Finance (No. 2) Bill

HC Deb 26 April 1993 vol 223 cc728-825

Order for Second Reading read.

Madam Speaker

Before I call the Minister, I ask right hon. and hon. Members for short speeches. There is a great deal of interest in the debate, but I simply appeal for voluntary restraint on the length of speeches.

3.32 pm

The Chief Secretary to the Treasury (Mr. Michael Portillo)

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

I welcome this opportunity to commend the Finance Bill to the House. My right hon. Friend the Chancellor's Budget judgment this year was exceptionally difficult. He had to avoid putting the recovery in jeopardy; he needed to tackle the level of Government borrowing; and, above all, he had to frame a Budget that would promote confidence. He made exactly the right judgment, and the measures in the Bill achieve those aims.

Business optimism since the Budget has been demonstrated to be at the highest level since April 1988 —so says the Confederation of British Industry, and so says 3i in a survey published today. Activity is rising in all sectors, according to Dun and Bradstreet and also the Association of British Chambers of Commerce.

Retail sales in the first three months of this year were up 3.3 per cent. on a year earlier; they are now at record levels. Car production is up 8 per cent. in a year and car registrations up 12.75 per cent. Production in our factories is rising, while industrial production in Japan, Germany and France is falling. Output across the whole economy in Britain is up 0.6 per cent. on last year, and in the non-oil economy up 0.6 per cent. in the first quarter. The economy has now been growing for three successive quarters.

Business surveys now show better export prospects and improved competitiveness in the home market. Exports to non-EC countries are up 12 per cent. on last year. The level of the pound may be part of that, but the real key to competitiveness lies elsewhere. During the recession, companies have improved their productivity through better management and by getting to grips with quality control.

The Labour party would have us believe that British manufacturing industry is dead. Far from it. Last year, it exported £87 billion-worth of goods—more than £1,500 for every man, woman and child in this country, which is higher than the figure for Japan.

Manufacturing exports are at record levels, and manufactured export volumes are forecast to grow 7½ per cent. in the year ahead, in 1993. That will give Britain a rising share of world trade in manufactures, after years in which that level fell.

Unit wage costs recently rose sharply in Germany and Japan, by about 9 per cent. in each case—but in the United Kingdom they are down 2 per cent. on a year ago, which is the biggest fall since records began. This country now has that genuine competitive edge. It has nothing to do with the currency, but is an underlying improvement in our competitiveness vis-a-vis the performance of other countries.

Mr. Nicholas Winterton (Macclesfield)

Like my right hon. Friend, I warmly welcome the improvement in the economic indicators, but will he direct his attention to the huge and growing deficit in United Kingdom manufactures? What do the Government intend to do about that, because manufacturing industry produces the only form of non-inflationary growth in this country? Will my right hon. Friend also confirm that the Government have no intention of returning to the exchange rate mechanism in the foreseeable future?

Mr. Portillo

My hon. Friend intervenes at the very point in my speech that will deal with his question. British industry's competitiveness is most important—for example, in the energy supplies that it buys. I hope that we will have my hon. Friend's support when we do things that may be difficult and unpopular, but which are absolutely essential in maintaining competitive energy supplies to our manufacturing industry. That point is not one on which we have always had my hon. Friend's support.

Mr. Dennis Skinner (Bolsover)

If everything in the garden is rosy, as the Minister says, will he give an assurance that unemployment will fall below 3 million at the end of this calendar year?

Mr. Portillo

Only Labour's spokesman is foolish enough to try to make predictions about unemployment. The hon. Member for Dunfermline, East (Mr. Brown) makes such predictions and falls flat on his face. I shall point out how he has done so recently. The Government do not make forecasts of unemployment, but we are very pleased at the recent figures recorded. I shall come to a possible explanation.

Manufacturing output is at its highest level for more than two years, and manufacturing productivity is at its highest level ever, and is growing faster than at any time in six years. Manufacturing is not only alive and well but performing vigorously.

Sustaining our competitive advantage will depend on controlling costs, and on controlling wage costs in particular. It is good news that earnings growth is at its lowest level for a quarter of a century. Wage restraint will help our businesses to compete. It will assist the creation of new jobs too, and it may be no coincidence—here I take up the question asked by the hon. Member for Bolsover (Mr. Skinner)—that lower earnings growth has been followed by two months of falling unemployment.

The hon. Member for Peckham (Ms Harman) is always calling on the Government for a jobs package. She ought to call on her trade union friends to work towards achieving higher employment and not just higher wages, as they so often do. I give the hon. Lady marks over and above the hon. Member for Dunfermline, East, because, in the light of increasingly good economic news, that hon. Gentleman has been swerving like a weathercock in a stiff breeze—from lugubrious and grudging through to churlish, and finally coming to rest at despondent. The hon. Gentleman cannot see a good economic indicator without wishing to talk it down. Perhaps he has a good future in air traffic control—"Labour control to the British economy: change your indicators, you are coming in too high." That is the attitude of the hon. Member for Dunfermline, East.

We know that some economic indicators tend to lag behind the economy; we know that housing and unemployment are the last indicators that tend to turn —they are known in the jargon as "lagging indicators" —but the last thing of all that turns is the despondency of the hon. Member for Dunfermline, East. He is the economy's most lagging indicator of all. His motto is "A sound bite a day keeps confidence at hay."

The hon. Gentleman's last effort was a real gem. Last week, he could not wait for the unemployment figures to be announced. He put out a press release in advance, crossed his fingers and hoped for the worst. He said that the news would herald a summer jobs crisis. The good news on unemployment, when it came through, must have been a crushing disappointment for him.

My right hon. Friend the Chancellor of the Exchequer recently said that his song was Edith Piaf's "I have no regrets." I think the hon. Member for Dunfermline, East's song should be Ricky Nelson's "Fools rush in, where wise men fear to tread."

The hon. Member for Dunfermline, East is going to face a summer jobs crisis, because he is under threat from the hon. Member for Sedgefield (Mr. Blair)—the man with the golden smile. It is not the golden smile that the hon. Member for Dunfermline, East has to watch out for; it is the golden elbow—and I think that that is coming very soon.

