RATE OF CORPORATION TAX FOR 1990

HC Deb 07 May 1991 vol 190 cc638-81 4.21 pm

Mrs. Margaret Beckett (Derby, South)

I beg to move amendment No. 1, in page 16, line 4, at end add—

'(1A) Where a company whose activities consist

1. (i) wholly or mainly in the manufacture of finished goods, partly finished goods or materials, and
2. (ii) of activities falling within such classes, groups or descriptions set out in the Standard Industrial Classification issued by the Central Statistical Office as may be prescribed by way of regulations made under this subsection so elects in writing within two years of the end of an accounting period which includes the whole or any part of the financial year 1990, subsection (1) above and subsection (2) below of this section shall not apply to that company in relation to that accounting period; and where such an election is made, then, in relation to that company for that accounting period,

1. (a) the rate at which corporation tax is charged for the financial year 1990 shall be 34.01 per cent. (and not 35 per cent. as provided by section 19 of the Finance Act 1990)
2. (b) section 24(2)(a)(i) of the Capital Allowances Act 1990 shall have effect as if the percentage specified therein were the aggregate of 25 per cent. multiplied by A and 40 per cent. multiplied by B, where B represents the fraction of the accounting period comprised within the financial year 1990 and A represents the fraction of the accounting period not so comprised (if any), and
3. (c) the fraction mentioned in section 13(2) of the Taxes Act 1988 for the financial year 1990 shall be taken to be a fraction of which the numerator is one thousand eight hundred and two and the denominator is eighty thousand (and not one fortieth as provided by section 20 of the Finance Act 1990).'.

The amendment proposes to raise the assistance and support that should be given to British business, especially in the context of the proposals in the Finance Bill and of the general state of the economy.

I remind the House of some of the economic indicators: 500,000 jobs have been lost in the past 12 months, and the losses are accelerating; almost 25,000 firms failed last year—an increase of almost 77 per cent.—and it is predicted that about a further 25 per cent. are likely to fail in the coming year; and since last spring, £2 billion has been slashed from investment and there has been a substantial cut—perhaps as high as £7 billion—in manufacturing output since last March.

Against the background of those alarming results for our economy, we contend that the Government should be giving priority to manufacturing industry and manufacturing investment, primarily because the tradable sector is almost overwhelmingly the sector of the economy in which we earn our living in the world, as opposed to merely exchanging goods and services within our boundaries. There are some tradable services, but Britain's trade in manufactures is the essence of the way in which it earns its living.

When the serious balance of payments deficit began to emerge, Conservative Members, especially the former Chancellor—I cannot remember how many Chancellors we have had since—the right hon. Member for Blaby (Mr. Lawson), sought to suggest that the problems were of demand and of the way in which the economy was developing rather than structural problems because of our inadequacy in producing the manufactures that we wish to buy and consume.

Although that explanation enjoyed brief popularity among Ministers, they now accept that we have structural problems and that our inability as an economy to produce all the goods we need is leading to our underlying difficulties. In that context, I want to draw attention to some figures which show the trends in our trade balance.

First, there are the statistics for manufactured export volumes between 1979 and 1990 produced by the United Nations on a comparable basis across most of the developed world. I emphasise that these are results, rather than forecasts, as the Chancellor of the Exchequer has told us how much he prefers results. The results show that, of 14 countries, the United Kingdom comes 13th for the percentage change in manufactured export volumes since 1979. That is a clear sign of how far we are falling behind so many of our competitors.

It is evident from more recent figures for our manufactured trade that the value of our exports between 1979 and now, including the forecast figure for this year, has fallen by minus 8.7 per cent. Since 1979, the value of our trade has fallen by more than 2 per cent.—minus 2.4 per cent. precisely—as a percentage of our gross domestic product—a percentage of the wealth we earn.

The same picture is evident for volumes. Although our exports have risen by 59 per cent. since 1979, our imports have risen almost twice as much—by 108 per cent. World manufactured exports have risen by 87 per cent. Again, that paints a rather alarming picture of how we are doing against the increase in world trade.

Since 1979, our share of world manufactured exports has fallen by 15 per cent., if measured, as is most accurate, at constant prices. That is an alarming picture, which is confirmed by figures for the change in manufacturing trade balance since 1979, again as a percentage of our national wealth, our GDP. Of the 22 countries of the Organisation for Economic Co-operation and Development for which figures are available, the United Kingdom comes 21st.

Mr. Tim Smith (Beaconsfield)

If we put those figures into a longer historical context and look at our record since the second world war, would we not find that a 59 per cent. increase in export manufactures in the past 12 years was rather a good performance and that our percentage of world trade has stabilised during the past five or six years, which is a remarkable achievement compared with the continual decline of previous decades?

Mrs. Beckett

That would be a remarkable achievement if it were so, but, unfortunately, it is not. I agree that there was a period when our share of world trade reached a plateau and we all began to hope that the position would improve, but that is no longer the case. The overall picture that is emerging is of continuing decline. I accept the hon. Gentleman's point that that has happened not only under this Government, but it has continued to happen under this Government, who have continually told us that they have enjoyed a dramatic success such as was not enjoyed by previous Governments in previous decades. Yet, comparing our performance with that of our competitors, we have done poorly—although, as we must always remind the House, we had the enormous advantage of income from the North sea, which we could have used to invest and improve that very performance. That is the evidence from the trade balance of the difficulties that we are experiencing with our manufactured trade.

I should like to produce more evidence as to the scale of the problems and why it is that the Opposition believe that manufacturing should be given so high a priority. If we look at the position of our EC competitors, there is no doubt that there has been what the Prime Minister likes to call a decline in manufacturing activity in other countries as well as here. Unfortunately, however, there is equally clear evidence to show that the decline that we are experiencing is much worse than that of our competitors.

4.30 pm

The Eurostat data on production expectations show clearly that the United Kingdom has the deepest recession. When it comes to stocks of finished products, the data show that we are more or less level pegging, in bottom position, with Spain and France. Overall, the figures show clearly that we are experiencing a more severe recession than anyone else.

If we consider the OECD countries and whether there is evidence there of a more general decline, we see that there are countries where, just as in this country, output is likely to have been lower in 1990, and that it fell for much of 1990. In other countries, the picture is somewhat mixed. Output began to rise, and fell again. In terms of the severity of the recession, however, what comes through clearly is that only in Canada or Greece is there anything like the scale of recession that there is in the United Kingdom. Even there, the picture is not as gloomy as, unfortunately, it is in this country.

From the rate of growth of manufacturing output in OECD countries between 1979 and 1990, it is clear that, in percentage terms, out of all the 16 OECD countries for which figures are available, the United Kingdom came 14th. My hon. Friend the shadow Secretary of State for Trade and Industry drew the attention of the House to the most recent and alarming figures that we have produced for average output. We have considered what is likely to happen, using the Government's own forecasts, during the coming year and have looked at what that means in terms of the change in output since 1979 when this Government came to power. On average, they show that output will have risen only by a mere 6 per cent. over that period of 11 years.

If we look at the most recent figures that are available to me—those for February 1991—we see that the picture is even worse than the average figures that we quoted previously. If we take the period from May 1979 to February 1991, the total increase in manufacturing output in that period amounted to a mere 3.5 per cent. These are extremely worrying figures, at a time when we are approaching the single market in 1992. We shall face more severe challenges then than we have experienced for a substantial period.

That is the information which has been made available to the House, and it shows the scale of the difficulties that we face. It brings me to the question of what we are doing about them and what action is being taken. If we look at the only measure that can possibly begin to remedy these problems—the trend of developments with regard to investment—again we see an extremely alarming picture. The figures for business investment and total investment—figures that the Government normally like to give—have taken a nose dive in the most recent months. They fell by a greater amount than we have seen since the great depression of the 1930s. If we compare the figures for the first half of 1990 to the first half of this year, we see that a decline in investment is predicted of perhaps as much as 12 per cent. Again there is no question but that that is very much the overall pattern.

The figures for investment as a proportion of gross domestic product have fallen almost continuously. Perhaps there was a slight recovery towards the middle of the 1980s. However, they are substantially below the figures that this Government inherited in 1979, and they are very much below the pattern of what was spent on investment in this country in previous years under successive Governments.

The figures for manufacturing fixed investment at constant 1985 prices show that investment is expected to come in at a lower level than that which the Government inherited in 1979. If the most recent forecasts from the Confederation of British Industry turn out be correct—we must all hope that they will not the figures for manufacturing fixed investment are likely to go back to the levels that we saw in the 1960s. That is no way to prepare ourselves for the challenges of the single market in 1992.

If we look at what our competitors are doing in manufacturing fixed investments, on the figures per person employed in manufacturing among the OECD 15, we see, on the most recent figures that we have, the United Kingdom coming in 14th. As those were the figures for 1988, when, by the Government's standards, there was something of an investment boom, the position now may be even worse.

Nor is that the case only for investment in manufacturing generally. Our competitors are increasing their investment in research and development, but if we look at the change in Government-funded civil research and development, we come 18th out of the OECD 19 for the period 1985–89, when, we are told, there was a boom in investment. If we look at the figures for Government-funded research and development as a percentage of gross domestic product, we see that we are 12th out of the OECD 19 and, in terms of per head of population, we are 13th out of the OECD 19.

In summary, manufacturing output is falling; manufacturing investment as a percentage of gross domestic product has fallen since 1979 by 12.7 per cent. at constant prices; manufacturing fixed investment, excluding leased assets by almost 15 per cent.; and that including leased assets by almost 14 per cent. That is an alarming picture when we consider the background to these figures and this summary.

That brings me to the prospects for recovery. The Chancellor said the other day that recovery was around the corner, but I am not sure what corner that is. It must be one that is rather a long way away. According to the Government's figures in the Red Book, the recovery will be consumer-led rather than, as one would hope, investment-led and laying the foundations for a more prosperous economy.

I am not sure how many hon. Members have seen the report in the Financial Times this morning of the most recent survey of expectations from academics, economists, study institutions and others. It shows increasing anxiety about the strength of the recovery, when it begins, and a suggestion that it might be fragile and weak at best. There are worries about the Government's reliance on growth in real incomes and consumer spending rather than in structural improvements to pull us out of recession and into recovery.

Perhaps most interesting of all—given the Government's time scale, which seems to be focusing on the general election—the economists predict that, although there will be a recovery and inflation will begin to fall, by early 1992 inflation will have begun to climb again, interest rates will have stopped falling and the trade gap will have begun to widen. That is an alarming prospect for the country and a difficult one for the Government, who are clearly trying to time the election for that period after the recovery has occurred and before the deterioration that is so widely expected becomes evident.

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

So the hon. Lady admits that there will be a recovery.

Mrs. Beckett

We have never denied that there will be a recovery. I am astonished at the Chief Secretary, who is brighter than he is trying to pretend. Of course there will be a recovery. When the economy is absolutely flat on the floor, the situation would be desperate indeed if there were never to be a recovery. The question is when it will occur, to what extent, and—most important of all—whether it can be sustained. We have to ask ourselves whether this country is taking the necessary action to prepare itself for long-term prosperity rather than short-term recovery, which, it is predicted, will be—in the words of the Chancellor about the recession—possibly shallow and short-lived.

I should like, in this context, to draw attention to these words of the president of the CBI: Investment in training, innovation, research and development, as well as in fixed capital, adds to the nation's productive capacity, enhances its efficiency and speeds up its eventual economic recovery. The following words fit in very well with the observations of a variety of experts I have been quoting: If we do not expand this capacity we will not be able to sustain renewed economic growth for very long. Once industry is back working near its full capacity, further increases in spending could not be met with higher output but would simply result in those familiar problems of rising prices, surging imports and current account deficits, which we experienced in the late 1980s. Against that background, I am moving this amendment to enable us to raise the issue of investment allowances specifically targeted at manufacturing industry. This is in complete contrast to the underlying philosophy behind the changes that the Government are making through the Budget and the Finance Bill. The reduction in the rate of corporation tax will lead to reduced business costs across the board. No doubt that is welcome to businesses, particularly small and medium-sized businesses, but the benefit is not targeted at any group of companies or any sector of the economy. The welcome, however, is tempered by realisation of the fact that the reduction in business costs is counterbalanced by increases in business costs, such as the one resulting from the change in national insurance contributions. Then there are those matters that are not covered by the Finance Bill, such as changes in the statutory sick pay scheme and the increase in the business rate, which have added substantially to business costs, and which everyone knows are matters of considerable concern to industry and commerce.

Let me refer to what the Opposition see as the real significance of the Government's decision to concentrate on cuts in the rate of corporation tax, rather than to provide the investment allowances for which so much of industry was calling. I know that some groups, such as the Institute of Directors, are always pleading for cuts in tax rates, but the Government must be aware of the widespread view that investment allowances—particularly allowances targeted at manufacturing industry—would have been the right means of helping business. The Government must be aware of the views of the Engineering Employers' Federation, the CBI and the TUC. We all know, of course, that they ignore the TUC.

The really revealing fact is that, even when industry itself asks the Government to do something that would not reduce business costs across the board but give priority to the encouragement of investment—directly in manufacturing, and indirectly in training—the Government are not prepared to agree. The resources available to the Government are bound to be limited. In response to the call for targeted help, particularly for those sectors of industry that are the agents of recovery, the agents of growth, surely the Government ought to take account of that fact, especially when we are in the depths of such a recession, and when we have such a record of difficulties.

The decision not to reintroduce investment allowances, but instead to cut the rate of corporation tax, was not a practical one dictated by the recession, by a wish to promote investment more than anything else—in particular, to promote investment in manufacturing industry. It was an ideological decision—a decision that fits in with the overall attitude, which the Government have adopted for so many years, that, even when industry itself seeks targeted help of this kind, they should stand aloof and say that it has nothing to do with them. The Government's attitude is that they should make changes for the whole of industry, and leave the rest to individual firms. They do not care whether companies use assistance for the purpose of repairing their balance sheets, rather than for investment purposes.

