Corby)
Hunter, Andrew	Price, Sir David
Hurd, Rt Hon Douglas	Raffan, Keith
Irvine, Michael	Raison, Rt Hon Sir Timothy
Jack, Michael	Redwood, John
Jackson, Robert	Renton, Rt Hon Tim
Janman, Tim	Riddick, Graham
Jessel, Toby	Ridley, Rt Hon Nicholas
Johnson Smith, Sir Geoffrey	Ridsdale, Sir Julian
Jones, Robert B (Herts W)	Rifkind, Rt Hon Malcolm
Jopling, Rt Hon Michael	Roberts, Sir Wyn (Conwy)
Key, Robert	Roe, Mrs Marion
Kilfedder, James	Rossi, Sir Hugh
King, Roger (B'ham N'thfield)	Rost, Peter
King, Rt Hon Tom (Bridgwater)	Rowe, Andrew
Kirkhope, Timothy	Ryder, Rt Hon Richard
Knight, Greg (Derby North)	Sackville, Hon Tom

Sayeed, Jonathan	Townend, John (Bridlington)
Scott, Rt Hon Nicholas	Townsend, Cyril D. (B'heath)
Shaw, David (Dover)	Tracey, Richard
Shaw, Sir Michael (Scarb')	Tredinnick, David
Shelton, Sir William	Trippier, David
Shephard, Mrs G. (Norfolk SW)	Trotter, Neville
Shepherd, Colin (Hereford)	Twinn, Dr Ian
Shepherd, Richard (Aldridge)	Vaughan, Sir Gerard
Shersby, Michael	Viggers, Peter
Sims, Roger	Wakeham, Rt Hon John
Skeet, Sir Trevor	Waldegrave, Rt Hon William
Smith, Tim (Beaconsfield)	Walden, George
Soames, Hon Nicholas	Walker, Bill (T'side North)
Speed, Keith	Walker, Rt Hon P. (W'cester)
Speller, Tony	Waller, Gary
Spicer, Sir Jim (Dorset W)	Walters, Sir Dennis
Squire, Robin	Ward, John
Stanbrook, Ivor	Wardle, Charles (Bexhill)
Stanley, Rt Hon Sir John	Warren, Kenneth
Steen, Anthony	Watts, John
Stern, Michael	Wells, Bowen
Stevens, Lewis	Wheeler, Sir John
Stewart, Allan (Eastwood)	Whitney, Ray
Stewart, Andy (Sherwood)	Widdecombe, Ann
Stewart, Rt Hon Ian (Herts N)	Wiggin, Jerry
Stokes, Sir John	Wilkinson, John
Sumberg, David	Wilshire, David
Summerson, Hugo	Winterton, Mrs Ann
Tapsell, Sir Peter	Winterton, Nicholas
Taylor, Ian (Esher)	Wolfson, Mark
Taylor, Teddy (S'end E)	Wood, Timothy
Tebbit, Rt Hon Norman	Woodcock, Dr. Mike
Temple-Morris, Peter	Young, Sir George (Acton)
Thompson, D. (Calder Valley)	Younger, Rt Hon George
Thompson, Patrick (Norwich N)
Thorne, Neil	Tellers for the Ayes:
Thornton, Malcolm	Mr. David Lightbown and Mr. John M. Taylor.
Thurnham, Peter