I want to be fair to the hon. Member for Dunfermline, East, because he is not the only one in the Labour party who is a member of the posse of gloom merchants.

Mr. John Townend (Bridlington)

There is more than one?

Mr. Portillo

There is more than one. There are also the hon. Member for Livingston (Mr. Cook), the hon. Member for Glasgow, Garscadden (Mr. Dewar) with his long, lugubrious face, and the right hon. and learned Member for Monklands, East (Mr. Smith). They are the four horsemen of the apocalypse: death, disease, disaster and Dunfermline.

Dame Elaine Kellett-Bowman (Lancaster)

This is a repetition of exactly what happened last month, when the whole centre page of one of our local papers, the Lancashire Evening Post contained a statement from local trade unionists heralding disastrous job figures when they had improved vastly. The article was published before the figures.

Mr. Portillo

My hon. Friend is absolutely right. Mr. Bill Jordan, the leader of the Amalgamated Engineering and Electrical Union, has now put matters right. He said that a poll of his members had shown that eight out of 10 firms have full order books and that only one in five companies are still making redundancies. So the trade unions have spoken, even if the Labour party finds it difficult to admit what conditions we are now operating in.

The Labour party insists on talking Britain down, but I am pleased to report that no one out there is listening to the Labour party. Britain remains a very attractive location for inward investment. The United Kingdom attracts one third of all the investment that comes into the European Community; that is twice the amount that goes to France, and France is our nearest rival.

The Budget and the Finance Bill are designed to protect incentives. We retain the lowest corporation tax of any developed country and a top rate of income tax of 40 per cent., which is much lower than in Italy, Germany, France and even the United States. That is one of the things that make us such an attractive place for investment.

Mr. Peter Hain (Neath)

Will the right hon. Gentleman give way?

Mr. Barry Jones (Alyn and Deeside)

Will the Chief Secretary give way?

Mr. Portillo

No, I want to finish.

The Bill removes obstacles to inward investment by tackling some of the problems that foreign companies have faced with advance corporation tax, by reforming the taxation of foreign exchange gains and losses, and by putting in place the biggest ever deregulatory package for small businesses. Remember that the social chapter will apply to others, but not to us. My right hon. Friend the Prime Minister has said that they can have the social chapter; we will have the jobs.

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

Given all these things, what is it that has happened since the Red Book, which was published before the general election, that explains the Government's growth forecast being so much lower for the next four years than it was when forecasts were made before the general election? Before the general election, we had forecasts of 3.25 and 3.75 per cent. growth over the next couple of years. All the forecasts are now below 2 per cent. What has happened to make the situation so much worse?

Mr. Portillo

The right hon. Gentleman knows that, across the world, the recession has gone on for longer than people hoped. The right hon. Gentleman also knows that, every time we have a meeting of the Organisation for Economic Co-operation and Development or G7 Ministers, we are all in the business of revising down the forecasts that had been made collectively across the world of the rate at which recovery would occur, so there is no mystery about this, particularly for the right hon. Gentleman, who follows these matters closely.

Mr. Hain

We have had a list of sound bites from the Chief Secretary and a Pinocchio impression, but could we have some serious economics? I put it to him that, if any of the factors that he has quoted approvingly are valid, they are due to the 18 per cent. devaluation since last September. Why, therefore, are the Government deliberately encouraging an appreciation of the pound by about 5 per cent.? Surely the policy and the priority should be low interest rates, but interest rates are still very high in real terms, and are crippling prospects of long-term sustainable industrial recovery.

Mr. Portillo

Pinocchio's nose grew with telling untruths. We have had a lot of untruths from the Labour party and the Liberal Democrats. I shall be coming to them shortly. In framing his joke, the hon. Gentleman has not been listening carefully to my speech. All right, we have a lower exchange rate, which is helpful to competitiveness in the short run, but I have been pointing to an underlying change in the competitiveness of this country. I have been talking about a change in our unit wages costs vis-a-vis other countries. Perhaps the hon. Gentleman needs a moment longer to reflect upon what I know is an unfamiliar concept, but one which, when he has absorbed it, he will realise is extremely important in explaining our recovery.

Two of the foundations for recovery have been in place for some time. They are low inflation and low interest rates, but after this recession what Britain needs is rising confidence, and rising confidence has been enhanced by the Chancellor's clear medium-term economic policies. He has set all his policies in a medium-term framework.

First, the Chancellor set out a clear monetary policy—a target for underlying inflation of 1 to 4 per cent., and a set of indicators that he will consider when deciding on interest rate policy. Secondly, in the autumn statement, he established a public spending policy for the medium term. Over time, the Government's spending will grow less than the trend growth in the economy. We have published fixed spending ceilings, above which we will not go. Thirdly, the Budget set out a strategy for tackling the deficit in the coming years.

The form that this Finance Bill takes underlines the Government's medium-term strategy for the economy, because, unusually, this Bill sets out tax rates not just for this year but for the years ahead. Contrast these clear statements with what we have heard from the Opposition. Before the election, they had a policy for everything, and usually two policies for everything. Since the election, they have entered a policy void. The hon. Member for Dagenham (Mr. Gould)—remember him? I might say, my hon. Friend the Member for Dagenham—puts it very well. Of the Labour party, he says: We appear not to have an independent view on the level of public spending or borrowing, or where interest rates should be, or the importance or otherwise of monetary policy, or how the exchange rate should be managed. What a condemnation of the Labour party. I want to make it clear that this is not something I picked up from the hon. Member for Dagenham over lunch in the Churchill Room. This is something that he has stated publicly—writing in The Mail on Sunday, no less.

The hon. Member for Peckham is shadow Chief Secretary. She has held her job almost as long as I have held mine. I have to badger Ministers all the time about controlling spending. That does not make me a very popular chap. It is probably for that reason that I have to look to people on the other side of the House to have lunch with. But what about the hon. Member for Peckham, who is in the equivalent position?

I cannot remember a single subject upon which the hon. Lady has called for restraint. All her comments have been to the effect that more money is needed for health, education, overseas aid and everything under the sun. Like the other megastar whom she most closely resembles—I am of course referring to Miss Joan Collins—she likes to have the most expensive of everything and, like so many of Joan Collins' screen roles, she just cannot say no. On the subject of what our tunes are today, I suggest that her tune is "I'm Just a Girl Who Can't Say No", from the musical "Oklahoma".