4.45 pm

That, too, is closely related to the speech that the Chancellor made last week—to the Adam Smith Institute, I think—in which he said that the Government intended to continue to pursue exactly the course that they have pursued for the past 11 or 12 years. They intend to stand aloof from industry and say, "Get on with it, and don't expect us to involve ourselves in any way. Don't expect us to make even the most indirect choices about the priorities that you should be pursuing." This is particularly interesting to me, because the decision to follow the path—advocated by the Institute of Directors—of reducing the rate of taxation and increasing taxes on expenditure ties in with the long-term approach that that institute is urging on the Government. It seeks the erosion, and, over five or 10 years, the ultimate abolition, of all taxes on companies, all taxes on capital and, indeed, all taxes on income.

Perhaps some increases in taxes on expenditure are necessary, but what is sought, as a quid pro quo for those changes, is the disappearance of what is loosely described as the welfare state, which is taken for granted by so many people in this country. The Institute of Directors has the courage to do what the Government have never had the courage to do—explicitly to explain that, as a trade-off for cuts in tax rates, leading to substantial reductions in taxes, it would like to see the Government foster increased use of private retirement insurance, private education insurance, private unemployment insurance and private health insurance—with a scheme retained and supported by the state only for the destitute, for whom, clearly, the move towards private insurance schemes as a whole cannot be sustained.

To me, it is very revealing, as well as very frightening, that the Government intend to continue along the ideological path on which they have embarked, which ties in so well with the action that is urged on them by groups such as the Institute of Directors and the No Turning Back group of Conservative Members of Parliament. This measure is a signal, like those provided by the Chancellor, that there is indeed no change in the Government's attitude to industry; no change in the role that they see for themselves; no recognition of the need for any kind of partnership with industry and commerce; no recognition—worse of all, in the face of the alarming figures indicating the real prospects for our economy—that they have a duty to plan, in the national interest, to sustain the long-term competitiveness of our economy. The Opposition have tabled this amendment because they see a very clear ideological and philosophical divide with the Government on the issue. Unfortunately, actions such as those which the Government have taken will not contribute to the long-term prosperity of the country.

Mr. Mellor

Clause 22, to which this amendment relates, is straightforward. I say "straightforward" because the density, when one comes to Finance Bills from other legislation, takes some getting used to. On this occasion, I have the advantage of starting off with something that is reasonably straightforward. I do not need a long glossary to enable me to comprehend the basic language. The other clause that I shall be dealing with tonight, clause 23, has the advantage of being even more straightforward.

It may be appropriate just to recall, before we plunge into the thicket of point and counterpoint, that subsection (1) of clause 22 reduces the corporation tax rate for the financial year 1990 from 35 per cent. to 34 per cent. and, of course, it is linked to clauses 23 and 24. Clause 23 reduces the corporation tax rate to 33 per cent. for the year 1991 and clause 24 deals with changes to the small companies' rate. The other two subsections of clause 22 deal with the taper mechanism between the level at which the small companies' rate applies and the profit levels before one arrives at the full rate of 34 per cent. It makes certain adjustments to that so that there is no great cliff edge between the small companies' rate and the main rate.

As this is one of the centrepieces of the Budget, it is appropriate that we should start with it today. A major reduction is being proposed, in this and related clauses, in the tax burden on industry. Although obviously it is the duty of Oppositions to carp and cavil—and the hon. Member for Derby, South (Mrs. Beckett) has carped and cavilled—this is a very significant step forward, because, as I shall later demonstrate, it once again gives us the keenest corporation tax rates of any of the world's major economies. That is something of which we can be proud.

As for the lyrical picture that we were painted of what life was apparently like in the 1970s—although I am bound to say that I do not remember it that way and I wonder who, in truth, does—it is worth remembering that in 1979 the main rate of corporation tax was 52 per cent. We are debating a proposal to reduce it to 34 per cent. and we hope that in a subsequent debate the House will approve its reduction to 33 per cent. Back in those balmy days of 1978–79, Labour's last full financial year, the small companies' rate was 42 per cent. Today it is 25 per cent. In those days, 12 years ago, the small companies' rate——

Mr. Robert Sheldon (Ashton-under-Lyne)

Will the right hon. and learned Gentleman give way?

Mr. Mellor

I will give way when I have finished giving the figures. I know that the right hon. Gentleman has some responsibility for these matters, so I will present him with the full picture and then happily give way.

The small companies' rate was incurred on profits of £60,000. Our proposal is that in 1991 the small companies' rate shall not apply until profits of £250,000 are attained—over four times as much in cash terms, so a very substantial increase in real terms.

The marginal relief threshold, the taper that applies up to the main level, means that we propose that this year a company shall become liable to pay the full rate of corporation tax only when its profits exceed £1.25 million. That contrasts with the threshold at which full corporation tax was paid under Labour of £100,000. It is an increase of over 1200 per cent. That is a sign of just how dramatic has been the reduction of the tax burden on industry and it is something that we should never forget.

Mr. Sheldon

Is that a fair way to make that comparison? Surely the comparison should be made with the amount that industry paid out in corporation tax. There were allowances and reliefs of a number of kinds, as I am sure the right hon. and learned Gentleman knows, and industry asks only how much it will have to pay. It is not just these headline figures that the right hon. and learned Gentleman is putting out. On that basis, industry is doing very badly at the present time and more assistance needs to be given to it.

Mr. Mellor

It is certainly true that part of the trade-off for the reduction in corporation tax was the removal of some elements of capital allowance, stock allowances and so on. I was proposing to come to that, since it is of the essence in the debate between us. But it is undoubtedly true that the burden of taxation on business has been lightened by the Government and it is the purpose of the Budget to burden industry even less. That is a principal theme of this Budget.

It is worth referring to some international comparisons to make the point. They show that our main rate of corporation tax for 1991, at 33 per cent., compares with a rate of 50 per cent. in Germany—36 per cent. on distributed profits—and over 40 per cent. in a range of other EC countries.

The comparison becomes even more interesting when one looks at the total tax burden on business as a percentage of total gross domestic product—that is, counting in taxes on corporate profits, employers' social security contributions and payroll taxes and then expressing it as a percentage of total GDP for the last year for which figures are available, which is 1988. That shows that in the United Kingdom corporate profits are 4 per cent. and total social security contributions 3.5 per cent., leading to a total burden of 7.5 per cent., expressed as a percentage of total GDP. That compares with 15 per cent. in France, 12.4 per cent. in Italy and over 9 per cent. in West Germany. So, compared to the EC average, at 7.5 per cent. we are markedly and handily below the EC average of 9.7 per cent. and below the Organisation for Economic Co-operation and Development average of 8.9 per cent.

If one wants a reason why Britain, far from being the investment desert that the hon. Lady has described, has become the favoured place for inward investment in the European Community, there it is. I see that the hon. Member for Islington, South and Finsbury (Mr. Smith) is amused by this, so I will give him the opportunity later to intervene. If any of my figures are wrong, I hope that he will correct me and put me out of my misery.

Thirty-nine per cent. of the inward investment in the European Community from outside the Community in the last year for which figures are available, 1989, came to Britain. France was next with just over 14 per cent. Of the inward investment available from the major non-EC manufacturing countries, no less than two thirds of United States' investment in the EC came to the United Kingdom, as did 40 per cent. of the Japanese. That is a vote of confidence in the United Kingdom and in the tax rates, and not just the tax rates on business but the tax rates on individuals, which are just as relevant.

Mr. Chris Smith (Islington, South and Finsbury)

I am grateful to the Chief Secretary for giving way. I was not in any sense scoffing at the idea or prospect of inward investment, which is very welcome and essential. I was scoffing at the Chief Secretary's denial of the fact that we have at the moment in this country an investment desert. That is precisely what we have. Investment in industry as a whole is forecast by the Government themselves to fall by 10 per cent. in the course of this year, and investment in manufacturing industry is forecast to fall by even more. Investment in manufacturing industry is now at a lower level than when the Government came into office 12 years ago. I call that an investment desert.

Mr. Mellor

Most of the hon. Gentleman's comparisons are with the position at a historic high achieved under the very tax regime that the hon. Member for Derby, South spent most of her time attacking. The reduction in corporate taxation and the overall confidence in the United Kingdom engendered by a whole range of supply-side measures, particularly the breaking of the stranglehold of trade unions over so much of the economic activity in the country, led to a tremendous outburst of investment in this country. Between 1986 and 1989 alone investment increased by over 40 per cent. It is inevitable that there will be a falling-off from that peak, but the fact that it may fall by 10 per cent. does not seem to me to be any kind of indictment of the situation in which we find ourselves.

Mr. Denzil Davies (Llanelli)

rose——

Mr. Mellor

I will develop the argument, if I may, and then of course I will give way to the right hon. Gentleman.

Mr. Davies

rose——

Mr. Mellor

I have told the right hon. Gentleman that I shall give way to him when I have fully answered the hon. Member for Islington, South and Finsbury. That is the way that I have always dealt with matters in Committee and I hope that it finds favour with other hon. Members—[Interruption]apart from the hon. Member for Newcastle-under-Lyme (Mrs. Golding), who has a voice of dissent which should he registered.

5 pm

If we take investment in manufacturing at constant 1985 prices, in 1984, when the fundamental changes in the corporation tax regime were made, it was £8.9 billion. In 1989 it rose to £12.4 billion. It is true that in 1990 it fell back to £11.9 billion. That is a reflection of the dramatic increase in recent years. There is absolutely no reason to expect that investment will not go back once confidence is restored and activity begins to turn up, as the hon. Lady conceded that it will. We know that it will.

Mr. Denzil Davies

Having had a low rate of taxation in comparison with the Germans, and having had a massive investment boom over the past three or four years, why have we such a massive deficit on trade and manufacturing goods with those very EC countries that have a higher rate of corporation tax?

Mr. Mellor

In fact, we have for the first time, in 1988 and 1989, seen an increase in Britain's share or world manufactured exports.

Mr. Davies

Answer the question.

Mr. Mellor

I am answering the question. The right hon. Gentleman does not do himself much service by barracking me from a sedentary position. I will give the explanation and, if he wants to intervene again, I will let him. He might listen to the answer because I hope that it will get near the point.

The point is that for the first time, after years and years and years of decline, Britain's share of world manufacturing exports has started to rise—by a very small amount, it is true. The fact that our manufacturing trade balance is in deficit with a number of countries is a reflection of consumer choice and the tremendous increase in wealth.

I will give the right hon. Gentleman an example. As a former Treasury Minister he will recall that the man on average wages, with a non-working wife and two dependent children, was £1 a week better off in real terms at the end of Labour's period of office than at the beginning of it. Today that same family is £72 a week better off in real terms. Obviously a great deal of that spending power is expressed in purchasing imported goods. There is no doubt about it. Everyone associated with British manufacturing is only too well aware that, although British manufacturers have improved their performance in a range of areas, not least the car industry, which under the Government has been much more of a success story than it ever was under Labour——

Mr. Denzil Davies

rose——

Mr. Mellor

I will finish the point and then I shall give way. There are still areas in which, when put to the choice in a free market—it is impossible within the European Community to think in other terms, notwithstanding Labour's nostalgia for import controls and such things—many British families prefer to buy overseas goods. That is their free choice.

Mr. Davies

The right hon. Gentleman made an admission. As I understand it, he is saying that one reason why we have a massive balance of payments deficit is that the Government have cut taxation and income taxation. Is that what he is saying?

Mr. Mellor

That seems to be an argument by the right hon. Gentleman that he does not like people having more money in their pockets. That is a nonsensical position. We believe in spreading prosperity through society. Indeed, our record on that is far superior. When the right hon. Gentleman walks round his constituency and goes into people's kitchens, where he sees cookers, transistor radios and hi-fi systems, does he abuse the people for spending their money on imported goods, or does he resent the fact that today they have those goods when 12 years ago they did not? That is part and parcel of living in a society where the consumer, given resources, will make his or her choice, as is right.

The Government decided in 1984 to move to sharp reductions in the direct taxation of companies. As to the consequences, I have already pointed to the tremendous increase in investment in business which was so apparent and which will happen again, and also to the tremendous growth in jobs. Over 3 million jobs have been created in our economy since 1983.

Contrary to the industry-friendly gloss that the hon. Lady put on her proposal, what we see is really the second leg of Labour's twin attack on industry. The attack mounted today is an assault on the principle of letting industry choose what it wants to do with its own money. The idea is that a raft of incentives to invest, not yet disclosed but presumably not in things that industry would choose but in things that the Labour party would want to choose for industry, is to be preferred to allowing industry to have choice.

All the evidence of the seven years since the dramatic switch was made is that not only has investment increased, but the quality of investment has increased. I do not want that to dominate the debate. There will be plenty of other opportunities for that. It will be a most interesting debate.

On Sunday, the right hon. and learned Member for Monklands, East (Mr. Smith) revealed the precise extent of Labour's attack on the very people who are running business—the middle managers and top management on whom our success depends. Under Labour, they would find their rate of tax increased from 40 per cent. to 59 per cent. All that would happen then would be an increase in the brain drain. We thought that we had done away with the brain drain.

The record shows that between 1975 and 1979 there was a net outflow of 68,000 professional and managerial people, whereas between 1983 and 1989 there was a net inflow of 30,000. That is part and parcel of creating a tax system which allows the decision-takers within industry, on whom a successful base depends, to keep a sensible proportion of their income. It is already being trailed in the newspapers that if people feel that they are returning to the tax rates that prevailed 10 years ago, they will again vote with their feet. Those are all reasons why the Labour party's proposals will come under increasing scruitiny.

I was anxious to focus primarily on company taxation. Now I shall deal with the amendment, which is extremely vague. The hon. Lady did not give us a crucial fact among the welter of statistics: what would be the cost of the attempt to determine for industry its investment decisions? We have had difficulty with that because much of the amendment is extremely vague. It is a classic example of the Opposition trying to have it both ways. On the one hand they are trying to hold out to those interested in the outside world that they have a precise set of remedies which mean that they will do better than we are doing, while on the other they withhold key pieces of information which allow the full implications of what they are doing to sink in. They must not think that we are not alive to that fact.