NOES
Abbott, Ms Diane	Crowther, Stan
Adams, Mrs Irene (Paisley, N.)	Cryer, Bob
Allen, Graham	Cummings, John
Archer, Rt Hon Peter	Cunliffe, Lawrence
Armstrong, Hilary	Cunningham, Dr John
Ashton, Joe	Dalyell, Tam
Banks, Tony (Newham NW)	Darling, Alistair
Barnes, Harry (Derbyshire NE)	Davies, Rt Hon Denzil (Llanelli)
Barron, Kevin	Davis, Terry (B'ham Hodge H'I)
Battle, John	Dewar, Donald
Beckett, Margaret	Dixon, Don
Beggs, Roy	Dobson, Frank
Beith, A. J.	Doran, Frank
Benn, Rt Hon Tony	Douglas, Dick
Bennett, A. F. (D'nt'n & R'dish)	Duffy, A. E. P.
Benton, Joseph	Dunnachie, Jimmy
Bermingham, Gerald	Eadie, Alexander
Boateng, Paul	Evans, John (St Helens N)
Boyes, Roland	Ewing, Harry (Falkirk E)
Bradley, Keith	Ewing, Mrs Margaret (Moray)
Bray, Dr Jeremy	Fatchett, Derek
Brown, Gordon (D'mline E)	Faulds, Andrew
Brown, Nicholas (Newcastle E)	Fearn, Ronald
Brown, Ron (Edinburgh Leith)	Field, Frank (Birkenhead)
Bruce, Malcolm (Gordon)	Fisher, Mark
Buckley, George J.	Flannery, Martin
Caborn, Richard	Flynn, Paul
Callaghan, Jim	Foot, Rt Hon Michael
Campbell, Menzies (Fife NE)	Forsythe, Clifford (Antrim S)
Campbell, Ron (Blyth Valley)	Foster, Derek
Canavan, Dennis	Foulkes, George
Carlile, Alex (Mont'g)	Fraser, John
Carr, Michael	Fyfe, Maria
Clark, Dr David (S Shields)	Galbraith, Sam
Clarke, Tom (Monklands W)	Galloway, George
Clelland, David	Garrett, John (Norwich South)
Cohen, Harry	George, Bruce
Cook, Robin (Livingston)	Gilbert, Rt Hon Dr John
Corbett, Robin	Godman, Dr Norman A.
Corbyn, Jeremy	Golding, Mrs Llin

Gordon, Mildred	Nellist, Dave
Gould, Bryan	Oakes, Rt Hon Gordon
Grant, Bernie (Tottenham)	O'Brien, William
Griffiths, Nigel (Edinburgh S)	O'Neill, Martin
Griffiths, Win (Bridgend)	Orme, Rt Hon Stanley
Grocott, Bruce	Parry, Robert
Hain, Peter	Patchett, Terry
Hardy, Peter	Pendry, Tom
Harman, Ms Harriet	Pike, Peter L.
Hattersley, Rt Hon Roy	Powell, Ray (Ogmore)
Haynes, Frank	Prescott, John
Heal, Mrs Sylvia	Primarolo, Dawn
Healey, Rt Hon Denis	Quin, Ms Joyce
Henderson, Doug	Radice, Giles
Hinchliffe, David	Randall, Stuart
Hoey, Ms Kate (Vauxhall)	Redmond, Martin
Hogg, N. (C'nauld & Kilsyth)	Rees, Rt Hon Merlyn
Hood, Jimmy	Reid, Dr John
Howarth, George (Knowsley N)	Richardson, Jo
Howells, Dr. Kim (Pontypridd)	Robertson, George
Hoyle, Doug	Robinson, Geoffrey
Hughes, John (Coventry NE)	Rogers, Allan
Hughes, Robert (Aberdeen N)	Rooker, Jeff
Illsley, Eric	Rooney, Terence
Janner, Greville	Ross, Ernie (Dundee W)
Johnston, Sir Russell	Ross, William (Londonderry E)
Kaufman, Rt Hon Gerald	Rowlands, Ted
Kennedy, Charles	Ruddock, Joan
Kinnock, Rt Hon Neil	Salmond, Alex
Kirkwood, Archy	Sedgemore, Brian
Lambie, David	Sheerman, Barry
Leadbitter, Ted	Sheldon, Rt Hon Robert
Leighton, Ron	Shore, Rt Hon Peter
Lestor, Joan (Eccles)	Short, Clare
Lewis, Terry	Skinner, Dennis
Lloyd, Tony (Stretford)	Smith, Andrew (Oxford E)
Lofthouse, Geoffrey	Smith, C. (Isl'ton & F'bury)
Loyden, Eddie	Smith, Rt Hon J. (Monk'ds E)
McAllion, John	Snape, Peter
McAvoy, Thomas	Soley, Clive
Macdonald, Calum A.	Spearing, Nigel
McFall, John	Steel, Rt Hon Sir David
McKay, Allen (Barnsley West)	Steinberg, Gerry
McKelvey, William	Stott, Roger
McLeish, Henry	Strang, Gavin
Maclennan, Robert	Taylor, Mrs Ann (Dewsbury)
McMaster, Gordon	Taylor, Rt Hon J. D. (S'ford)
McNamara, Kevin	Taylor, Matthew (Truro)
McWilliam, John	Turner, Dennis
Madden, Max	Vaz, Keith
Mahon, Mrs Alice	Wallace, James
Marek, Dr John	Walley, Joan
Marshall, David (Shettleston)	Wardell, Gareth (Gower)
Marshall, Jim (Leicester S)	Wareing, Robert N.
Martin, Michael J. (Springburn)	Watson, Mike (Glasgow, C)
Maxton, John	Welsh, Andrew (Angus E)
Meacher, Michael	Welsh, Michael (Doncaster N)
Meale, Alan	Williams, Rt Hon Alan
Michie, Bill (Sheffield Heeley)	Winnick, David
Michie, Mrs Ray (Arg'l & Bute)	Worthington, Tony
Mitchell, Austin (G't Grimsby)	Wray, Jimmy
Moonie, Dr Lewis	Young, David (Bolton SE)
Morgan, Rhodri
Morris, Rt Hon A. (Wshawe)	Tellers for the Noes:
Morris, Rt Hon J. (Aberavon)	Mr. Ken Eastham and Mr. Jack Thompson.
Mullin, Chris
Murphy, Paul