If public spending is too high, it weighs on the country's wealth-creating sector. We lose sight of that fact at our peril. This year, general Government expenditure is planned to be more than 45 per cent. of GDP. Government spending is likely to rise by 19.5 per cent. in real terms between 1988–89 and 1993–94. Central Government debt interest payments are projected to rise by nearly 9 per cent. a year in real terms between now and 1996–97. On their own, they will add nearly I per cent. to the proportion of national income which is taken by public spending.

On 8 February, I announced to the House a programme of fundamental public expenditure reviews. During this Parliament, that process will consider every Government programme, reassessing spending commitments against the needs of the 1990s and the century ahead. I have agreed demanding agendas with the Secretaries of State for Social Security, for Health and for Education, and with the Home Secretary, and work is now under way on that. We have chosen those programmes because they are among the biggest. What is loose change in those programmes is, or can be, more than the entire budget for some other programmes.

Social security is a prime example. It accounts for £80 billion a year, one third of all public spending. Every working person in this country contributes £10 daily to cover the costs of social security. Every year, the amount we spend on social security increases. Since 1978–79, leaving aside unemployment, the programme has grown by more than 3 per cent. a year in real terms. In last year's public spending round, we added £3.9 billion to the DSS programme—that is what we added for one year—and it is a striking thought that that increase in social security spending is nearly twice the total annual investment in national roads, even though investment in national roads is at a record level.

Looking to the future, the prospects are also very difficult. Demographic pressures are against us, and they will add £250 million a year on their own. Items which a few years ago were insignificant have swollen to massive proportions. Back in 1978–79, help with mortgage interest rates through income support was £10 million. Today it is more than £1 billion. The number of people claiming invalidity benefit has doubled over the last year, while the nation has become healthier over the past 10 years. The number of single parents has also doubled. There are now 1,300,000 single parents bringing up more than 2 million children. All too many of those families depend on income support, and the numbers seem set to keep rising.

Mr. Malcolm Wicks (Croydon, North-West)

rose—

Mr. Portillo

Let me say a little more.

The Opposition recognise the problems, and the fact that great difficulties are posed by some of the trends. The Opposition have set up a social justice commission to put some of the issues in the spotlight while apparently leaving the shadow Chief Secretary in the dark. We must be prepared to examine in an open-minded way some of the fundamental features of our approach. What is the right balance between universal and selective benefits? That question, those words and those sentiments are not mine; they are the words and the question of the right hon. and learned Member for Monklands, East.

Mr. Wicks

The Minister said that 70 per cent. of one-parent families in Britain depended on state social security. Does he recognise that, in Sweden, for example, 70 or 80 per cent. of single parents are in employment and standing on their own two feet? Does that not imply that what is needed is a package consisting of jobs, training, education and child care to enable one-parent families to be independent, which is good for the economy and good for those families? Will the right hon. Gentleman draw on those lessons for the United Kingdom?

Mr. Portillo

I note that the Swedish economy had been in tremendous difficulty recently, and that Swedish interest rates have made ours look like a Sunday picnic. Our own rate of employment is second in the EC after Denmark. The participation of our labour force in employment is very high. I recognise the hon. Gentleman's argument, but there are clearly counter-arguments to be advanced.

Public expenditure control is necessary and is in place but, in present circumstances, our commitment to sound public finances requires us to raise revenue, too. We shall do so in the way that least affects the recovery or incentives, in a way that spreads the burden fairly and in ways that accord with our long-established principles. Over time, we have shifted the tax burden away from direct taxes, which blunt incentives, to indirect taxes, which do not. We also prefer to broaden the tax base rather than increase rates of tax.

The Prime Minister signed the Rio convention on climate change last June. We are determined to meet our environmental commitments, along with others, and return carbon dioxide emissions to 1990 levels by the year 2000. If we sign up to commitments, we mean it and we meet them. VAT on domestic fuel and power will contribute significantly to the achievement of our Rio target. The Opposition parties argued last year that the Rio convention did not go far enough, yet now they are unwilling to face up to the consequences of curbing pollution. Their reaction has been as predictable as it is depressing.

It is quite clear that the Labour party was itself planning such a change. It has issued statements about green taxes and has written policy documents about taxing fuel. It has omitted any reference to fuel and power when talking about our zero rates, and has quite explicitly said that VAT should be increased on things that damage the environment. One does not need to be Inspector Morse to work out that that means VAT on domestic fuel and power.

Today, however, I want to take issue with the Liberal Democrats in particular. In the Newbury by-election campaign, they have pledged themselves to scrapping the extension of VAT, and have sought to make that the centrepiece of their campaign. The right hon. Member for Yeovil (Mr. Ashdown) tells us that he believes in a new kind of politics. In what he has called the "Newbury declaration"—if anyone can imagine anything so pompous—he explained that politicians should look to "long-term gain" not "short-term calculation", and that politics ought to be about telling people the truth". So have the Liberal Democrats been telling people the truth? Listen to what they said in "Costing the Earth", a federal green paper issued in 1991: Liberal Democrats advocate as a first priority the imposition of a tax on energy … the UK is unusual amongst EC Members in not applying even standard rates of VAT onto domestic fuels … if it proved completely impossible to persuade our international partners to adopt energy taxes … we would nevertheless press forward … for example, by ending the anomalous zero rate of VAT on fuel.

Mr. Beith

Will the Chief Secretary give way?

Mr. Portillo

I will give the right hon. Gentleman his moment.

The "Newbury declaration" of the right hon. Member for Yeovil is not only pompous: it is sanctimonious humbug. Liberal Democrats are wedded to short-term calculation and do not give a damn about "long-term gains". So far from believing that politics ought to be about telling people the truth, for a few extra by-election votes the Liberal Democrats would sell their grannies.

Mr. Beith

The Minister will acknowledge that that green paper did not become party policy. Instead, we took up the suggestion, which the Minister is resisting, that energy taxes should be related to pollution and resource depletion effects like a European carbon tax. That is the sensible way to proceed: not to visit a tax at the same level on wind power as is visited on nuclear power.