The amendment appears on one reading to be merely giving away a lot of money after deadweight investment. It appears to be willing ex post facto to subsidise certain investments that have already been made. I cannot see the point of that. Even if only new investment will be affected, even on a cautious estimate—for instance, costing the difference between the existing and the proposed reliefs for new investment only, assuming that investment continues at its present level, and not building in any increase that may take place within the period—in 1991–92 the likely enhanced cost would be about £200 million and in 1992–93 it would be a further £150 million.

Of course, the hon. Lady has not told us where that fits in with Labour's spending priorities, and what would have to give. The amendment gives a hint—a little tease—of an increase in corporation tax, which would be used to pay for it. That shows what the hon. Lady correctly described as a philosophical divide between the two parties. The Government believe in leaving industry to make decisions, based on it maximising the amount of profit that it retains in its hands for its own uses. In the long term, that will create a much more dynamic economy. I would rather trust a business man to make the decisions than the men in Whitehall. Labour is hankering back to the dirigiste approach to economic management that failed when it was last in office, and that has now been shown comprehensively to fail in those eastern European countries where it was the prevailing orthodoxy.

Mrs. Beckett

It is important to put on the record the fact that we have repeatedly said that we have no intention of increasing the rate of corporation tax. The Chief Secretary should be aware of that, but if he is not I am happy to tell him.

Mr. Mellor

What I do not understand—and perhaps the hon. Lady will explain it to me—is the meaning of the reference in the amendment to a rate of corporation tax of 34.01 per cent. That is the proposed increase in the rate of corporation tax——

Mrs. Beckett

The Chief Secretary's civil servants could have explained that to him without any difficulty. It is purely a question of the technicalities of how to draft an amendment while being in order.

Mr. Anthony Coombs (Wyre Forest)

The hon. Lady does not understand her own amendment.

Mrs. Beckett

With respect to the hon. Gentleman, that was an extraordinarily silly comment. Of course we understand our amendment. We had to draft the amendment in a certain way so that it would be in order for the tabling of amendments to the Finance Bill. There is no, and never has been any, suggestion of the Labour party increasing the rate of corporation tax.

Mr. Mellor

I am grateful to the hon. Lady for her clarity. It appears that, although the amendment proposes an increase in corporation tax, under pressure the hon. Lady said that she did not really mean it and it was just an attempt to keep within order. If so, that raises the question of what will pay for the proposal. Does she agree that, even on the most cautious estimate, it will cost at least £200 million in the first year and £150 million in the second year? Has she costed the proposal?

Mrs. Beckett

It is difficult to obtain accurate costings—a point that the Chief Secretary also made. We are offering our alternative to the Government's proposals and the Chief Secretary has identified the sums involved. If we targeted that sort of money on encouraging investment in manufacturing industry, rather than simply handing out money to industry, as the Government are doing in the Bill, there would be more value for our money.

Mr. Mellor

This is just a taste of things to come. As we get closer to an election, suddenly the newspapers are interested not only in what the Government are doing, but in what the Labour party is doing. That was evident in this weekend's newspapers. We now have another classic example of the Labour party's gesture politics. It is making a gesture towards what it regards as a disaffected section of the business community—those who would hanker after the good old days of investment allowances. It is flinging a little something in their direction as a bit of a tease without being prepared to say what that amounts to.

When put on the spot, the Labour party says that its proposal will not require an increase in corporation tax—it is to be a free lunch. It will be a further subsidy to business, and someone will have to pay for it. I thought that we now had a Labour party of fiscal rectitude, with everything that is spent having to be paid for. We have not been given the costings for this proposal. Instead, we are told that it is a virtue of a detailed amendment—not a Second Reading debate or an Opposition Supply day—running to more than 20 lines not to provide any costings. Our cautious costing of £200 million, which does not assume any subsidy of pre-existing investment, is simply to be added to the dead weight of Labour's spending proposals—for which, sooner or later, people will have to pick up the tab.

The Leader of the Opposition misunderstands the fundamental basis of VAT, and we have been told that VAT is sacrosanct. We have also been told that the top rate of income tax absolutely will not go above 50 per cent. We are now told that corporation tax will not be increased. The range of choices from which the additional resources could come is now rather limited. Indeed, there is only one source—and this will not surprise anyone who admired the career of the right hon. Member for Leeds, East (Mr. Healey) when he was Chancellor—and that is income tax. The burden will fall on middle and lower-income, standard rate taxpayers. That is the uncomfortable truth that will become increasingly apparent.

5.15 pm

Labour Governments regularly start by soaking the rich. By the end of the time in office of the right hon. Member for Leeds, East, the rich had come to embrace even those poor souls who were hoping for an inflation increase in the income tax threshold to take them out of income tax, but the right hon. Gentleman was unable to afford that for large parts of his stewardship.

Mr. Chris Smith

Can the Chief Secretary explain why in 1979 the share of gross domestic product taken in tax by the Exchequer was 34 per cent., but it is now 37.5 per cent.?

Mr. Mellor

There has been a dramatic increase in a whole range of activities. Even with the urgent prioritisation that we have undertaken, there has been an increase in public expenditure. We fund our expenditure; we do not rely—[Interruption.] Labour Members do not want to hear this point because they do not like it. Under the stewardship of the right hon. Member for Leeds, East, in one year alone, at today's prices, the public sector borrowing requirement was £60 billion. I have already said, but it bears repeating, that the Labour party believes in the late President Hoover's proposition, "Blessed are the young, for they shall inherit the national debt." The Labour party would saddle future generations with costs that it is not prepared to fund properly.

The hon. Member for Islington, South and Finsbury increasingly must focus on the fact that if that is what it takes for the Government to run honest public finances and the level of public expenditure that we are currently running, how on earth will the Labour party cope with the public expenditure that will be needed to fulfil its pledges? The Labour party apparently wishes to remain constant to the exchange rate mechanism, which will not allow it to run up a huge public sector borrowing requirement without threatening Britain's position within the system.

Mr. Chris Smith

I am grateful to the Chief Secretary for acknowledging that the Government have increased the tax burden on the British people. Will he also confirm that, for a family on three quarters of the average wage, the tax burden has increased from 30.9 per cent. of income in 1978–79 to 33.6 per cent. in 1991–92?

Mr. Mellor

That question does not deal with the points that will be of most relevance to such families: their income, the amount by which it has increased, and the real increase in their prosperity. I have already given the figures. The disposable income of all families, including those below the average wage, has increased sharply. If it has been necessary for the Government to take certain measures to put public finances on a level that attracts international confidence, and so allows us to maintain our position within the ERM—to which the Labour party says it is as committed as the Government—and if it has been necessary to prioritise public expenditure and so increase expenditure on key public services, such as health, by up to 50 per cent. in real terms, what are the prospects for the Labour party, with its raft of additional spending commitments, yet without any proposals on how to fund them? It will not be able to run up the public sector borrowing requirement in the way that the right hon. Member for Leeds, East took for granted. That is something on which the Opposition will need to focus because we shall return to it in due course, although at a time that is almost certainly not now.

Dame Elaine Kellett-Bowman (Lancaster)

Does my right hon. and learned Friend agree that precisely the same people would suffer under Labour as suffered last time, the school teachers and the nurses, who suffered from massively increased taxation and national insurance contributions and who, under the Opposition's categorisation, will be known as the rich? They certainly were not rich under Labour. They are a great deal better off now.

Mr. Mellor

Indeed, and a number of such groups saw a fall in the real spending power of their incomes during that period.

Mrs. Beckett

Does the Minister think that the hon. Member for Lancaster (Dame E. Kellett-Bowman) knows that this Government put up the rate of national insurance contributions from 6 to 9 per cent.?

Mr. Mellor

We are talking about people's disposable incomes. That is the key point. When we talk to our constituents on the doorstep, we discover that they are concerned about what they can buy this year compared with five or 10 years ago. On that test, this has been one of the most spectacularly successful decades ever in Britain. I suspect that, as the election approaches and the Labour party's expenditure proposals are scrutinised with the rigour that they will be, and their tax proposals similarly, people will begin to realise that these are boons which do not necessarily translate into a new Government, unless it happens to be a Conservative Government.

The hon. Lady, as she was bound to do, has attempted to discredit the Government's record on the treatment of industry, but she knows only too well that whatever quibbles there may be from time to time in a relationship in which industry will always feel free to make its points, as we feel free to make ours, two things emerge from all that has been said by the CBI, the Institute of Directors and others. First, there is a recognition of the tremendous success of the 1980s and the fundamental and beneficial changes that were made to the United Kingdom economy then. Secondly, there is the welcome that they gave to the Budget. I have already quoted in these debates—I shall not weary the House further with them, although I could if pressed—the glowing welcome given to the Budget by every collective body representing industries, such as the CBI, the Institute of Directors, the National Federation of Self-Employed and Small Businesses and the Association of British Chambers of Commerce.

I shall just quote the president of the CBI, Sir Brian Corby, who said: This is almost precisely the Budget that the CBI recommended—a Budget for soundly based recovery, for saving and for investment. The prospect for further reductions in interest rates, the resumption of growth and low inflation are better tonight than they were this morning. The Chancellor has listened to those who create the nation's wealth. Obviously, in what is not a monochrome society, and I hope never will be, there will be some who will look back with nostalgia to the good old days of investment allowances and so on, but I do not think that there are all that many of those. Most people recognise that in the end a business that retains more of its profits will be better able to direct itself and to make its own decisions, which should not be distorted by Government.

So much of the debate, which inevitably, Sir Paul, as the first debate on this year's Finance Bill, you have been kind enough to allow to go a little wider than the immediate matter under discussion,comes down to the recession and its ending. It is clear from all sides that, while undoubtedly this has been a sharp and difficult period through which companies have had to go and are still having to go, a growth of optimism is now becoming apparent. It was apparent last week in the CBI's latest analysis of opinion. It is even more apparent today with the publication of the Institute of Directors' bi-monthly survey which shows optimism about the economy recovering sharply at plus 33 per cent. from minus 64 per cent. in February, directors' confidence about prospects for their own companies up to plus 37 per cent. from minus 36 per cent. in February, and 35 per cent. of respondents expecting a positive net investment in the next six months.

I appreciate that many companies still have a good way to go, but I believe that it is clear that confidence has returned and that what we are proposing in the Finance Bill will assist industry's cash flow, will assist in the building of that confidence and will assist in the measured and strong recovery of the British economy from the difficulties of the last several months. On that basis, I hope that in due course the House will not accept the Opposition's amendment but will endorse the principles of clause 22.

Mr. Sheldon

The Chief Secretary quoted with approval those who had accepted many of the arguments of the Budget and who had welcomed it. I, like many others, have in my time made the fairly obvious comment that a Budget that is cheered when the Chancellor sits down is often disliked and disapproved of by the time we reach Third Reading. lain Macleod was one of those who made that comment.

Another comment that lain Macleod made during the course of a Finance Bill debate was that one of the least useful arguments in discussing any amendment is to talk about its defective aspects and to pick holes in it. He pointed out frequently, and eventually silenced those who opposed the argument, of which I was not one, that it is the Government who have the resources to cost measures and to make the proper amendments if they feel convinced by the arguments. I recommend that course of action to the Chief Secretary and others on the Treasury Bench.

My hon. Friend the Member for Derby, South (Mrs. Beckett) was right to table an amendment of this kind on one of the crucial issues of our time. It is of enormous importance that we realise the damage that has been done to manufacturing industry and come to accept the need for changes in so many aspects of the way in which Governments deal with it. There was a time when the Government scorned manufacturing industry; it was just one of many, and it was the service industries that were the industries of the future. It was only as time went on that they began to realise—it has come rather late, and it has not come wholeheartedly even now in some quarters—that the importance of manufacturing industry is that it is the base of the economy from which so many things follow.

The fact that there has been a loss of investment means that we shall find ourselves in great difficulties in getting our balance of trade right. The important thing about our balance of trade is that, if investment has been so good, why do we have a balance of trade deficit at present? Why is our balance of payments currently so weak? We are in the middle of a deep recession, and no one can underestimate its extent. Everything that is said about the future of the recession is only guess work; nobody knows. I, and I am sure many other hon. Members here, speak to a number of business men every week, and we know that there is no question but that they are suffering and that the problems are even more serious in manufacturing industry. It is right that we should press these matters upon the Government and inform them of what is really going on in the country at present.

Mr. Denzil Davies

Does my right hon. Friend agree that one reason why investment has not borne fruit in trade is that, in the main, it has been in non-tradable activities such as banking, finance, communication and property?. Investment in tradable activities—items that have been traded across the exchanges—has been very low.

Mr. Sheldon

That is absolutely right. It is a point that I would certainly wish to make myself. My hon. Friend knows my addiction to investment in plant and machinery. It is that which is the fountainhead of exports of manufactured goods. I have always wanted to encourage such investment. Investment can be a carpet in an office, making a grand office which produces nothing but which creates an impression. Britain needs to increase its manufacturing exports, but given the increase in world trade, that is not enough; imports must be considered as well. The European Community, as well as the general agreement on tariffs and trade, has played a part in increasing world trade, which I wholeheartedly welcome. However, our exports need to rise with it, and Britain is rather weak in that respect.

Mr. William Cash (Stafford)

The hon. Gentleman was rightly enthusing about the European Community, but I cannot go along with his view concerning protectionism. The draft treaty articles prepared with a view to achieving political union have been resolutely kept away from the Library for some time. However, a copy has been deposited in the House, and is now available. It is known as a non-paper, but in the light of the hon. Gentleman's remarks, perhaps he would care to consider the implications of that draft treaty on a single currency and on other measures that some of us might regard as rather protectionist.

5.30 pm

Mr. Sheldon

I have always been in favour of a Europe that is open and free, but I have discerned a number of restrictive aspects in the Community. I was merely referring to the increase in world trade and to Britain's need to export more manufactured goods to match it.

Whenever one talks today to industrialists, or to the executives of any type of company, a large part of the conversation always concerns credit control. People are worried stiff about firms going under, others paying late, and still others turning into bad debts. I welcome the Budget's provisions for bad debt relief, but it is only giving back money that companies should never have risked in the first place had they known that a bad debt was likely to develop. It is a useful provision, but not a cause for much satisfaction.