Question accordingly agreed to.

Bill read a Second time.

Motion mae, and Question proposed,

That Clause Nos. 14, 21, 22, 23, 24, 31 and 77 and Schedule 14 be committed to a Committee of the whole Housse;

That the remainder of the Bill be Committed to Standing Committee;

That, when the provisions of the Bill considered, respectively, by the Committee of the whole House and by the Standing Committee have been reported to the House, the Bill be proceeded with as if the Bill had been reported as a whole to the House from the Standing Committee.—[Mr. Maude.]

10.15 pm

Mr. Peter Bottomley (Eltham)

I beg to oppose the motion.

For procedural reasons, I am speaking against the Government motion. I should, if I had been in order, have preferred to speak in favour of my instruction, but I understand that that is not possible.

I want to argue why clause 50 should be taken on the Floor of the House, and it may be for the convenience of the House if I do that fairly briefly.

It was a mistake for the Government to use the Budget in 1985 rather than primary legislation to achieve what they were after.—[Interruption.

Mr. Speaker

Order. Would hon. Members below the Gangway please either leave the Chamber or come in and sit quietly?

Mr. Bottomley

It would have been possible in a debate on the Floor of the House to argue that it might have been better for the Government to consult the Building Societies Association over what effect their regulations might have, rather than go through three sets of the law courts. It would be possible to argue in a Committee of the whole House that it has been a mistake for the Government to keep trying to change the law, and certainly it would be possible to argue that it was a mistake for the Government to keep the cash for five months after the House of Lords judgments on 25 October 1990. That may be a matter which could be dealt with in other ways. I have today referred the matter to the Parliamentary Commissioner.

The difficulty that the House is in is that the House of Lords has judged very clearly that the House of Commons did not know what it was doing when it approved the amended regulations. The fact that the Revenue knew that the regulations by themselves were not sufficient is shown by the fact that they amended them.

Page 4 of the Building Societies Association letter could be quoted in a debate on the Floor of the House, where it says that the House of Lords held that there was a fundamental flaw in the regulations—this is the important point which should be considered by the whole House—"consequent on the double taxation."

There is also, on page 3 of the letter from the Leeds Permanent building society to my right hon. Friend the Chancellor, the statement: In the unanimous opinion of the House of Lords, the retrospective Regulations tax twice. There is a subsidiary issue as to whether subsequent regulations of the House allowed the Revenue to tax twice, and that I think is a matter for the whole House. I do not think that anyone in the House realised at the time that that was what was happening.