Mr. Portillo

The right hon. Gentleman's integrity and that of his party are not improved by wriggling. It is perfectly clear what the Liberal Democrats were saying then and it is perfectly clear what they are saying now, and it is perfectly clear that there is a huge gap between the two.

Mr. Robert Hughes (Aberdeen, North)

Now that Inspector Clouseau has had his fun with the Liberal party, perhaps the Minister can tell us why, if the VAT on domestic fuel was related to Rio and global warming, the total sum generated is not going into energy conservation in the home?

Mr. Portillo

The hon. Gentleman emissions the point. Putting VAT on domestic fuel and power will reduce our carbon dioxide emissions by 3.5 per cent. and, with our other measures, that takes us two thirds of the way towards fulfilling our Rio convention commitment. That is how it operates, and it achieves exactly that effect. The hon. Member for Aberdeen, North (Mr. Hughes) knows perfectly well that we are talking about a Budget in which revenue has to be generated. We have the honesty to talk about generating revenue, while the Labour party does not.

In contrast to what we have heard from the Liberal Democrats, the truth is that independent experts, such as the Institute for Fiscal Studies, have confirmed that this Budget will impose a roughly equivalent extra financial burden on those in all income brackets in our society.

The action that we propose on the married couple's allowance, on dividends and on car taxation ensure that the better-off pay their fair share. The truth is that any increase in domestic energy prices feeds through automatically in the normal uprating of all benefits, including retirement pensions, and we have promised to provide extra help on top of that for people who will face the most difficulty in meeting their higher fuel bills. That special assistance to those on income support and other income-related benefits will be available before the new bills come in.

The truth is that the Government can be proud of their record of help for the neediest people. Last October, we boosted the weekly income support rates for pensioners by £2 for a single pensioner and by £3 for a pensioner couple. This month, everyone on income support has benefited by between £1.40 and £2.80 per week because they no longer have to make any contribution to local taxation. What is more, this month all major benefits—not just income-related benefits—have risen by 3.6 per cent., which is nearly twice the current rate of inflation?

Mrs. Barbara Roche (Hornsey and Wood Green)

Will the Minister give way?

Mr. Portillo

No, I will not.

Following privatisation, everyone has benefited from falling fuel prices. Domestic gas prices have dropped by 9 per cent. in real terms over the past five years, and domestic electricity prices are actually being cut in price terms this year.

Under the previous Labour Government, electricity prices rose by 30 per cent. in real terms. No special help was given to people on low incomes then. What is more, Conservative Members remember that the right hon. and learned Member for Monklands, East (Mr. Smith) was an Energy Minister in that Labour Government.

Mr. David Shaw (Dover)

With regard to pensioners, does my right hon. Friend recall the position in 1976, when the International Monetary Fund had to be called in, the Christmas bonus could not be paid and Barbara Castle had to change the pension payment date—from April to April, to November to November—in order to lose 10 months of inflation and rob the pensioners? Is it not the Labour party which always has its stiletto knife in pensioners' backs?

Mr. Portillo

My hon. Friend is right in his recollection of history. In every election since 1979, the Labour party has made grandiose promises to pensioners, but pensioners have not believed them, because they remember that the Labour party tricked them when Labour was last in office, and they know that, when the Labour party offers them policies, they do not add up, and they have no expectation of those promises being fulfilled in future.

In recent weeks we have seen a string of very good economic figures. They have forced the hon. Member for Peckham to change her tune and to recognise that recovery may be under way. However, not being able to bear such good news, like all great stars she has taken out her handkerchief and spoken in tragic tones. Her performance has been very moving. She now directs our attention to the need for sustained recovery and for tackling the underlying weaknesses of the economy.

On the Government side of the House, Members have always been interested in sustained recovery and in building up the underlying strengths of our economy. My right hon. Friend the Chancellor of the Exchequer strengthened the car industry by abolishing car tax; it has responded with the best monthly production figures for 19 years.

The Chancellor gave unparalleled help to exporters in the Budget; exports to non-European Community 24countries are up 12 per cent. on last year. He took steps to help the housing market; prices are beginning to stabilise and even to rise a little.

The Opposition are not really interested in building up the underlying strengths of this economy. They oppose every policy that offers Britain a stronger future; they opposed every privatisation that turned loss-making corporations into profit-making businesses; they have fought every trade union law reform which has given us the best industrial relations record for 100 years; and they have let their union friends boycott every major training initiative. Now they refuse to condemn the teachers' boycott of testing in our schools, even though it is damaging our education and our economic prospects.

The British people will contrast that record of the Labour party with the courage shown by my right hon. Friend the Chancellor of the Exchequer. His tenacity has brought down inflation to its lowest level for a generation.

The evidence of economic recovery is growing, confidence is returning, Britain is on track. This Finance Bill will keep Britain on track, and I commend it to the House.

4.6 pm

Ms Harriet Harman (Peckham)

The Bill arises from a Budget which breaks promises, hits hardest at the people who can least afford it and fails to do what is necessary to deal with the fundamental weakness of the economy and to set the country on course for sustainable economic growth.

At the heart of the Bill lies a fraud on the electorate. The Tory election campaign was centred on the pledge to cut taxes. The Prime Minister promised specifically and repeatedly that the Government would not put value added tax on gas and electricity—they would not and they had no need to—yet they are putting before the House a Finance Bill which means that for every £1 paid on heating bills they will take another 17.5p in tax, which will affect everyone. It will hit hardest at the poorest, as they spend a larger share of their incomes on heating bills, and the Government know it. It will hit hardest at the elderly, who spend more time at home and need to use more gas and electricity to stay warm, and the Government know that, too.

Not only have the Government broken their election promises, not only are they hitting the poor and the elderly hardest, but they add insult to injury by trying to justify the measure by claiming that it is environmental. When the Chief Secretary spoke in the Budget debate, he was slightly more honest, saying: Before the election we said that we had no plans to raise VAT, and that was the plain truth [Interruption.] Yes, it was. Last year, we were looking at a level of Government borrowing far lower than that we are facing today. We must take action to deal with the changed position."—[Official Report, 17 March 1993; Vol. 221, c. 300.] So which is it? Is it what the Chief Secretary said on 17 March—that the Government have gone into the red—or is it a green measure, as he is trying to pretend today? We know that this is not a measure for the environment; it is intended to raise money. It is a measure not from a Government who have gone green but from a Government who have gone into the red.