I know of some companies that are having to reprogramme their computers to allow not for 120 days credit—which is the normal period at the top of the range—but for 150, 180 or even 210 days, in calculating how they stand in relation to some of their slow payers. One used to pay value added tax in arrears, which produced a cash flow, but today VAT generates a negative cash flow, in most cases, if not all, which is a burden on industry that it did not used to bear to anything like the same extent.

Companies are compelled to divert a substantial portion of their resources to credit control. One can tell from recruitment advertising that credit control managers—some of whom have almost reached the status of directors—are much more important than they used to be. Much of that is due to high interest rates and inflation.

A country's balance of trade is a serious matter when it is in the middle of a recession. No one knows when. or if, recovery will come. It is all pure guesswork. President Hoover spoke about recovery being around the corner, and about "normalcy". He really believed that nonsense, but had no basis for doing so. The only basis for our faith in a recovery is our belief that the world is subject to a virtuous cycle of growth, interrupted by recession now and again. However, we cannot know when things will change, or if they will change. No one can predict whether an improvement will come in the summer, autumn or winter. Anyone who wants to try, by reading the entrails of a chicken, is welcome to do so—but all those people who speak of a recovery have no more insight than anyone else.

We used to have stock relief when inflation increased, because companies were being charged corporation tax on notional profits. They were buying their stock at a higher value, and being charged higher corporation tax accordingly. The same is happening today. If inflation is running at 10 per cent., and one is paying corporation tax of 33, 34 or 35 per cent., one is being charged 3 per cent. extra because of one's stockholding. Worse still, the biggest stockholder is manufacturing industry, which not only has stock but work in progress.

Mr. Tim Smith

My recollection is that the right hon. Gentleman was one of the Treasury Ministers who introduced stock relief in 1975 when inflation was running at 25 per cent. Company cash flow became so dire that there was no alternative, if widespread liquidations throughout industry were to be avoided. Surely getting down inflation should be the priority, because then we would not have to worry about whether or not to tax stock.

Mr. Sheldon

I could not agree more, but one must remember that the inflation of 25.9 per cent. to which the hon. Gentleman referred resulted from the boom in oil prices, which increased fivefold. In 1980, Britain had 21.9 per cent. inflation as a result of the Government's own stupid actions after they had been in office a year. That arose from the belief that VAT could be doubled but that prices would not be affected because the Government controlled the money supply. Rarely has such economic nonsense been spoken in the House than at that time, when the Government claimed that inflation at 21.9 per cent. could not happen because they would restrict pay levels by the monetary aggregate being held in check. I agree that the best thing is to reduce inflation—but where it exists, it must be dealt with and brought down in other ways.

Recovery is supposed to come from consumer confidence. What is that meant to mean? Is it meant to mean spending our way out of a recession? Are we really looking for a consumer boom? Is that the proper way to achieve recovery? I have never heard such nonsense. It is ridiculous to engineer a boom for political reasons. Real recovery can come only through investment or exports. One way of achieving that is to increase investment so that British industry can both improve its exports and compete better with imports. One should never underestimate the importance of import competition. More firms have closed as a consequence of import competition ruining their industry, and because of their failure to act, than from their failure to achieve desirable export levels.

The great economies became dominant through manufacturing industry—not through the provision of services or by devising clever ideas in the City. They are important, but they should translate industrial success into commercial success. That is their value.

One thinks of the great British economy of the 19th century, of the United States towards the end of last century and up to the start of the second world war, and of today's great economies of Germany and Japan. They were all created through manufacturing industry. Those of us who wantonly ignore that truth are failing to learn one of the most important lessons of our time.

When Britain faced great problems in the past, we tended to unite and to deal with those difficulties in a sensible way that satisfied the expectations of most people, if not all. We have failed utterly to do so on this occasion, which is what I find so bad.

Mr. Ian Stewart (Hertfordshire, North)

I am glad that my right hon. and learned Friend the Chief Secretary found it difficult to understand the Opposition's aim in tabling the amendment. The hon. Member for Derby, South (Mrs. Beckett), who spoke to it, failed spectacularly to explain what the amendment was about or what its practical consequences would be.

The hon. Lady began by trying to paint as gloomy a picture as possible of the state of the economy and of the prospects for recovery, but the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) and she will know that the predictions of recovery are based not on crystal ball gazing but on many well-established indicators with which the right hon. Gentleman will be familiar from his time at the Treasury. Those indicators are a substantial recovery in stock market prices, a considerable fall in interest rates and an improvement in confidence reported by industrial surveys. After a lapse of time, all those indicators have traditionally and invariably led to a recovery in the underlying economy. My only suggestion to my right hon. and hon. Friends at the Treasury is that the Government might consider introducing another indicator—the urgency with which the Opposition are calling for an early election.

The fact that the Opposition are now looking forward to a recovery—the hon. Lady admitted that—has sharpened the stridency of their calls for an early election before the recovery takes place and before the benefits of the policies which the Government have followed for the past two years are evident. Their calls for an election may be maintained for the time being, but as the year progresses, and as the evidence of the economic recovery develops—as it will—it will be seen that the Opposition hope to have an opportunity to test public opinion at a time when those benefits have not yet come through.

I am baffled by the message which the amendment is meant to contain, because the amendment does not bear much relationship to the hon. Lady's speech. I was disappointed in what she said as I remember her days as an Education Minister when she used to do her homework and did not talk such nonsense. She said that the amendment, which would have a retrospective effect on capital allowances for manufacturing industry in previous financial years, was designed to promote investment in manufacturing industry. I ask her a simple question: is it the Opposition's policy to introduce a permanent extra incentive to capital investment by manufacturing industry, along the lines of that contained in subsection (2)(b) of the amendment? Is that the Labour party's intention?

Mrs. Beckett

We have made it clear that the amendment is intended to raise the issue of investment allowances. We have also made it clear for some time that we think it is especially important to target the allowances on manufacturing in the context of a recession. The allowances would not necessarily be permanent. If the right hon. Gentleman is not aware of that, he has not done his homework.

Mr. Stewart

It is strange that the hon. Lady should raise the issue of investment allowances but have no idea about Labour's policy. It is typical of the way in which the Opposition Treasury spokesmen go about their business. They made a complete nonsense of the shadow Budget. They got their sums wrong and deceived the public and the House.

Mrs. Beckett

Will the right hon. Gentleman give way?

Mr. Stewart

I shall give way in a moment, but I shall finish my point. The Opposition's calculations are a disgraceful deception.

5.45 pm

Mrs. Beckett

The right hon. Member is untruthful as well as extremely unpleasant. He is also inaccurate. If he were to check the record, he would find that the Chief Secretary and the Chancellor conceded that our calculations were correct. This is the third occasion during a brief speech in which—[Interruption.] The Chief Secretary said that our figures for child benefit were correct if one did not feed the increase in child benefit into child support, which we did not intend to do. The Chief Secretary is again confirming that our figures were correct.

The right hon. Member for Hertfordshire, North (Mr. Stewart) has not been speaking for very long. He has been insulting and unpleasant on three occasions. I do not mind that—I expect it of him—but if he accuses me of inaccuracy, he should get his facts right.

Mr. Stewart

I shall leave my right hon. and learned Friend the Chief Secretary to deal with that, but the hon. Lady makes my point for me—I touched a raw nerve. She will have to do better. She said that she did not know whether it was Labour party policy to introduce extra subsidies for industrial investment. She wants to raise the issue but she has no policy. She said that Labour's policy was to promote industrial investment. How can a subsidy on investment that has already taken place be a policy to promote industrial investment? It is nonsense from start to finish. I am sorry to have to point that out in blunt terms, and the hon. Lady may think me discourteous, but if she tables nonsensical amendments she deserves to have them described as such.

The hon. Lady also said that we need to discriminate in favour of manufacturing industry. I wonder whether the Labour party has forgotten all the lessons that it learned 20 years ago about selective employment tax. It tried to introduce a subsidy to manufacturing investment by constructing a system of favourable taxation to companies that are described in the amendment as being the manufacturers of goods, materials and so on. It was a catastrophic disaster. It was unworkable in practice and caused endless problems between subsidiaries and parent companies and between different companies within the same group. It proved totally unworkable. The hon. Lady represents a party which pretends to be ready for Government but which is ready to go back to remedies that failed catastrophically when they were last introduced. That was under a Labour Government—one hardly needs to ask.

I readily concede that the hon. Lady was honest enough to say that there was a great difference between the approach taken by the Government and that of the Opposition to the taxation of business. She accepted that it was part of the Opposition's philosophy to subsidise what they regard as the virtuous part of the economy—those involved in manufacturing—rather than those involved in selling the manufactured goods. I have never understood how there could be a prosperous economy if we discriminated against those who ensured that products were sold but favoured those who produced the product that might or might not be saleable. It is economic nonsense, and it is sad as well as rather frustrating to learn that the Labour party is reviving an old notion which failed so comprehensively.

If the Labour party eventually decided that it had a policy, and if that policy involved a 40 per cent., or substantially higher, investment allowance for manufacturing industry, as my right hon. and learned Friend the Chief Secretary pointed out, it would mean a substantial loss of revenue which would have to be recovered elsewhere through a corporation tax system, heavier Government borrowing, or the imposition of another type of taxation—probably income tax on basic rate taxpayers.

The purpose of the Government's reforms in the 1980s was to achieve lower rates of taxation with fewer allowances against them. Although at the time there was much apprehension about the effect on investment and on the profitability of companies, the reforms were followed by a substantial increase in investment and in the profitability of companies. The Government's yield from corporation tax rose and the rates of corporation tax could be substantially reduced.

Investment decisions came to be made on the grounds of profitability and of the likely success of the investment in commercial terms rather than on their use as a tax shelter for profits that the company had made and on which it did not want to pay tax. That is what happens if there is a higher rate of tax and many allowances. Yet the hon. Member for Derby, South suggests that we should go back to a system of higher allowances. It is inherent in that system that one would have to have higher rates of taxation. If those were not higher rates of corporation tax, they would be higher rates of taxation on something else. One would bring back a range of distortions in the economy which, thankfully, we have been able to get rid of over the past few years.

On all the fundamental points, the amendment is highly unsatisfactory. It offers to produce a deadweight subsidy of investment that has taken place in the past without any incentive to investment in the future. It does so in a discriminating fashion by picking out arbitrarily certain types of company and favouring them. The Labour party says that it would not be at the expense of others. How can it not be at the expense of others? If one is favoured, someone else will have to pick up the bill. The amendment goes against a system which has been found to be satisfactory in the commercial and industrial worlds over the past few years of getting lower rates of taxation so that companies can take a sensible decision about how they use their cash flow. That is one reason why industry, after the reform of the 1980s, has invested so much more and has made better use of that investment. Investment itself has no merit unless it is properly used. We want to encourage not investment itself but the proper use of investment, which is more important. The Labour party has never been able to understand that.

Industry now needs—and companies in north Hertfordshire tell me that they need this—low inflation, lower interest rates, a stable exchange rate and low taxation. We are already on the way to far lower inflation. There has already been a substantial fall and large falls are still to come throughout the year. Interest rates are already on the way down and have further to fall. The exchange rate mechanism has given a framework of stability in the exchange rate in trading with European partners. The low levels of corporate and personal taxation have increased incentives for efficiency and have given a far better prospect of recovery than we should have had under the old tax system after which the hon. Member for Derby, South and her colleagues hanker.

I hope that the Committee will reject the amendment not only because of the dismal way in which it was moved but because of its major shortcomings of substance. It is rather disgraceful that the Labour party should table an amendment that is so unsatisfactory and so poorly explained.

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

The Chief Secretary to the Treasury cannot draw a great deal of comfort, as he sought to do, from the various surveys that have appeared in recent weeks about business confidence and business prospects. He draws a different message from that drawn by some of the sponsoring bodies. The Confederation of British Industry argued not that its survey fully supported the Chancellor's confidence, but that it was too soon to talk about an early recovery. The surveys show a low level of projected investment following a recent sharp fall in investment. That is a worrying problem. The question that we must address now is whether changes in the corporation tax system can materially affect it and bring about a great improvement. If so, we must ask what kind of change. There is no advantage in denying the scale of the problem or in being unduly optimistic about the speed and scale of the recovery which we all hope to see.

Can changes in the corporation tax regime materially improve industrial investment and investment that will be useful rather than simply induced by tax changes? Clearly, the Government will want to argue that the corporation tax changes in the Budget will have precisely that effect. However, they cannot get away with saying that the changes represent a massive net reduction in the burden on business represented by taxation because they consistently ignore other factors, such as the massive increase in the uniform business rate. When added up, it is a far larger sum than that returned to business by the tax changes in the Budget. By opting to increase the uniform business rate by the largest legally permissible sum—10.9 per cent.—the Government not only put in a figure double their projected rate of inflation, but behaved in the manner for which they criticised local authorities—that is, putting the rates up by more than inflation. The Government have done that on such a scale that the increase greatly outweighs the tax changes.

The increase tends to have an especially severe impact on small business. Some of the small business organisations have been quick to point out the damaging net effect on their financial position of the Budget proposals. The Forum of Private Business has been especially critical on that point, not only because of the uniform business rate, but because of other changes including the funding of sick pay and other liabilities that are landing on business.

We are discussing three categories of change: the Government's proposals, Labour's proposals and our proposals. I listened carefully to the hon. Member for Derby, South (Mrs. Beckett) when she moved the amendment. At the end of her speech, I did not understand what Labour intended to do through the amendment. I was helped a little by the Chief Secretary's exposition and then by the hon. Lady's intervention about the technical reasons for the wording of the amendment. It was not clear from the amendment that the increases were included only for the amendment to be in order. Still less was it clear whether the reductions in corporation tax proposed by the Government would also be implemented by the Labour party. That is the crucial hole in the costings. Labour's alternative Budget included proposals for allowances instead of a reduction in the rate of corporation tax. That is part of the amendment. However, the amendment would allow both of those changes to proceed. That may also be for technical reasons. However, it did not become clear whether Labour proposed to retain the reduction in the level of corporation tax. If it does, there is another whole element of costing to find.