The final point, on page 4 of the Leeds letter, to which I would have referred if there had been a debate on the Floor of the House, is that the Inland Revenue's counsel argued in the House of Lords that he found it too embarrassing to defend the Government's windfall claim. That is a point which I was making to my hon. Friend the Financial Secretary more obliquely. The letter goes on to say that the counsel for the Revenue told their Lordships that they should not ask themselves if this was 'just or unjust', but only whether Parliament had, by the 1986 retrospective amendment, 'decreed this state of affairs, just or unjust'. It is clearly a matter for the whole House to decide whether it is just or unjust. That is why I argue that we ought to have clause 50 on the Floor of the House. However, if we cannot do it in a Committee of the whole House, we shall have to wait until the Standing Committee reports back to the House. Those are the words of Lord Oliver on page 9 of his judgment, Lord Goff on page 18 and Lord Lowry on page 25. Those seem to be points to which all hon. Members will,want to refer.

My final point is one not of constitutional procedure but of politics. If each member of a building society loses £25 on average, there is the prospect of 10 million people writing to their Member of Parliament or to my right hon. Friends the Chancellor or the Prime Minister asking for their money back. That strikes me as rather inappropriate politics if we have a general election within the next year. My guess is that, on reconsideration, the Government will want either to change clause 50 or, preferably, to drop it. I hope that, between now and when the clause is debated, they will decide to do the latter.

The Financial Secretary to the Treasury (Mr. Francis Maude)

rose——

Mr. Tim Smith (Beaconsfield)

rose——

Mr. Speaker

Order. I am afraid that there can be only one speech against the committal motion.

Question put, pursuant to Standing Order No. 61 (Committal of Bills):—

The House divided: Ayes 290, Noes 28.

Division No. 133]	[10.20 pm
AYES
Adley, Robert	Browne, John (Winchester)
Aitken, Jonathan	Bruce, Ian (Dorset South)
Alison, Rt Hon Michael	Buchanan-Smith, Rt Hon Alick
Allason, Rupert	Buck, Sir Antony
Amess, David	Burns, Simon
Amos, Alan	Butterfill, John
Arbuthnot, James	Carlisle, John, (Luton N)
Arnold, Jacques (Gravesham)	Carlisle, Kenneth (Lincoln)
Arnold, Sir Thomas	Carrington, Matthew
Ashby, David	Carttiss, Michael
Aspinwall, Jack	Cash, William
Atkinson, David	Chalker, Rt Hon Mrs Lynda
Baker, Rt Hon K. (Mole Valley)	Chapman, Sydney
Baker, Nicholas (Dorset N)	Chope, Christopher
Baldry, Tony	Churchill, Mr
Batiste, Spencer	Clark, Rt Hon Alan (Plymouth)
Beaumont-Dark, Anthony	Clarke, Rt Hon K. (Rushcliffe)
Beckett, Margaret	Colvin, Michael
Bellingham, Henry	Coombs, Anthony (Wyre F'rest)
Bendall, Vivian	Coombs, Simon (Swindon)
Bennett, Nicholas (Pembroke)	Cope, Rt Hon John
Bitten, Rt Hon John	Couchman, James
Blackburn, Dr John G.	Cran, James
Blaker, Rt Hon Sir Peter	Currie, Mrs Edwina
Boateng, Paul	Curry, David
Body, Sir Richard	Davies, Q. (Stamf'd & Spald'g)
Boscawen, Hon Robert	Davis, David (Boothferry)
Bos well, Tim	Day, Stephen
Bottomley, Mrs Virginia	Devlin, Tim
Bowden, A. (Brighton K'pto'n)	Dixon, Don
Bowden, Gerald (Dulwich)	Dorrell, Stephen
Bowis, John	Douglas-Hamilton, Lord James
Boyson, Rt Hon Dr Sir Rhodes	Dover, Den
Brandon-Bravo, Martin	Dunn, Bob
Brazier, Julian	Durant, Sir Anthony
Bright, Graham	Dykes, Hugh
Brown, Michael (Brigg & Cl't's)	Emery, Sir Peter