Mr. John Butterfill (Bournemouth, West)

Can the hon. Lady tell us what the Labour party did to help the elderly? When Labour was last in power, electricity prices rose by 30 per cent., and I do not recollect her protecting them at that time.

Ms Harman

Since the Conservative Government have been in power, our pensioners have fallen behind those in the rest of Europe. They have found that residential care services, domiciliary care services, home help and meals on wheels have been cut. They have found that the public transport services that they need to get round have been cut. I should like to know whether the hon. Member for Bournemouth, West (Mr. Butterfill) told those people whom he asked to vote for him at the general election that he would vote to increase VAT on their gas and electricity. I will give way for him to say what he put in his election address.

Mr. Butterfill

Will the hon. Lady answer my question?

Ms Harman

I have answered the hon. Gentleman's question. Not only will VAT be put on the cost of the fuel that is used; it will also be put on the standing charge. How on earth can it be an environmental measure to put VAT on a standing charge that, by definition, does not vary with the amount of fuel used? The Government came up with the answer that to have VAT on gas and electricity but not on the standing charge would lead to tax avoidance. Do Conservative Members really believe that, or is it simply another thing that they have taken to saying without even caring or knowing whether anyone believes them any more?

Mr. Stephen Milligan (Eastleigh)

Can the hon. Lady tell us clearly what a Labour Government would do, in the remote possibility that they came to power? Would they repeal the tax? If so, how would they find the additional revenue?

Ms Harman

We will vote against the measure tonight. We will vote against putting VAT on gas and electricity. I challenge the hon. Gentleman: when he asked his constituents to vote for him, did he say that he would put 17.5 per cent. on their gas and electricity bills? Our principles are to be fair to pensioners and ensure that a Labour Government do not clobber them with the same economic mistakes as this Government have.

In the last general election, the candidate for Enfield, Southgate, Michael Portillo, said: Conservatives want to cut your taxes. Can that be the same Michael Portillo who now, as the Chief Secretary to the Treasury, asks for £17 billion extra in taxes? Curiously, the Cabinet that has decided to put taxes up is full of right hon. Members who told their voters that they would put taxes down.

The Tory candidate for Rushcliffe, Kenneth Clarke, said in his election address: Only the Conservatives believe in keeping taxes down. Did he mention that when the Cabinet considered the Budget? The Tory candidate for Edinburgh, Pentlands said: six reasons for voting conservative this time … (3) to stop your taxes going up". Did he mention that in the Cabinet? The Tory candidate for Wirral, West, David Hunt, said: Ten reasons to vote Conservative … (1) keep taxes low". Did he mention that when the Budget was considered by the Cabinet? The pledge was echoed by Tory candidates throughout the country.

Perhaps I can remind some of the hon. Members who will be voting tonight of what they said to their voters. The Conservative candidate for Richmond, Yorks said: Only the Conservatives can keep taxes down … A Conservative Government means lower taxation. A Conservative Government has not meant lower taxation. The Tory candidate for Chichester, Anthony Nelson, said: A Conservative Government means lower taxation. I want to see taxation reduced further. Those Tory Members and all the others who made the same promises now face a choice. They can either keep the clear promises they made to their voters or follow the discredited Ministers through the Lobby to put up taxes as the Government's panic response to the damage that they have done to the economy. If they vote with the Government, their constituents will know that they can never be trusted again. [Interruption.] Perhaps the hon. Member for Rutland and Melton (Mr. Duncan) can tell us what he said about keeping taxes down.

Mr. Alan Duncan (Rutland and Melton)

The Labour junior Treasury spokesman in the other place said that VAT should be extended to all zero-rated goods. Does the hon. Lady agree with her Front-Bench spokesman in the other place?

Ms Harman

We are opposed to putting VAT on gas and electricity. The Government promised that they would not put VAT on gas and electricity—but they are doing exactly that.

The Finance Bill not only breaks election promises but fails to set the economy on course for sustained economic recovery. The Chief Secretary joked about that, but many people in Britain believe that the situation remains serious. Of course everyone hopes that there will be a recovery. Every sign of improvement is welcome, because the price that the country has paid for the Government's economic incompetence is high. During this recession, 1,347,000 more people lost their jobs. During this recession, 420,000 more young people joined the dole queue. Some 149,000 more businesses have failed and 188,000 more families have lost their homes through mortgage default.

Having failed to accept responsibility for the recession, the Government now try to take credit for the recovery. Every increase in unemployment is due, of course, to factors outside the Government's control. Every drop in unemployment is due to the Government's economic policies. Every business failure is due to factors outside the Government's control. But any increase in business confidence is due to the Government's economic policies.

The fall in retail sales was due to factors outside the Government's control. The increase in retail sales is now directly due to the Government's economic policy. No one who lost his job can blame the Government, but everyone who finds a job has the Government to thank. This is a Government who take credit for anything, but accept responsibility for nothing.

Mr. David Willetts (Havant)

The hon. Lady referred a moment ago to the recovery. Does she accept that a recovery is under way?

Ms Harman

I very much hope that a recovery is under way. I very much hope that this unnecessarily long recession, caused by the Government's economic failures, is ending. But I want to be sure, and people in the country want to be sure, that never again do so many lose their jobs and so many businesses fail because the Government think that the economy is nothing to do with them.

The economy remains scarred by recession. Still 2,940,000 people have no job. Still more than 1.5 million people live in homes worth less than their mortgage?

Mrs. Ann Winterton (Congleton)

If the hon. Lady agrees that, indeed, the recession appears to be ending and recovery is under way, how much of the start of that recovery does she put down to our coming out of the exchange rate mechanism? Is it her party's policy to return to the ERM in due course?

Ms Harman

We want to see stability for business in Britain as part of economic recovery. One of the things that business has lacked on exchange rates, interest rates or any other issue is certainty for the future. We believe that management and co-operation on exchange rates are part of that. But one of the problems with the ERM that the Government have failed to address is why our economy was so fundamentally weak that we had no chance of surviving at the rate at which we entered.