Mrs. Beckett

I said clearly and explicitly that we propose to retain the reduction in corporation tax that the Government are instituting. We do not propose to increase it. I had no idea that hon. Members would be so interested in the technical details of the amendment. If I had, I should certainly have explained it. We made it clear that the intention was to raise the issue of the choice that arises in the use of specific quantums of resources—between investment allowances and using such resources to cut the tax rate. I thought that I had made it plain. If I did not make it plain to the satisfaction of the hon. Member for Berwick-upon-Tweed (Mr. Beith), I am pleased that he has given me the opportunity to do so now.

Mr. Beith

The hon. Lady still has not made the matter plain. She first said that she intended to keep the reduction and then that we are talking about a given quantum of tax reduction which can be used either for a reduction or for allowances. If I may put the hon. Lady's case for her, it seems that the logic of Labour's position is that it would be better to use the money for allowances than for a reduction in the total rate. The hon. Lady was quite specific in saying that she did not propose to remove the reduction that the Government are introducing, yet she still wishes to argue for allowance changes.

Mr. Mellor

I am listening with great interest to the hon. Gentleman. Tabling a 20-line amendment is a pretty bizarre way in which to raise an issue. The issue could have been raised in a debate on the clause itself.

Mr. Beith

I agree. I took the amendment to be a set of serious proposals because Labour is quite specific in other ways, with which I shall deal later. The Labour party is entitled to propose a wholly different strategy about corporation tax. However, it is still not entirely clear to me whether Labour wants both strategies at the same time, or just one. If it is both at the same time, a lot more money will need to be found from somewhere. It cannot be found through the means specified in Labour's alternative budget. From what the hon. Member for Derby, South said earlier, the figures were not accurate. Indeed, the alternative Budget assumed that £1 billion could be found from closing a loophole on overseas trusts. We estimated that about £500 million could be found from closing that loophole. The Government estimate, although admittedly on a slightly more limited change, a far lower figure, which we shall debate subsequently. The prospect of £1 billion being gained from that change has not materialised in any further discussions. The costings figures are, to put it mildly, in considerable doubt.

6 pm

I argue that there should be a different strategy that is directed towards the fundamental weakness of the corporation tax system—the way in which it is affected by inflation. The strategy should not be based on allowances that are directed towards manufacturing industry. In our alternative Budget we advance the argument that corporation tax allowances should be indexed. That would begin a reform of the corporation tax system. It should be remembered that the corporate tax burden increases as inflation increases. Our proposal would move the system towards neutrality with respect to inflation and provide some further assistance for investment. I submit that it would lead to a better use of resources. I should explain for the avoidance of doubt that I am talking about using the same resources and presenting the indexing of allowances as an alternative to a straight cut in the level of corporation tax. In other words, there would be a different use of the same resources from that proposed by the Government.

I do not believe that the Government's approach leads to resources being used in the most efficient way, either for the promotion of investment or the reform of the tax system. We are talking of the expenditure of £380 million in this tax year. That is a substantial sum which would go most of the way to paying for indexed allowances. The Labour party's alternative is to increase allowances in a way that might help to increase some manufacturing investment. At 40 per cent. the allowances would be so high that it is difficult to avoid the conclusion that some unnecessary or misdirected investment would arise. I am still unconvinced that we can readily separate manufacturing from other valuable fors of industrial investment.

Is it always better to build machines rather than to provide services? Is that always a better allocation of investment resources? I am not convinced that it is. Why should someone who proposes to make an investment in inland waterways to provide a better and more environmentally friendly form of transport have that investment regarded as less suitable to attract allowances than an investment in manufacturing output?

Mr. John Battle (Leeds, West)

To take up the hon. Gentleman's example, it is not possible to clean out inland waterways in the absence of the appropriate machinery. The service sector often depends on the manufacturing sector.

Mr. Beith

Both sectors are interdependent. If the system is neutral as between manufacturing and services, both areas can benefit from allowances at the same level. It seems a roundabout way of encouraging inland waterways to hope that a certain form of manufacturing will develop in the United Kingdom rather than elsewhere and to tilt the allowances in that direction. Why should specialised maintenance be excluded from the benefit of investment allowances when it may be crucial to maintaining industrial competitiveness? It is said that there is a proper distinction, but that case has not been made out.

Reforming the corporation tax system so that it is not affected by inflation by indexing depreciation allowances would give some incentive to increasing investment as a long-term principle. We would build into the tax system something that would last into the future and something that would be predictable in its impact. It would not produce a very short-term high level of investment. I do not imagine that the Labour party envisaged a 40 per cent. level of allowance lasting indefinitely—I assume that it sees it as a short-term boost to investment. Perhaps it would be a longer-term boost, but it would not survive all Governments into the future. A reform of the system that would be likely to last would be a continuing and predictable guide to investment decisions for the future and one that would lead to a more suitable use of resources.

The way in which inflation affects the corporate tax system should be underlined. The tax base increases with inflation through stock depreciation. When the right hon. Member for Blaby (Mr. Lawson) introduced the 1984 changes that got rid of stock relief, I think that he felt that he was in the process of driving inflation out of the system. If he had been able to predict the rates of inflation that we have experienced since then, perhaps he would not have been so ready to get rid of stock relief at that time.

The annual writing down allowances are based on historic cost rather than current cost. Thus inflation reduces the real value of the allowances and the tax base increases with inflation. A recent paper produced by the Institute for Fiscal Studies was the result of an attempt to quantify the factors that I have outlined and others in the United Kingdom economy. It used a sample of 750 firms and estimated that if inflation remained constant at 10 per cent.—heaven forbid—from 1990 to 1993, corporate tax liabilities would be one third higher in 1993 than they would be if inflation was at zero. The effect of 10 per cent. inflation on the tax system would be to raise the cost of capital by 2 per cent. above its cost with zero inflation. The paper concludes that almost all the corporation tax bias against investment at current inflation rates results from the inflation non-neutralities in the present tax system. That is the use of horrible jargon, but there is a strong argument for getting rid of the effect of inflation on the corporation tax system.

Firms are hit extremely hard during times of high inflation. Interest rates go high and the Government squeeze the economy. It seems the least appropriate time during which to increase the corporation tax burden.

In that context, I raise another issue in the hope that the Government will give it further thought. I wonder why the Government still have not dealt with the problems of unrelieved advance corporation tax. It is still a fault in the tax system. Unrelieved advance corporation tax hits especially export-earning companies with a high proportion of overseas earnings that do not have mainstream corporation tax against which to set the advance corporation tax that they have already paid. That is another area of corporation tax reform on which the Government could engage.

The extent to which corporation tax can induce the sort of investment that we want in industry can be exaggerated. The decisions that we take on this part of the Finance Bill will not achieve a great turnround in investment. The decisions that we take could distort the pattern of investment, especially if our approach were loaded too much in a particular direction. Perhaps the most useful service that we could perform would be to make the system more neutral in respect of inflation and to ensure that it provided a predictable basis on which companies could plan for the future. They could then make investment decisions without the fear that they are dependent on incentives that might quickly be withdrawn or that they will be undermined by a pattern of taxation that is distorted by inflation.

Mr. Tim Smith

I was very interested in what the hon. Member for Berwick-upon-Tweed (Mr. Beith) said about unrelieved advance corporation tax. There is a problem, and it is one that we should address. Indeed, it is a major problem for many of Britain's most successful companies that have major overseas investments. I am not sure whether the hon. Gentleman is a member of the Select Committee on the Treasury and Civil Service. As we are talking of a tax issue that has major economic implications—it is not an arcane point—it could well be taken up by the Committee at some stage. It is a complex but extremely important issue that bears serious consideration. When I first read the amendment, I struggled to understand its implications. I thought that it might be the Labour party's contribution to tax simplification. The hon. Member for Derby, South (Mrs. Beckett) said that the object of the exercise was merely to raise an issue. Surely she could have tabled an amendment that proposed that capital allowances should be increased from 25 per cent. to 40 per cent. for one year. We would all have understood what she meant. As has already been said, the amendment is wholly retrospective. The financial year 1990 has finished, and there can be no question of encouraging new investment. The amendment would merely produce a windfall gain for companies that have already invested.

Mrs. Beckett

This is becoming incredibly tedious. The amendment has to be retrospective for it to be in order. The clause refers only to the rate of corporation tax for the coming year. I assure the hon. Gentleman that the amendment was the simplest way that we could find of raising the issue. We wanted to ensure that it was not technically defective. If we had tabled a technically defective amendment, would Conservative Members have spent all their time saying that it was a shame that the Opposition were unable to produce anything but technically defective amendments?

Mr. Smith

I am happy to deal with the merits of the amendment; I shall leave aside the technicalities. I shall merely say that it would have been better to seek to amend the following clause, which deals with next year's corporation tax rates.

What is the most effective way of encouraging increased investment? Can we do it best by introducing increased capital allowances? I suggest that there has been some falling away from the record levels of investment that we saw in 1986, 1987 and 1988 because of a reduction in corporate profitability as a result of the recession.

Much the most important source of investment funds in the United Kingdom is retained profit, not borrowings or new equity investment and certainly not extra tax reliefs. The great thing about the 1980s was the huge increase in profitability in British industry and the ability of industry not only to distribute more and pay more to the taxman but to retain more in the company and invest more. That has been the main source of increased investment in the past few years.

The encouraging news is that it is forecast that next year and in 1993 we shall see a resurgence of profitability in British industry. Therefore, we can reasonably assume that we shall also see a resurgence of investment. Indeed, when one talks to people in business, they do not all say that they have cancelled their investment programme. They say that they have deferred their investment decisions as a result of the uncertainties brought about by the recession and the loss of business confidence.

It is not possible to continue deferring investment decisions for ever. For example, if a company has a programme of replacing its vehicles, whether company cars or its commercial fleet, it cannot defer the decision to invest for ever. It becomes more expensive in terms of repairs and maintenance to do so. Eventually, the company must make a decision to invest. Many investment decisions have been deferred. Companies are simply waiting for the restoration of confidence. When that happens, we shall undoubtedly see a resurgence of investment and profitability.

Whether the tax system can encourage a resurgence of investment is a side show. We need to have a corporation tax profit which is as close as possible to the accounting profit. That is important because otherwise there are distortions. My right hon. Friend the Member for Hertfordshire, North (Mr. Stewart) referred to what happens when such distortions occur. I remember what happened because I had the misfortune to work in industry when we had a Labour Government from 1974 to 1979. At that time, people would work out the profit at the end of the year and calculate the tax of 52 per cent. Then they would say, "Hang on a second—if we make some more investment or bring forward some investment decisions, we can obtain 100 per cent. allowances." Decisions were not made on their merits or because it was a sensible commercial investment and the timing was right; they were made for tax reasons, and I cannot think of a worse reason for making an investment decision.

There is a distinction to be made between the quantity of investment and the quality of investment. It is not sufficient simply to seek more investment. We have already heard about what happened in eastern Europe, where many countries had record levels of investment but appallingly bad productivity and output.

It is important to have a tax system that does not encourage people to make decisions for the wrong reasons. I supported the changes made in the Budget of 1984. The Confederation of British Industry was not happy about those changes. It was a radical change from a 52 per cent. rate of corporation tax with high allowances and stock relief to a 35 per cent. rate of tax and lower allowances. The CBI was worried about what would happen. I remember the representations that were made to Back-Bench Members about those changes. However, the Treasury was right to make those changes. They were the right ones and we have seen a huge growth in investment, profitability and, until recently, the corporation tax take since the changes were made seven years ago.

In both the corporation tax and personal tax systems, we should have—and we now have—as broad as possible a tax base and as few reliefs as possible. That is the most sensible way to proceed. As I said, it is also important that the corporation tax profit should be as near as possible to the accounting profit. I say that not merely because it is neat to do it that way, but because, in accountancy terms, the object of depreciation is to amortise the cost of an asset over its useful life. That is not easy. It involves subjectivity. There is room for differences of opinion about the rights and wrongs of it.

It is not possible for the tax system to follow accounts exactly—we must have some form of arbitrary rule—but 25 per cent. on a written-down basis reflects the way in which assets are generally used. The only worry—I dare say that it is an important one—was raised by the hon. Member for Berwick-upon-Tweed. It is what happens when there is inflation. As soon as there is any inflation in the system, one has a problem. It then costs considerably more in money terms to replace assets than it did to acquire them in the first place.

It is better to focus on developing tax policies which bring inflation down rather than policies which accommodate and institutionalise inflation. I should be wary of doing that. Even though there are some distortions, it is probably better to stick with the historic cost accounting approach and attempt to bring inflation down. It would not be sensible to pursue the proposal in the amendment, apparently at a cost of £200 million to the Exchequer this year. The hon. Member for Derby, South has produced no evidence that the proposal would produce the investment that the country needs, so I hope that the Committee will reject the amendment.

6.15 pm

Mr. Denzil Davies

We have had several nit-picking speeches from Conservative Members, from the Chief Secretary to the Treasury downwards—or upwards. I had hoped that we were seeing some change of attitude in the Tory party to manufacturing industry. However, that did not come out in any of the speeches that we heard tonight.

If my hon. Friend the Member for Derby, South (Mrs. Beckett) had tabled an amendment to give a tax subsidy, as the right hon. Member for Hertfordshire, North (Mr. Stewart) called it, or tax allowance to banks, stockbrokers or property companies, to encourage the purchase of shares by individual persons, to encourage personal equity plans, business expansion schemes or, indeed, employee share ownership schemes or to further any of the other items of fiscal engineering that the Government have undertaken, we should have heard loud guffaws of approval from the Conservative Benches. But instead the amendment seeks to encourage manufacturing industry.

The attitude of Conservative Members to the amendment confirms the deep-seated hostility to manufacturing industry in the Tory party, or at least the modern Tory party since 1974. I have observed that attitude carefully from the Opposition Benches and from the Government Benches for a long time. It came out again in the nit-picking speeches that we heard this afternoon. The hostility goes back 12 years. Some of us were on these Benches or the Benches opposite during the last 12 years and before.

In 1977, 1978 and 1979, the Labour Government sought to introduce measures to improve our manufacturing industry. Those measures were not only opposed but treated with contempt and derision by the Tory Opposition Treasury team. Yet in 1979, we had a surplus in our trade in manufactured goods. The right hon. Member for Hertfordshire, North called the years of the Labour Government the years of failure. I suggest that they were the years of success. The balance of trade is the only indicator of success for the manufacturing sector. Manufactured goods are the only tradable commodity across the exchanges.