Evans, David (Welwyn Hatf'd)	Jessel, Toby
Evennett, David	Johnson Smith, Sir Geoffrey
Fairbairn, Sir Nicholas	Jones, Robert B (Herts W)
Fallon, Michael	Jopling, Rt Hon Michael
Favell, Tony	Key, Robert
Fenner, Dame Peggy	Kilfedder, James
Fishburn, John Dudley	King, Roger (B'ham N'thfield)
Flynn, Paul	King, Rt Hon Tom (Bridgwater)
Fookes, Dame Janet	Kirkhope, Timothy
Forsyth, Michael (Stirling)	Knight, Greg (Derby North)
Foster, Derek	Knight, Dame Jill (Edgbaston)
Fox, Sir Marcus	Knowles, Michael
Freeman, Roger	Knox, David
French, Douglas	Lang, Rt Hon Ian
Fry, Peter	Lawrence, Ivan
Gardiner, Sir George	Lee, John (Pendle)
Gill, Christopher	Leigh, Edward (Gainsbor'gh)
Gilmour, Rt Hon Sir Ian	Lester, Jim (Broxtowe)
Glyn, Dr Sir Alan	Lilley, Rt Hon Peter
Golding, Mrs Llin	Lloyd, Sir Ian (Havant)
Goodhart, Sir Philip	Lord, Michael
Goodlad, Alastair	Luce, Rt Hon Sir Richard
Goodson-Wickes, Dr Charles	Lyell, Rt Hon Sir Nicholas
Gorman, Mrs Teresa	McCrindle, Sir Robert
Gorst, John	MacGregor, Rt Hon John
Grant, Sir Anthony (CambsSW)	MacKay, Andrew (E Berkshire)
Greenway, Harry (Ealing N)	Maclean, David
Greenway, John (Ryedale)	McNair-Wilson, Sir Patrick
Gregory, Conal	Madel, David
Griffiths, Peter (Portsmouth N)	Major, Rt Hon John
Grist, Ian	Malins, Humfrey
Ground, Patrick	Mans, Keith
Grylls, Michael	Maples, John
Hague, William	Marlow, Tony
Hamilton, Neil (Tatton)	Marshall, John (Hendon S)
Hampson, Dr Keith	Martin, David (Portsmouth S)
Hannam, John	Martin, Michael J. (Springburn)
Hargreaves, A. (B'ham H'll Gr')	Maude, Hon Francis
Hargreaves, Ken (Hyndburn)	Mellor, Rt Hon David
Harris, David	Meyer, Sir Anthony
Haselhurst, Alan	Miller, Sir Hal
Hawkins, Christopher	Mills, Iain
Hayes, Jerry	Miscampbell, Norman
Haynes, Frank	Mitchell, Andrew (Gedling)
Hayward, Robert	Moate, Roger
Heseltine, Rt Hon Michael	Monro, Sir Hector
Hicks, Mrs Maureen (Wolv' NE)	Montgomery, Sir Fergus
Higgins, Rt Hon Terence L.	Morris, M (N''hampton S)
Hill, James	Morrison, Sir Charles
Hind, Kenneth	Morrison, Rt Hon Sir Peter
Hogg, Hon Douglas (Gr'th'm)	Moss, Malcolm
Holt, Richard	Neale, Sir Gerrard
Hordern, Sir Peter	Needham, Richard
Howard, Rt Hon Michael	Nelson, Anthony
Howarth, Alan (Strat'd-on-A)	Neubert, Sir Michael
Howarth, G. (Cannock & B'wd)	Nicholls, Patrick
Howell, Rt Hon David (G'dford)	Nicholson, David (Taunton)
Howell, Ralph (North Norfolk)	Nicholson, Emma (Devon West)
Hunt, Rt Hon David	Norris, Steve
Hunt, Sir John (Ravensbourne)	Page, Richard
Hurd, Rt Hon Douglas	Paice, James
Irvine, Michael	Patnick, Irvine
Jack, Michael	Patten, Rt Hon Chris (Bath)
Jackson, Robert	Patten, Rt Hon John
Janman, Tim	Pattie, Rt Hon Sir Geoffrey