The economy has become seriously weakened. We have fallen behind the countries with which we have to compete. There was no recognition of that in the Chief Secretary's speech. British investment per manufacturing worker is half that of Germany and America and only one third that of Japan.

We have fallen behind on skills. Skill levels are 40 per cent. below those of our leading rivals. The skills gap is particularly serious in engineering, in which Germany and France continue to produce twice as many qualified people as we do. Our failure to invest in skills and industry shows in our failure to match our competitors on productivity. British productivity is now 30 per cent. below the Organisation for Economic Co-operation and Development average.

The Government's lack of attention to those economic fundamentals is reflected in a growing balance of payments problem. Despite the recession, we continue to import more than we export. The manufacturing deficit is set to rise. The balance of payments deficit will worsen in the next two years. The volume of imports is set to rise faster than exports. Government forecasts show that they expect consumer spending to lead the economy out of recession. But that will make the already serious balance of payments problems worse unless it is matched by investment in industry and skills.

Only the Government fail to recognise the deep problems that remain, problems which are evident to those who look at Britain from home and abroad, even if they are apparently undetectable to those who survey the scene from either No. 10 or No. 11 Downing street.

The Government must address the skills gap and the investment gap which are at the heart of our growing trade gap. Before the Government sound the trumpet to celebrate the end of the recession they should notice that the trumpet, too, is now made in Japan by Yamaha. That is why it remains vital that the Government should adopt the measures that the Labour party is proposing not only for an urgent employment programme, but for a boost to investment, starting with the phased release of the accumulated receipts from the sale of council houses.

The Government have been borrowing, and the cost of the recession and the weakening of our industries is revealed by public finances. They have borrowed not to train people or to equip them with new skills, but to keep them idle. For the first time since the systematic collection of statistics began, more public money is being borrowed than invested. The Government's approach to public spending is like running the bath taps with the plug out.

When the Prime Minister was Chief Secretary, he said that we would have a zero PSBR; he then said that he would not accept a PSBR of £25 billion, but now the Government forecast, and they hope to be able to keep to, a PSBR of double that at £50 billion.

Despite the £115 billion in oil revenues and the £62 billion in privatisation receipts, the Tories are set to push public borrowing to a record high. The quest to press on with privatisation has now become a sick joke. Group 4 may need to change its name to Group 8 in recognition of the number of prisoners who have escaped. The Chief Secretary will remember that Margaret Thatcher promised that her plans for privatisation would set the people free. Group 4 has given a new and fresh meaning to that election slogan.

The privatisation receipts, in common with the oil receipts have not gone on investing in skills, industry and our social and economic fabric, but on financing the growing dole queue. The country has enormous strengths, but the Government's economic policy is eroding them systematically. It is not that the Government have an economic problem, but that the economy has a Government problem. It is not the Labour party which is talking Britain down, but the Conservatives who are holding it back.

At a time when unemployment remains at around 3 million, it is extraordinary that the Finance Bill contains a measure for the taxation of oil which, on the Chancellor's own assessment, will result in at least 10,000 job losses. The oil industry and independent forecasters estimate that the proposal will cause nearer 30,000 job losses. The change in the tax regime for North sea oil will result in a fall in exploration, and will therefore affect the future of the oil industry. The Government have introduced this change at a time when many other areas of the world have substantial oil reserves, sometimes greater than those in the North sea. The loss of incentives to continued exploration in United Kingdom waters may be highly damaging.

The measure in the Bill will benefit some operators in the oil industry, especially if they cut the amount of exploration they undertake, which many, faced with the proposed change, now plan to do. Operators in the mature fields will benefit from the reduction in, and eventual abolition of, the petroleum revenue tax. There is a real risk, however, that those operators, instead of investing their new profits in the North sea, will invest that money in other parts of the world. This may be an issue for Scotland and the oil industry, but it is also an important issue for the country. It poses a significant risk to the United Kingdom, not just in terms of immediate jobs losses, but in terms of the future of our energy resources.

As the economy struggles out of one of the deepest and longest recessions for 50 years, confidence may return to the high street, but public confidence will not return to the Chancellor and his Ministers. The Tories will not address the question of how to build a strong economy because, quite simply, they do not believe that that is an issue for government. They think that it can all be left to the market and that the economy has an inherent capacity to grow.

It is simply no longer possible to place any trust in what the Tories say either about the economy or about their plans for the economy. The Conservatives failed to forecast the recession and they denied its existence when it started. They underestimated its severity and length, and they overestimated how soon a recovery would begin. Every official forecast made by the Prime Minister and by the Chancellor has had to be revised downwards—except for the forecast for the PSBR, which has had to be doubled. The Chief Secretary has just said—

Several hon. Members

rose—

Ms Harman

I have given way half a dozen times. I am not prepared to give way now, because many hon. Members want to speak in the debate.

The Chief Secretary said in a moment of seriousness that, when the Government signed up for commitments, they kept them. I thought that he must be about to make a joke, but I realised that he was trying to be serious. The Government said that they would maintain the value of the pound, but they devalued it. They said that the recession was ending in April 1992; it had another year to go. They said that they would not put VAT on gas and electricity. It is set to go up by 17.5 per cent. They said that they would not have a PSBR of more than £25 billion. It is to be double that. They said that they would cut taxes, but they are to raise them by £17 billion.

The Chief Secretary said that there would be £1.75 billion in extra investment for councils from the release of receipts from the sale of council houses and from other capital receipts. In the autumn statement debate, I challenged that figure, because councils told me that they expected not an increase but a drop in receipts, because they could no longer sell council houses. Yet the Chief Secretary and the Chancellor, when they clearly knew that councils would not have £1.75 billion to invest and to spend, kept giving that figure.

The Institute of Housing has carried out a survey which supports my findings. It concludes: Local authority building will be zero and only 400 additional homes will be built through housing associations. A modest increase in investment in 1993 will be paid for by cuts in 1994 and 1995. Will the Chief Secretary now admit to the House that there was no £1.75 billion-worth of capital receipts available for council investment and that that figure was and is bogus? I shall give way to the Chief Secretary if he wants to admit that that figure is bogus. I see that he is staying in his seat.