We now have the years of failure. Last year, we had a £16 billion deficit in our manufacturing trade, despite our wonderful corporation tax system, which is supposed to be far better than that of Germany or France. Yet Germany and France managed to have a surplus in manufacturing trade, while we have managed only a deficit under the Tory Government.

I remember that, in 1979, when Lord Joseph became Secretary of State for Trade and Industry, one of the first things he did was to take away investment grants, which helped small companies in the regions. Then he whittled away at the selective employment regions, the development areas and all the assistance that has been given to the regions, mainly to manufacturing industry. Regional Britain was then, and to some extent still is, manufacturing Britain.

Across the road at Great George street, the right hon. and learned Member for Surrey, East (Sir G. Howe) was doing his bit to destroy huge chunks of British manufacturing industry. As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said, the right hon. and learned Gentleman increased VAT to 15 per cent. Some people forget that he also introduced a massive increase in the price of gas and electricity to British industry and removed what were in effect subsidies. The subsidies should have been removed eventually over a period, but it was done all in one year.

I had a private electric arc furnace steel works in my constituency. The Tory Government of 1981 managed to wipe out most of Britain's private steel-making capacity, certainly in special steels, with 15 per cent. VAT. high interest rates, a high pound and a massive increase in the price of energy, especially gas and electricity, on which those industries were dependent. Altogether, 25 per cent. of our manufacturing base was wiped out between 1980 and 1982 by the policies of the Conservative Government, who had no interest in manufacturing industry.

Why were the Government hostile to manfacturing industry? There were three reasons: first, because the strength of the trade union movement lay in manufacturing industry, so anything that weakened it was good and if it had to be weakened, so be it; secondly, they had contempt for regional assistance because the regions were the basis of manufacturing industry; thirdly, there was the influence of what is euphemistically described as the radical right—that collection of loonies, mad economists, mad theorists and third-rate financiers we see on television from time to time—who influenced policy so much in the past 12 years. They had no interest in manufacturing industry and no concern for the balance of payments. They believed in letting the market decide everything.

The trouble is that the market in Britain will always gravitate to service industries. We are not against service industries, property development or commercial development, but because of our banking and financial system, the bias has always been to service industries. Some attempt must be made to redraw the balance to manufacturing industry.

The right hon. Member for Blaby (Mr. Lawson) believed in what is called fiscal neutrality—removing all allowances and a lower rate of tax. That increased benefits to service industries, which did not have to spend money on investment, but had a deleterious effect on our manufacturing industry.

That is one reason for the decline in our balance of trade in the past four or five years, but the then Chancellor was not prepared to help manufacturing industry because it did not fit with the political aims of the Tory party. Manufacturing industry is now a small sector of our economy. The Tory hinterland—the south-east—is almost entirely dependent on "highly geared" service industries, which is a euphemism for them being up to their eyeballs in debt.

The property-owning democracy is up to its eyeballs in debt. High interest rates are damaging the hinterland of the Tory party, but apparently they are the only way of reducing inflation. In the next few years, it will be interesting to see whether the south takes the same attitude to inflation as it did in the past. It was easy to preach against inflation and to say that the only way of reducing it was a recession, which largely did not affect the south of England. I think that the Chief Secretary realises that things are changing: the recession is affecting the south of England, and the fight against inflation is creating unemployment there. I wonder whether we shall hear the same cries against inflation as we heard in the past.

It was easy to talk about wanting to reduce inflation when the recession mainly affected the regions, but now the Government are extremely worried about rising unemployment in the south-east. That is why there will be electoral difficulties in the autumn, as there are now, and at the beginning of next year if the Prime Minister does not call an election until then.

The Government have shown that they are not interested in manufacturing industry. They will find every reason not to help it, but Britain will survive only with a strong manufacturing sector. Jobs in banking and the property sector will not increase in the next five years. Where will all the good people of the south-east who have been laid off find work? They will not find it in banking, finance, retail distribution, pensions or insurance. The boom in the City in the past 10 years will not be repeated.

The Government should change their attitudes, because the only way of reducing our balance of payments and the only way in which Britain can grow, live and pay its way again is through the manufacturing sector. Perhaps the Chief Secretary should rethink, and at least start tonight with the amendment.

Mr. Michael Spicer (Worcestershire, South)

I am sorry to have to disagree with the right hon. Member for Llanelli (Mr. Davies), for whom I have enormous admiration and respect. I remember debating the Development Land Tax Bill in 1976 with him night after night. In those days, he could at least recognise a philosophical divide when he saw one. There has been no nit-picking by Conservative Members, but there is a division on what makes proper investment work.

There is no question of Conservative Members disliking manufacturing industry. In the past 10 years, output in manufacturing industry has been rising and rising and recently reached a peak. Contrary to what the right hon. Gentleman suggested, because of the way in which we have geared incentives, manufacturing industry has been encouraged and Britain has been the recipient of vast foreign investment, notably in the automobile industry and other advanced industries. One need only drive up and down motorways to realise that manufacturing estates have been transformed in recent times.

Mrs. Beckett

The hon. Gentleman said, if I heard him correctly, that manufacturing output has been rising and rising under the Government. I am sorry to have to tell him that it fell dramatically in 1980 and did not recover from the figure that was inherited in 1979 until 1988. It increased in 1988, 1989 and 1990 but is falling again. That is not the same as saying that there has been a dramatic increase in manufacturing investment throughout that period.

Mr. Spicer

The hon. Lady will confirm that manufacturing output recently reached a peak. Of course there have been ups and downs and cycles, but under this Government it reached a peak. The issue is what makes efficient investment that creates a return, which must relate to the marketplace and not to some policy on the tax system.

The amendment is classic Labour party dogma and seems extremely muddled. The hon. Member for Derby, South (Mrs. Beckett) tried to defend it and said that the fact that the amendment would increase corporation tax more than will the Bill is purely technical. We must accept that it is purely technical, but my right hon. and learned Friend the Chief Secretary was justified in saying that the amendment might be a taste of things to come.

6.30 pm

My problem when listening to Labour spokesmen on economic matters is that I find that what they say is utterly incredible. I do not believe what they say. I am prepared to accept and understand that they have a dogmatic position which we can oppose and debate. My problem is in assessing whether there is any meaning in what they say. Over the past few years Labour spokesmen have been extremely bad at putting their case across. Their policies do not add up—not just in the mathematical sense, but because there is no logic behind them.

There is an alternative way of looking at what the amendment would do. One can accept the point about the cost of capital and listen to what the Labour party says about it and about interest rates—nterest rates are a relevant alternative way of encouraging investment, which we all accept is needed—ut the Labour party's position on interest rates was originally determined in 1987–9. The Labour party talked about how the Government ran an overheated economy, yet when interest rates were low and when, in retrospect, there was a case for raising them and having a tighter monetary policy, the Labour party was pressing for lower interest rates. That must not be forgotten.

More recently, some of us have believed for some time that interest rates should be lower. The Labour party, far from recognising the relationship between exchange rate policy and interest rates, was pressing for and goading us into entry into the European exchange rate mechanism, which has been perhaps the major constraint on interest rate policy. The same people who were pressing for lower interest rates pressed for entry into the ERM, which has been a major constraint on the cost of capital—ne might even argue that it has been the factor in continuing the high underlying costs of investment. Therefore, they are the least able now to argue for lower interest rates and lower costs of capital as alternatives.

Anything that the Labour party says on macroeconomic policy is distinctly incredible and questionable. Nothing adds up, except when Labour Members come to the House on occasions such as this and propose the classic Labour dogmatic positions which, as my hon. Friends have said, have been debased and debunked for many years.

If one considers trade policy and the effect on our balance of payments, and if one considers investment and all those matters with which both sides of the House are concerned, one cannot ignore the cost of capital or interest rates.

What has struck me—was saying this even when I was a Minister last September—as been the Treasury's difficulty under all Governments for many years in recognising the lags that exist. This involves not just the old analogy of the tanker taking a long time to change direction; it is much more complicated than that. The lags are complicated. It is not just a question of the lag between a change in interest rates and a change in confidence—I hope and pray that my right hon. and learned Friend the Chief Secretary is correct that confidence is now returning; there is a lag between a major change in interest rates and confidence. There is also a lag between a change in confidence and actual investment, and one between actual investment and employment. Then there is the effect of a change in employment on politics and voting intentions, which we, as politicians, cannot discount. Different people calculate that those lags stretch for long periods ahead. It has been calculated that some lags stretch two or three years ahead.

The amendment is nonsense. It is a typical Labour amendment, representative of the old-fashioned thinking in which Labour Members engage. It does not address the fundamental issue, which is the need both to reintroduce general incentives to investment and to lower the cost of capital which is vastly greater in this country than in Japan, West Germany or the United States. If we are anxious to be competitive, as we all are, my right hon. and learned Friend and his team are absolutely correct to head towards lower interest rates. I hope that the interest rate structure will be determined by the real interests of this economy and not by considerations which relate to the German economy, for example, to name but one.

Mr. Battle

We are entitled to ask the Government why they are so resistant to proposals to support the manufacturing base of our economy. Behind the generalised comments on our amendments lies a deep hostility, in some cases, even to analysing the economy into the manufacturing and service sectors and to considering what is happening within those different sectors. One hon. Member refused to acknowledge that there were any differentials between the sectors of the economy. There is a case for tilting the structure of the Budget towards supporting manufacturing industry rather than allowing it to continue to decline.

During the past 13 years the Government have practically consigned our manufacturing base to history. Not far from where I live a famous textile mill was refurbished and turned into the Armley Industrial museum. A working textile loom, industrial engineering and textile machinery can be seen there. The only experience of manufacturing that the children of the future will have will be in that industrial museum. My constituency was built on textiles, clothing and engineering, but employment in those industries and that economic base have been completely eroded.

Since the early 1980s, 2 million manufacturing jobs have been lost. That is the erosion that I am talking about. We were told that it was a slimming down to make manufacturing leaner and fitter. We even had the celebrated remark of Lord Young that the manufacturing base did not matter and the economy would boom if only more people would eat out. We know that we cannot run an economy simply on the service sector and eating out.

Even now manufacturing accounts for just over one fifth of total United Kingdom output. It is down from a third in the mid-1970s, yet the Confederation of British Industry now expects a further 300,000 jobs to be lost in manufacturing by the end of 1992. Our balance of trade depends on manufacturing. Four fifths of United Kingdom exports are factory-made goods.

There is a catch. Ian Thompson, the chief economist at the Engineering Employers Federation, claims that a large part of the increase in exports over the past few years is represented by the assembly or repackaging of imported manufactured goods, particularly in high value areas, such as advanced electronic equipment. He says: My contention is that the United Kingdom manufacturing sector will not be big enough to support the kind of expanding economy that we need in the 1990s.

Mr. Kenneth Hind (Lancashire, West)

If the hon. Gentleman considers what people, particularly those at Bradford university and elsewhere, were saying 15 years ago about work practices, he will realise that they projected a shrinkage in manufacturing employment and an increase in service sector employment. That has come about. That prediction is taking place alongside the improvement in productivity. It was likely to take place, and it has nothing to do with Governments. It is related to automation and other such matters.

Mr. Battle

We were also told that manufacturing job losses would be replaced by service sector jobs. However, we find that those replacement jobs are part time, temporary and even lower paid. The myth is still perpetuated, however, that low pay is the cause of unemployment in areas of highest unemployment. Each week I return from the Ho use to my constituency and hear announcements of hundreds of redundancies in manufacturing firms there—GKN Axles in Kirkstall, Doncaster Monkbridge Steel Stockholdings, Pennine Castings and, last week, Howson Algraphy which announced 340 redundancies. That is the scale of the erosion of the manufacturing base.

People suggest that it is just the service sector in the south-east that has been affected. The fact is that the economy is being undermined everywhere, not just in the south-east. The Government's economic policies are making manufacturing in constituencies such as mine in the north practically anorexic. They are being starved to death. They are also being starved of investment by high interest rates. Furthermore, they are being starved of the training back-up that they need. Now they are being belted by the uniform business rate.

The CBI forecasts that the projected fall in manufacturing investment this year will continue. It forecasts that it will fall by a further 17 per cent., after a 5 per cent. decline last year. In his Budget statement the Chancellor said that investment would fall by 10 per cent. in 1991. Manufacturing order books are lower than they have been for 40 years. In that context, the Government ought to take seriously the plea that the manufacturing base should be supported. It should not perpetuate the shibboleth and myth of the past—that the service sector will save our economy.

Our amendment is a small measure that I hoped the Government would support. It would provide a lifeline to manufacturing industry. It would not damn it and consign it to history textbooks.

Mr. Quentin Davies (Stamford and Spalding)

I find the amendment moved by the hon. Member for Derby, South (Mrs. Beckett) far more revealing of her own state of mind and that of the modern Labour party than she perhaps can have imagined when she tabled it. It enshrines, in a particularly striking and transparent way, two of the more antique economic illusions to be found in the modern world. I am aware that they were nurtured in the bosom of the British Labour party for generations after they had been abandoned elsewhere in the western world. However, I thought that in its new, reformed guise the British Labour party would have abandoned them.

The first of those illusions is the belief that, somehow, manufacturing is more virtuous than any other form of economic activity. I seem to remember that there is a passage in Marshall's "Principles of Economics" about how pervasive but mistaken is the idea that, whereas the maker of furniture performs a socially useful function, the man who markets and distributes it does not. When that book was published in 1890 I imagine that many people were victims of that apparently seductive illusion, but that book which, as you know, Sir Paul, stands at the beginning of modern economic teaching, was published 101 years ago. Therefore, it is remarkable to find that members of the Opposition Front Bench in the House of Commons today are still perpetuating that illusion. I am sure that Marshall would have been extremely surprised had he ever reflected upon the fact that that might be the case.

Some forms of economic activity are more useful than others and provide a better return on capital employed. Some may add more value. Others—at particular stages, at least—may show a greater rate of growth than others. There is no correlation between those criteria and manufacturing. My hon. Friend the Member for Beaconsfield (Mr. Smith) has already referred to a number of service industries that have a very high added value attached to them and that have enjoyed much faster growth rates than many manufacturing sectors.