Peacock, Mrs Elizabeth	Tebbit, Rt Hon Norman
Porter, David (Waveney)	Temple-Morris, Peter
Portillo, Michael	Thompson, D. (Calder Valley)
Powell, William (Corby)	Thompson, Patrick (Norwich N)
Price, Sir David	Thorne, Neil
Raffan, Keith	Thornton, Malcolm
Raison, Rt Hon Sir Timothy	Thurnham, Peter
Redwood, John	Townend, John (Bridlington)
Renton, Rt Hon Tim	Townsend, Cyril D. (B'heath)
Riddick, Graham	Tracey, Richard
Ridley, Rt Hon Nicholas	Tredinnick, David
Ridsdale, Sir Julian	Trippier, David
Rifkind, Rt Hon Malcolm	Trotter, Neville
Roberts, Sir Wyn (Conwy)	Twinn, Dr Ian
Roe, Mrs Marion	Vaughan, Sir Gerard
Rowe, Andrew	Viggers, Peter
Ryder, Rt Hon Richard	Wakeham, Rt Hon John
Sackville, Hon Tom	Waldegrave, Rt Hon William
Sayeed, Jonathan	Walden, George
Scott, Rt Hon Nicholas	Walker, Bill (T'side North)
Shaw, David (Dover)	Walker, Rt Hon P. (W'cester)
Shelton, Sir William	Waller, Gary
Shephard, Mrs G. (Norfolk SW)	Walters, Sir Dennis
Shepherd, Colin (Hereford)	Ward, John
Shersby, Michael	Wardle, Charles (Bexhill)
Sims, Roger	Warren, Kenneth
Smith, C, (Isl'ton & F'bury)	Watts, John
Smith, Tim (Beaconsfield)	Wells, Bowen
Soames, Hon Nicholas	Wheeler, Sir John
Speed, Keith	Whitney, Ray
Speller, Tony	Widdecombe, Ann
Spicer, Sir Jim (Dorset W)	Wiggin, Jerry
Squire, Robin	Wilkinson, John
Stanbrook, Ivor	Wilshire, David
Stanley, Rt Hon Sir John	Winterton, Mrs Ann
Steen, Anthony	Winterton, Nicholas
Stern, Michael	Wolfson, Mark
Stevens, Lewis	Wood, Timothy
Stewart, Allan (Eastwood)	Woodcock, Dr. Mike
Stewart, Andy (Sherwood)	Young, Sir George (Acton)
Stewart, Rt Hon Ian (Herts N)	Younger, Rt Hon George
Sumberg, David
Summerson, Hugo	Tellers for the Ayes:
Tapsell, Sir Peter	Mr. David Lightbown and Mr. John M. Taylor.
Taylor, Ian (Esher)

NOES
Beggs, Roy	Kennedy, Charles
Beith, A. J.	Maclennan, Robert
Bottomley, Peter	Michie, Mrs Ray (Arg'l & Bute)
Bruce, Malcolm (Gordon)	Nellist, Dave
Campbell, Menzies (Fife NE)	Ross, William (Londonderry E)
Canavan, Dennis	Salmond, Alex
Carlile, Alex (Mont'g)	Skinner, Dennis
Carr, Michael	Steel, Rt Hon Sir David
Cartwright, John	Taylor, Rt Hon J. D. (S'ford)
Cryer, Bob	Taylor, Matthew (Truro)
Douglas, Dick	Taylor, Teddy (S'end E)
Ewing, Mrs Margaret (Moray)	Welsh, Andrew (Angus E)
Fearn, Ronald
Forsythe, Clifford (Antrim S)	Tellers for the Noes:
Hughes, Simon (Southwark)	Mr. James Wallace and Mr. Archy Kirkwood.
Johnston, Sir Russell

Question accordingly agreed to.

Committee tomorrow.

1. ESTIMATES AND SUPPLEMENTARY ESTIMATES 1989–90
1. CLASS VIII, VOTE 14