The Government are now set to chop the welfare state. The increase in unemployment and the fall in receipts are used as the excuse not only to increase taxes, but to cut services. The election promises to protect services and benefits have also been forgotten. No Tory candidates and no Tory Members warned constituents that to vote Tory would mean chopping benefits and services. Of course, cutting the welfare state is not just an expedient caused by the Government's economic incompetence, but is the hidden agenda of the Tory right wing. It sees the increase in borrowing as a chance to take the axe to services in which it has never believed and to benefits on which it has never had to rely.

The Institute of Managers reports that, even at the bottom of the recession, directors have managed to award themselves a pay increase of 5.5 per cent., yet the Chief Secretary tells us—he told us this again today—that the key to a successful economy is low wages, not for directors, of course, but starting with a cut in the living standards of people working in the public sector?

Mrs. Angela Browning (Tiverton)

Will the hon. Lady give way?

Ms Harman

I have given way about six times and I intend to press on.

As the Government cut the welfare state and push up fuel costs for the elderly, more people will turn to charities for help.

Mrs. Browning

Will the hon. Lady give way?

Ms Harman

I give way on condition that the hon. Lady tells the Chief Secretary to clean up his jokes about me?

Mrs. Browning

I thank the hon. Lady for giving way, and if I can help her in the matter of the Joan Collins jokes I will be pleased to discuss that in private with her after the debate.

I should like to take up the hon. Lady's point about pay increases. We are all aware of the need for pay restraint right across the public and private sectors, but the hon. Lady will recall that the House voted on Members' pay and that many hon. Members, particularly Conservative Members, voted for a zero increase. The same cannot be said for all her Back-Bench colleagues.

Ms Harman

The trouble is that the Conservative Members who voted for no pay increase for Members of Parliament did not vote for their pay as directors or as consultants to be frozen. The difference between us and the Conservatives is that we believe in a highly skilled, high technology, high investment economy—and high wages will be part of that. We do not think that we should have a low skill, low technology, low wage economy and then try to compete with the third world.

As the Government cut the welfare state and push up fuel costs for the elderly, more people will turn to charities for help. Last year the Cancer Relief Macmillan Fund gave out more than £3 million in patient grants, of which by far the largest category were grants for heating costs. But the charities to which the elderly and the ill turn will in future be less able to respond because the Government plan to take money off them by making them pay VAT on gas and electricity for the first time.

The Imperial Cancer Research Fund calculates that VAT on gas and electricity will mean that it has to pay extra tax of £170,000 a year; and the Charities Reform Group calculates that 11 national charities will have to give the Government more than £1 million more.

The measures in the Finance Bill to encourage more payroll giving and gift aid will go nowhere towards making up for the millions of pounds that the Government will take off the charities through VAT on fuel or to make up for the fall in private charitable giving that has been caused by the recession.

The Government cannot even get their alibi right. The Chancellor claims that the rosy 1992 Budget forecast for growth was blown off course because of problems in the world economy. The Red Book, however, shows that the one figure that the Government got right in 1992 was that for growth in the world economy, as Dr. John Wells of Cambridge university has pointed out. The problem had everything to do with misleading the electorate about the country's immediate economic prospects and the possibility that taxes would be raised.

The Government did not tell voters at the last election that they planned to put up taxes and put VAT on gas and electricity, because they knew that, if they told them, they would not be re-elected. Although most Tories are happy to cheat the people who elected them, some, at least, have a conscience. I was glad to see that the Conservative group on Dundee council was prepared to second a motion from the Labour leadership of that council. Although he had a heavy heart in doing so, the Tory leader of Dundee council said that he had come to the conclusion that to oppose the motion condemning the Government for putting VAT on gas and electricity would be to try to "defend the indefensible"; and that to impose it for environmental reasons, for controlling pollution, was to stand logic on its head. Conservative candidates are asking for votes in the May council elections throughout England and Wales, but, before voting, people are entitled to know where those candidates stand. Do the Tory candidates, for instance, support the proposal to put VAT on gas and electricity? Perhaps the Chief Secretary can tell us, to help the voters of Newbury, whether, if the Tory candidate there were elected, he would vote for VAT on gas and electricity. Will Julian Davidson vote for that if he is elected? Can the Chief Secretary tell us? It would be very odd if he did not know whether a by-election candidate for his own party would vote with him on this matter if he were elected.

The Chief Secretary is not prepared to tell us whether his candidate in that by-election supports that key measure in the Budget. It is clear why he will not. If the candidate pledges to vote for the VAT extension, he has no chance of being elected, so he will refuse to say. The people of Newbury will know two things about him—that he plans to vote for VAT on gas and electricity and to conceal that fact from those he is asking to vote for him. In that respect, he is like other Tory Members. If any Tory Members have any integrity left, they will join us in the Lobby to vote against the Finance Bill and to keep their promises.

Mr. John Maxton (Glasgow, Cathcart)

On a point of order, Mr. Deputy Speaker. What is the position about Second Reading of the Bill? Am I right in thinking that it is exempted business? Many hon. Members are rising to speak, and if it is exempted, the vote does not need to be at 10 o'clock but can be at whatever hour the House decides.

Mr. Deputy Speaker (Mr. Geoffrey Lofthouse)

The hon. Gentleman is quite right on both points.

Mr. Nigel Forman (Carshalton and Wallington)

On a point of order, Mr. Deputy Speaker. Do the rules of the House contain any guidance about how we are expected to deal with a shadow Chief Secretary to the Treasury who apparently aspires to the job, yet suggests that public expenditure is to be increased and taxation is to be resisted?

Mr. Deputy Speaker

That is not a matter for the Chair, as the hon. Gentleman well knows. His point is a sheer waste of the House's time.

4.36 pm

Mr. John Watts (Slough)

The hon. Member for Peckham (Ms Harman) attacked the level of the borrowing requirement and some of the Budget measures that are designed to reduce it. In particular, she attacked VAT on domestic energy but did not mention her party's proposal to impose a levy on the profits of energy utilities and how that would assist consumers. She did not say whether, despite that levy, energy utilities would continue to pass to consumers the benefits from the lower costs that they have enjoyed in recent years.