It is completely wrong, for example, to suppose that software is an activity that is less inherently economically viable than the production of hardware. The two are closely related, but at various times it may be that the software produces far greater value for society. I hope, therefore, that we can lay that myth to rest for the rest of the debate on the clause and for the remainder of the Committee proceedings.

The other illusion that, apparently, is still dear to the heart of the Labour party is that investment is an end in itself—that, somehow, it is an inherently virtuous activity that should be pursued simply for its own ends. Nothing could be more destructive or more damaging to good, sound economic policy than that illusion, attractive though I know it still is to many Labour Members.

One of the most fundamental economic decisions that a society collectively takes, whether consciously or not, relates to what portion of its current output should be invested, what proportion of the harvest should be set aside as seed corn and what proportion of it should be consumed. There is no point, however, in forgoing present consumption unless the return from the investment will be worth more than the consumption that is currently forgone, otherwise the welfare of that society will not be enhanced; it will be diminished. Over time, that society will be poorer, not wealthier.

If one wants to consider an example of how it is possible to impoverish a society by forced investment—by investment that yields a negative return, a return that is less than the value of the investment—one needs only to look at the examples in eastern Europe that have come to light so dramatically over the past year or two.

6.45 pm

Mr. Hind

Does not my hon. Friend think that it is important to balance a consumer purchasing something, which maximises the investment and creates wealth, against the idea that the investment itself will benefit society? The Opposition would increase the amount of taxation that is levied upon the better off. Their argument is that investment should be increased. However, they would take away the very means of increasing investment, whether it be through savings, insurance policies or bank savings. They believe that consumers would spend more, but consumers would not have more money to spend because they would be paying more tax into the state's coffers. Their economic argument does not seem to stand up in any circumstances.

Mr. Davies

I agree entirely with my hon. Friend. I have at heart in my remarks—as I am sure do all hon. Members—the interests of society and the country as a whole. If a firm is induced by tax incentives to make an investment that does not, in real resource terms, yield a positive return, it may be compensated by the tax advantage that induced the firm to make the investment in the first place; but that compensation is at the expense of society as a whole. If one takes the aggregate of the resources available to society and looks at what is done with them, one finds that a proportion of them has been lost and thrown away. They have been put into what is called an investment, but the consequence of that investment is not the same resources being available for future consumption as would have been available if the investment had not taken place. They amount to less. That must be a madhouse.

It may be that the Opposition have not thought this through thoroughly. If they adopted the policy of trying to push firms into making investments that on commercial criteria, against a neutral tax system, they would not have made, they would steadily reduce the marginal return on investment. Once the marginal return on investment became negative, which would eventually happen, society would be greatly impoverished. Therefore, I urge the Opposition to turn to any good textbook that has been written since Marshall so that the future deliberations of our Committee can be relieved of some of these antique illusions.

Mr. Mellor

The attendance in the debate has been small but the speeches made in it have been of a high quality. We have had a number of frisky contributions. I shall restrict my speech because I sense an enthusiasm in the Committee to move on to other matters.

To make up for an oversight last week, when I should have said what I say now, may I say how pleased I am to see the hon. Member for Neath (Mr. Hain) here. He was an opponent of mine at two elections, and we had our disagreements. However, I wish him all good fortune and I hope that he will enjoy his time here. It says a lot for his diligence that he is sitting through debates on the Finance Bill. I am not sure whether one would recommend it as a good way to start.

Mrs. Llin Golding (Newcastle-under-Lyme)

It is a reward.

Mr. Mellor

I think that one would have demanded a recount if one had known that that was in store.

I particularly enjoyed the speech of the hon. Member for Berwick-upon-Tweed (Mr. Beith), as well as those from a number of my right hon. and hon. Friends, particularly of my right hon. Friend the Member for Hertfordshire, North (Mr. Stewart). All referred to the threadbare nature of the amendment. It is clear that everyone agrees with clause 22, which reduces corporation tax. I am not sure how convincing anyone, apart from her most devoted supporters, found the attempt by the hon. Member for Derby, South (Mrs. Beckett) to add to the clause an ill-focused return to investment allowances. The proposal was put before us without any definition of what kind of investment the allowances would be given to, or of the period for which they would be given, or whether they would be retrospective, or how far in the future they would go.

Given the sensitivity of costing and fiscal proof, it was astonishing that the hon. Lady was unable to offer—perhaps she will in winding up—any estimate of how much all this will cost. Our estimate is that it will be £200 million. Notwithstanding what the amendment says, it is apparently not her intention that this will be obtained from corporation tax. It is an interesting figure floating around. I return to the point that the number of sources for increased taxation that the Labour party is ruling out makes it likely that the poor old chap on the standard rate of income tax will have to bear the brunt of these changes. It is unfortunate, to say the least, that having taken the trouble to table a 20-line amendment, the Opposition cannot be more precise on these points. As attention increasingly focuses on what they propose to do rather than on what we have done and are proposing to do, I doubt whether the comparison will be to their advantage. We could not afford to make proposals anything like as threadbare as these.

I also find misconceived the assumption that there is something especially good about investment in manufacturing that is not so good about investment in other commercial activities. Britain must have a strong manufacturing base and nothing that I say belittles that need. Apparent in a number of the speeches from the Opposition was a hankering to go back to the days of L. S. Lowry. The idea is that, now that Britain no longer has L. S. Lowry-type landscapes, we have lost something. I wonder whether that is the forward-looking policy that we should be hearing.

I have said before, but it bears repeating, that, increasingly, as the Opposition shed some of the neo-Trotskyism of the early 1980s, we are left with sad, old glimpses of the policies of Callaghan and Wilson. There is not much evidence of the Opposition coming to terms with the modern British economy. That was particularly evident in the disparaging observations about banks made by the right hon. Member for Llanelli (Mr. Davies).

What are we to say about the differentials between investments? I happen to have the figures for the size of the financial services sector. I recently had an engagement with part of that sector and it has stuck in my mind. The sector is responsible for 20 per cent. of our gross domestic product and 12 per cent. of employment. It is a buoyant sector in which employment has increased by 60 per cent. since 1980. It contributes £9 billion to our invisible earnings, but it is to be regarded as a kind of second-class activity, in comparison to manufacturing, which is to be the subject of tax breaks. These have been presented to the House in nothing more than an ill-focused attempt to curry favour with one or two sectors of industry that still look back to the old days of stock allowances and investment allowances. However, most of industry, certainly as represented by its associations, has moved away from this and now recognises that, in the end, we want a competitive economy with low direct taxation rates, which leaves those who run industry free to make their decisions rather than having those decisions made for them, or distorted, by Whitehall. On that basis, I hope that the Committee will reject the amendment and, when it comes to it, endorse clause 22.

Mrs. Beckett

I can honestly say that this has been one of the most peculiar debates that it has ever been my privilege to attend. It is peculiar partly because of the extraordinary nit-picking way—my right hon. Friend the Member for Llanelli (Mr. Davies) was right—in which the Government have approached the wording of this modest amendment. It is designed to raise the issue of the choice, which would be open to any Government, between giving help and support to industry through cuts in the rate of tax or through something like investment allowances. I made it plain from the outset that this was the purpose of the amendment, and it is extraordinary that there should be so much concern about the wording of the amendment. I have not had the privilege of serving on a Committee with the Chief Secretary, but on the Committees on which I had the privilege of serving I found that the Government, on dozens of occasions, got the drafting of the Bill wrong. Despite the criticism, the Government do not seem to be able to find any defects in the wording of the amendment, which is odd.

As for the hon. Member for Berwick-upon-Tweed (Mr. Beith), I am not surprised that the Minister enjoyed his speech, but I shall scrutinise his amendments with the care that he devoted to scrutinising ours. As his amendments are nearly always defective or out of order, it was foolish of him to stray into this territory.

Mr. Mellor

I assure the hon. Lady, because I am only too well aware of the technical defects of drafting—I dare say that I shall have to confess to a few upstairs—that that was not my point. My point, and that of the hon. Member for Berwick-upon-Tweed, was that I could not understand why the amendment applied only to manufacturing and not to other forms of investment and that I wanted to know who it covered and how much it would cost. These are points of substance, not technical points.

Mrs. Beckett

I am about to address these points. I was dealing first with the technical points made by the Minister and the hon. Member for Berwick-upon-Tweed, among others. These are cash flow measures, not net changes from the point of view of spending over a period of years.

The Chief Secretary put his finger on the most important issue that has been raised—whether or not greater priority should be given to investment in the manufacturing sector. The Chief Secretary chided the Opposition and asked why we considered the manufacturing sector to be so important, and why we did not encourage all kinds of investment, no matter in what sector it is made. I am prepared to admit that there is more worth in investment in manufacturing industry, making goods that we can sell elsewhere to earn our living, than in a few more car parks and casinos. If the Government do not think that such investment is preferable—judging from what they have said, they plainly do not—I am delighted to get that on the record.

Mr. Quentin Davies

Will the hon. Lady give way?

Mrs. Beckett

No, I do not have time.

In his opening speech, the Chief Secretary talked about how wonderful it was that corporation tax was lower in this country than in Germany, France or Italy and that the tax burden on companies was lower here than in Germany, France, Italy and other countries.

The total tax burden on companies here is lower than that in France, lower than that in Germany and lower than that in Italy. Anyone listening to the right hon. and learned Gentleman would have thought that we had a more successful record than Germany, France and Italy. Anyone would have thought that, given this wonderful incentive, companies here had invested more and that, in some way, this refuted the appalling and frightening statistics showing our decline in manufacturing output, the decline in our share of manufacturing trade and the other very considerable difficulties that we face.

7 pm

In his response to an intervention from my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith), the Chief Secretary talked about investment having fallen off from a historic high. For a moment I thought that he, like my hon. Friend and, indeed, myself, was referring to the levels that had been inherited from a Labour Government in 1979. If he was, clearly he realised his mistake, as he hastily began to talk, instead, about the peak of investment in 1988–89. There is no doubt that, by 1988–89, investment had returned to the levels of 1979, just as, unfortunately, investment is now going back to the levels of the 1960s. The Chief Secretary referred to an investment level of about £11 billion—I think that the reference was to last year—but he will know that the same statistics show that the level is expected to fall this year. The figure may go below £9 billion; it will certainly go below £10 billion. That is the situation with which we are seeking to cope and our amendments are intended, in a minor way, to rectify it.

From the rate of corporation tax, the Chief Secretary turned to other rates of taxation and to proposals that the shadow Chancellor discussed this weekend. I assume that his reference to a tax level of 59p in the pound related to our proposal for the very top slice of income—not the level at which the current 40p rate applies. He mentioned our proposal to lift the ceiling on national insurance contributions. This would bring our tax level, first of all, back to the level of income tax alone two to three years ago, which is very similar to that being charged in competitor countries. Despite that fact, the Chief Secretary suggested that what we propose might lead to a brain drain. He does not seem to be aware of the fact that we have a brain drain already. We are losing some of the most intelligent and well-educated people—the people whose inventions and discoveries form the basis of so much manufacturing prosperity. Thanks to cuts in the Government's support for research and development, and to their overall attitude to investment, those people are simply unable to work here. Often with the utmost reluctance, they take their brains and their ideas—together with the prosperity that can result from their patents and inventions—to competitor countries.

The Chief Secretary, once challenged, was gracious enough to acknowledge that, under the present Government, the tax burden on the average family has risen. It would have been only fair to point out that, for families on average or below-average earnings, the benefits derived from the income tax cuts have been almost exactly offset by increases in national insurance contributions. Indeed, they have been extinguished by value added tax increases—even those before the most recent one—and by the poll tax, for which the Government refuse to give us a breakdown in terms of its impact on the incomes of people on average or below-average earnings.

The Chief Secretary's remarks on those points were most interesting. He seemed to imply some deception on our part, but we have made our taxation proposals very plain, which is more than can be said for the Government. The Prime Minister—then Chancellor of the Exchequer—spoke last year to the Welsh Tories at their party conference. No doubt it was a small gathering. In that speech he attacked some of Labour's taxation proposals. For example, he said: They intend to meddle with mortgage interest relief —in other words, not to allow mortgage interest relief at the top rate of tax. As long ago as July, the Prime Minister was very upset about that. Although we had clearly told the country what we proposed, the Government attacked us. Then, of course, they put it in their own Budget. On the same occasion, the right hon. Gentleman attacked the Labour party for its intention to freeze the married couple's allowance. That, too, is in this Budget—again without notice from the Conservative party. If the Chief Secretary wants to use this occasion to give us a categorical undertaking that at no point will the Government follow through the logic of their decision to charge employers' national insurance contributions on the full range of earnings, and that they will never lift the ceiling on earnings on which employees pay national insurance contributions, I shall be happy to give way. If he is not prepared to do so, we must all recognise the likelihood that the Government will follow through the logic of their decision. Just as with the married couple's allowance, and with mortgage interest relief at 40p in the pound, they do not propose to tell the electorate in advance of their decisions. Yet they complain about our proposals.

As was identified by the Chief Secretary in his closing remarks, the main point is whether and how we should give support to industry. Should assistance be given to all by way of cuts in the rate of corporation tax, or should there be a specifically targeted incentive for manufacturing? We certainly prefer the latter. The Chief Secretary drew attention to some costings that he suggested might be possible in respect of the proposal for investment allowances. I am happy to repeat something that I made quite plain in my opening remarks. The Government were prepared to forgo quantifiable amounts of revenue by allowing cuts in tax rates. We would have used that revenue to help manufacturing industry through investment allowances. Let me quote what the Institute for Fiscal Studies has said about that choice: The current tax system acts as a disincentive to investment. The CBI said that members still believe that investment in allowances for depreciation of plant and machinery is the most important priority. This is precisely the proposal that is contained in our amendment.

That brings me to what, apart from what one could almost describe as the Government's attacks on manufacturing industry, is the most extraordinary feature of the debate. The Chief Secretary rose maginificently above one of the points that I made in my earlier remarks—that this was the proposal of the CBI and others. The hon. Member for Worcestershire, South (Mr. Spicer) said that this was an incredible proposal which showed the Labour party's old-fashioned thinking. The hon. Member for Stamford and Spalding (Mr. Davies) referred to it as an antique illusion. The Chief Secretary said that such a proposal was clung to by the members of a disaffected section of the business community, of whom there were not all that many. Those were fascinating remarks from Conservative Members. I propose to send copies of them to the Engineering Employers Federation, the CBI and many other representatives of manufacturing industry, all of whom, as Conservative Members know are calling for precisely those steps.

There could be no better example of the arrogance of the Government than the way in which, yet again, they claim to know what industry wants better than does industry itself. They do not listen to anyone but themselves, and they have made it plain that they never will. That is one of the reasons why they are on their way out, and in the next Budget we shall be able to introduce measures of this kind.

Question put, That the amendment be made:—

The Committee divided: Ayes 169, Noes 264.

Division No. 136]	[7.9 pm
AYES
Abbott, Ms Diane	Doran, Frank
Adams, Mrs Irene (Paisley, N.)	Duffy, A. E. P.
Allen, Graham	Dunnachie, Jimmy
Archer, Rt Hon Peter	Dunwoody, Hon Mrs Gwyneth
Armstrong, Hilary	Eadie, Alexander
Ashton, Joe	Evans, John (St Helens N)
Banks, Tony (Newham NW)	Ewing, Harry (Falkirk E)
Barnes, Harry (Derbyshire NE)	Fatchett, Derek
Barron, Kevin	Faulds, Andrew
Battle, John	Fisher, Mark
Beckett, Margaret	Flannery, Martin
Bell, Stuart	Flynn, Paul
Benn, Rt Hon Tony	Foster, Derek
Bennett, A. F. (D'nt'n & R'dish)	Foulkes, George
Bermingham, Gerald	Fraser, John
Blair, Tony	Fyfe, Maria
Blunkett, David	Galloway, George
Boyes, Roland	Garrett, John (Norwich South)
Bray, Dr Jeremy	Godman, Dr Norman A.
Brown, Gordon (D'mline E)	Golding, Mrs Llin
Brown, Nicholas (Newcastle E)	Gordon, Mildred
Brown, Ron (Edinburgh Leith)	Gould, Bryan
Buckley, George J.	Graham, Thomas
Caborn, Richard	Grant, Bernie (Tottenham)
Callaghan, Jim	Griffiths, Nigel (Edinburgh S)
Campbell, Ron (Blyth Valley)	Griffiths, Win (Bridgend)
Campbell-Savours, D. N.	Grocott, Bruce
Canavan, Dennis	Hain, Peter
Clark, Dr David (S Shields)	Hardy, Peter
Clarke, Tom (Monklands W)	Heal, Mrs Sylvia
Clelland, David	Healey, Rt Hon Denis
Clwyd, Mrs Ann	Hinchliffe, David
Cohen, Harry	Hoey, Ms Kate (Vauxhall)
Corbett, Robin	Hogg, N. (C'nauld & Kilsyth)
Corbyn, Jeremy	Home Robertson, John
Cousins, Jim	Hood, Jimmy
Crowther, Stan	Howarth, George (Knowsley N)
Cryer, Bob	Howell, Rt Hon D. (S'heath)
Cunliffe, Lawrence	Hoyle, Doug
Cunningham, Dr John	Hughes, John (Coventry NE)
Darling, Alistair	Hughes, Robert (Aberdeen N)
Davies, Rt Hon Denzil (Llanelli)	Ingram, Adam
Davis, Terry (B'ham Hodge H'l)	Jones, Martyn (Clwyd S W)
Dewar, Donald	Kaufman, Rt Hon Gerald
Dixon, Don	Leadbitter, Ted
Dobson, Frank	Leighton, Ron

Lestor, Joan (Eccles)	Rees, Rt Hon Merlyn
Lewis, Terry	Reid, Dr John
Lloyd, Tony (Stretford)	Richardson, Jo
Lofthouse, Geoffrey	Robertson, George
Loyden, Eddie	Robinson, Geoffrey
McAllion, John	Rogers, Allan
McAvoy, Thomas	Rooker, Jeff
McCartney, Ian	Ross, Ernie (Dundee W)
Macdonald, Calum A.	Salmond, Alex
McFall, John	Sheerman, Barry
McKay, Allen (Barnsley West)	Sheldon, Rt Hon Robert
McKelvey, William	Shore, Rt Hon Peter
McLeish, Henry	Short, Clare
McMaster, Gordon	Skinner, Dennis
Madden, Max	Smith, Andrew (Oxford E)
Mahon, Mrs Alice	Smith, C. (Isl'ton & F'bury)
Marshall, David (Shettleston)	Smith, Rt Hon J. (Monk'ds E)
Marshall, Jim (Leicester S)	Snape, Peter
Martin, Michael J. (Springburn)	Soley, Clive
Martlew, Eric	Steinberg, Gerry
Maxton, John	Stott, Roger
Meacher, Michael	Strang, Gavin
Michie, Bill (Sheffield Heeley)	Straw, Jack
Mitchell, Austin (G't Grimsby)	Taylor, Mrs Ann (Dewsbury)
Moonie, Dr Lewis	Thompson, Jack (Wansbeck)
Morgan, Rhodri	Warden, Gareth (Gower)
Morris, Rt Hon A. (W'shawe)	Wareing, Robert N.
Mullin, Chris	Welsh, Michael (Doncaster N)
Nellist, Dave	Wigley, Dafydd
O'Hara, Edward	Williams, Rt Hon Alan
Orme, Rt Hon Stanley	Wilson, Brian
Parry, Robert	Winnick, David
Patchett, Terry	Wise, Mrs Audrey
Pendry, Tom	Worthington, Tony
Powell, Ray (Ogmore)	Wray, Jimmy
Prescott, John	Young, David (Bolton SE)
Primarolo, Dawn
Quin, Ms Joyce	Tellers for the Ayes:
Radice, Giles	Mr. Frank Haynes and Mr. Ken Eastham.
Randall, Stuart
Redmond, Martin

NOES
Adley, Robert	Butler, Chris
Aitken, Jonathan	Campbell, Menzies (Fife NE)
Alexander, Richard	Carlile, Alex (Mont'g)
Alison, Rt Hon Michael	Carlisle, John, (Luton N)
Allason, Rupert	Carlisle, Kenneth (Lincoln)
Amess, David	Carrington, Matthew
Amos, Alan	Carttiss, Michael
Arbuthnot, James	Cash, William
Arnold, Jacques (Gravesham)	Channon, Rt Hon Paul
Arnold, Sir Thomas	Chapman, Sydney
Ashby, David	Chope, Christopher
Aspinwall, Jack	Churchill, Mr
Atkins, Robert	Clark, Rt Hon Alan (Plymouth)
Atkinson, David	Clark, Rt Hon Sir William
Baker, Nicholas (Dorset N)	Clarke, Rt Hon K. (Rushclitfe)
Baldry, Tony	Coombs, Anthony (Wyre F'rest)
Banks, Robert (Harrogate)	Coombs, Simon (Swindon)
Beith, A. J.	Cope, Rt Hon John
Bellingham, Henry	Cormack, Patrick
Bellotti, David	Couchman, James
Bennett, Nicholas (Pembroke)	Cran, James
Bevan, David Gilroy	Critchley, Julian
Biffen, Rt Hon John	Currie, Mrs Edwina
Blackburn, Dr John G.	Davies, Q. (Stamf'd & Spald'g)
Boscawen, Hon Robert	Davis, David (Boothferry)
Boswell, Tim	Day, Stephen
Bottomley, Mrs Virginia	Devlin, Tim
Bowden, A. (Brighton K'pto'n)	Dickens, Geoffrey
Bowden, Gerald (Dulwlch)	Dicks, Terry
Braine, Rt Hon Sir Bernard	Dorrell, Stephen
Brazier, Julian	Douglas-Hamilton, Lord James
Bright, Graham	Dover, Den
Brown, Michael (Brigg & Cl't's)	Dunn, Bob
Bruce, Malcolm (Gordon)	Durant, Sir Anthony
Budgen, Nicholas	Eggar, Tim
Burns, Simon	Emery, Sir Peter
Burt, Alistair	Evans, David (Welwyn Hatf'd)

Evennett, David	McNair-Wilson, Sir Patrick
Fallon, Michael	Madel, David
Favell, Tony	Malins, Humfrey
Fearn, Ronald	Mans, Keith
Field, Barry (Isle of Wight)	Maples, John
Fishburn, John Dudley	Marland, Paul
Fookes, Dame Janet	Martin, David (Portsmouth S)
Forman, Nigel	Mates, Michael
Fox, Sir Marcus	Maude, Hon Francis
Franks, Cecil	Maxwell-Hyslop, Robin
Freeman, Roger	Mellor, Rt Hon David
French, Douglas	Meyer, Sir Anthony
Fry, Peter	Michie, Mrs Ray (Arg'l & Bute)
Gale, Roger	Miller, Sir Hal
Gardiner, Sir George	Mills, Iain
Garel-Jones, Tristan	Miscampbell, Norman
Gill, Christopher	Mitchell, Andrew (Gedling)
Glyn, Dr Sir Alan	Mitchell, Sir David
Goodhart, Sir Philip	Moate, Roger
Goodlad, Alastair	Montgomery, Sir Fergus
Goodson-Wickes, Dr Charles	Morris, M (N'hampton S)
Gorman, Mrs Teresa	Morrison, Sir Charles
Grant, Sir Anthony (CambsSW)	Morrison, Rt Hon Sir Peter
Greenway, Harry (Eating N)	Moss, Malcolm
Greenway, John (Ryedale)	Moynihan, Hon Colin
Griffiths, Peter (Portsmouth N)	Mudd, David
Ground, Patrick	Neale, Sir Gerrard
Grylls, Michael	Needham, Richard
Hague, William	Nelson, Anthony
Hampson, Dr Keith	Neubert, Sir Michael
Hannam, John	Newton, Rt Hon Tony
Hargreaves, A. (B'ham H'll Gr')	Nicholls, Patrick
Harris, David	Nicholson, David (Taunton)
Haselhurst, Alan	Norris, Steve
Hayes, Jerry	Onslow, Rt Hon Cranley
Hayhoe, Rt Hon Sir Barney	Oppenheim, Phillip
Heathcoat-Amory, David	Paice, James
Hicks, Mrs Maureen (Wolv' NE)	Patnick, Irvine
Higgins, Rt Hon Terence L.	Patten, Rt Hon Chris (Bath)
Hind, Kenneth	Patten, Rt Hon John
Hordern, Sir Peter	Pawsey, James
Howarth, Alan (Strat'd-on-A)	Peacock, Mrs Elizabeth
Howarth, G. (Cannock & B'wd)	Porter, Barry (Wirral S)
Howe, Rt Hon Sir Geoffrey	Porter, David (Waveney)
Howell, Rt Hon David (G'dford)	Powell, William (Corby)
Hughes, Robert G. (Harrow W)	Price, Sir David
Hughes, Simon (Southwark)	Raffan, Keith
Hunt, Sir John (Ravensbourne)	Raison, Rt Hon Sir Timothy
Hunter, Andrew	Rathbone, Tim
Irvine, Michael	Redwood, John
Jackson, Robert	Rhodes James, Robert
Janman, Tim	Riddick, Graham
Jessel, Toby	Ridsdale, Sir Julian
Johnson Smith, Sir Geoffrey	Rost, Peter
Jones, Robert B (Herts W)	Ryder, Rt Hon Richard
Jopling, Rt Hon Michael	Sackville, Hon Tom
Kellett-Bowman, Dame Elaine	Shaw, David (Dover)
King, Roger (B'ham N'thfield)	Shaw, Sir Giles (Pudsey)
Kirkwood, Archy	Shelton, Sir William
Knapman, Roger	Shephard, Mrs G. (Norfolk SW)
Knight, Greg (Derby North)	Shepherd, Colin (Hereford)
Knight, Dame Jill (Edgbaston)	Shersby, Michael
Knowles, Michael	Sims, Roger
Latham, Michael	Skeet, Sir Trevor
Lawrence, Ivan	Smith, Tim (Beaconsfield)
Lee, John (Pendle)	Speed, Keith
Leigh, Edward (Gainsbor'gh)	Spicer, Sir Jim (Dorset W)
Lennox-Boyd, Hon Mark	Spicer, Michael (S Worcs)
Lester, Jim (Broxtowe)	Squire, Robin
Lightbown, David	Stanbrook, Ivor
Lilley, Rt Hon Peter	Steel, Rt Hon Sir David
Lloyd, Peter (Fareham)	Steen, Anthony
Lord, Michael	Stern, Michael
Luce, Rt Hon Sir Richard	Stevens, Lewis
McCrindle, Sir Robert	Stewart, Allan (Eastwood)
MacGregor, Rt Hon John	Stewart, Andy (Sherwood)
MacKay, Andrew (E Berkshire)	Stewart, Rt Hon Ian (Herts N)
Maclean, David	Taylor, Ian (Esher)
Maclennan, Robert	Taylor, John M (Solihull)
McLoughlin, Patrick	Taylor, Matthew (Truro)

Taylor, Teddy (S'end E)	Wells, Bowen
Temple-Morris, Peter	Wheeler, Sir John
Thompson, D. (Calder Valley)	Widdecombe, Ann
Thompson, Patrick (Norwich N)	Wiggin, Jerry
Thurnham, Peter	Wilkinson, John
Townend, John (Bridlington)	Wilshire, David
Tracey, Richard	Winterton, Mrs Ann
Tredinnick, David	Winterton, Nicholas
Twinn, Dr Ian	Wolfson, Mark
Vaughan, Sir Gerard	Woodcock, Dr. Mike
Viggers, Peter	Yeo, Tim
Walden, George	Young, Sir George (Acton)
Waller, Gary	Younger, Rt Hon George
Walters, Sir Dennis
Wardle, Charles (Bexhill)	Tellers for the Noes:
Warren, Kenneth	Mr. Timothy Wood and Mr. Neil Hamilton.
Watts, John

Question accordingly negatived.

Clause 22 ordered to stand part of the Bill.