The hon. Lady gave a grudging welcome to the encouraging signs of economic growth that have emerged in recent weeks, but criticised the Government for, she claimed, acknowledging the recovery too soon. She said that the Government had claimed that it had started last summer, and that we had had to wait a year for it. My right hon. Friend the Chief Secretary explained that the GDP had grown in three quarters. I am a simple accountant and my mathematical ability may not be equal to that of the hon. Lady. However, it is clear that three quarters before the end of the last quarter would take us back to the beginning of the summer of last year. If recovery started last June, it is churlish of the hon. Lady to criticise the Government for a claim which, on her calculation, was perhaps three months premature.

Mr. Geoffrey Hoon (Ashfield)

The hon. Gentleman is the Chairman of the Select Committee on the Treasury and Civil Service. Why did that Committee roundly condemn the Budget?

Mr. Watts

It would take me a long time to deal in detail with every part of the report that was publi;hed today. The hon. Gentleman is referring to the fourth-form abuse in the earlier paragraphs of the report. I understand the irresistible temptation that faced the Liberal and Labour members of the Committee to insert a few abusive and rude comments about the Chancellor, but they did little to enhance the work of the Committee, and they were not an intelligent commentary on the development of the economy. When I have dealt with another matter that has arisen in the debate, I shall deal with the central feature of that report and the matters that the Government will have to deal with in the years ahead.

Mr. Giles Radice (Durham, North)

It would have helped the Select Committee even more if the Conservative Members who should have been there were actually there.

Mr. Watts

I plead not guilty, as I was there. As I have said on a number of occasions, I do not consider myself to be either a wet nurse or a Whip for one part of the Committee. My role as Chairman is to serve the whole Committee.

My right hon. Friend the Chief Secretary referred to a number of measures taken to assist the further development of industry and to a Liberal declaration in Newbury about VAT. In both references, he Missed out one important measure in the Budget. He made no reference to the improvement in the VAT treatment of the racing industry, which is a feature of the Budget for an industry that is of importance to many parts of the country. I link it to the Liberal declaration in Newbury, because I have seen reported a scurrilous allegation from the Liberal candidate that the measure was designed for the by-election and for no other purpose.

It is important that the record is set straight. The last time that I saw our late colleague, Judith Chaplin, was when she and I went to see my right hon. Friend the Chancellor in the course of pre-Budget consultations. The matter that she discussed with the Chancellor, as she had done often before, was the need for some reform of VAT on the racing industry. Therefore, it cannot be true, and is not true, that the measure is included in the Budget as a by-election bribe. It is there, if anything, as a tribute to the assiduous way in which our late hon. Friend served the interests of her constituency with such vigour.

Mr. Portillo

My hon. Friend is right. Does he agree that, if it had been a by-election ploy, during the course of my speech I would have made quite a lot of that historically helpful measure?

Mr. Watts

My right hon. Friend makes his own point in a most powerful way. I thought it appropriate to mention the matter in order to put the record straight and, in particular to draw attention to the role of our late, lamented friend.

The Bill implements the revenue-raising side of the Chancellor's fiscal judgment. It is clear that the difficult judgment, as my right hon. Friend described it, that the Chancellor took was the right one. He was right to avoid premature increases in the burden of taxation, which might have jeopardised the recovery that we are all so glad to see is shown by recent evidence, even though the consequence is a £50 billion public sector borrowing requirement for the coming year. He was equally right, sensible and wise to recognise that the deficit is not a problem that can be ignored and neglected throughout the economic cycle. It poses a potential problem in the development of the economy in the years ahead.

Table 2B.5 of the Red Book shows that, in 1997–98, the PSBR is projected at £30 billion or 3.75 per cent. of GDP, based on the central growth assumption in the forecast. On a low growth assumption, that deficit could be as high as 5.25 per cent. of GDP and, even on the assumption of a high assumed level of growth in the forecast, it would still be 2.5 per cent. The Bill contains revenue-raising measures to take effect next year. Had they not been in place, all those forecast levels of deficit would have been another 1.5 per cent. worse. That underlines the importance of those measures in the Bill.

I am reminded of the comments of my right hon. Friend the Chancellor that the Budget cannot be an a la carte menu. We must look to the revenues that are needed to balance our national accounts. Even on the most favourable assumption that can be contained in the official forecasts, the deficit does not end at the end of the present economic cycle. It is clear that, unless recovery is both substantially stronger than expected, and sustained, further reductions in public expenditure or increases in taxes will be necessary.

Naturally, my clear preference is for reductions in spending so that we can have the opportunity of further reductions in the level of taxation. The Conservative party is the only party, in the House or outside it, committed to lower taxation as a policy objective. The records of the Labour party in office and, if one looks back far enough, of the Liberal party in office and in support of a minority Labour Government prove that to be the case. Therefore, I urge my right hon. Friend the Chief Secretary to proceed with vigour with the fundamental review of public expenditure that he has been charged to undertake. No part of public expenditure can be considered to be out of bounds.

We have to address a medium to long-term problem. Therefore, we should not be seeking short-term cuts of the sort that Labour Governments took in the mid to late–1970s, involving slashing the Government's capital programme and imposing cuts in pensioners' incomes—a fact to which my hon. Friend the Member for Dover (Mr. Shaw) referred earlier—and imposing on workers in the public service not merely pay restraints but reductions in real pay. We must not look for such a menu to meet our requirements. We must look at rather more fundamental changes, both in the scope of expenditure and in the structure of the public sector.

Ms Diane Abbott (Hackney, North and Stoke Newington)

Is the hon. Gentleman aware that, when he calls for cuts in public expenditure, he is calling for a continuing downward spiral of low or slashed levels of public investment, leading to nothing happening about the unemployed and to continuing high levels of public expenditure on unemployment? Would it not be far better to invest in the economy, do something about the unemployed and help to cut the PSBR so that we would not have to continue to spend millions on maintaining a standing army of the unemployed?

Mr. Watts

I am grateful for the hon. Lady's support. I am sure that, had she been a Labour Member of Parliament in the 1970s, she would have opposed the slashing of the capital programme for roads, hospitals and schools which the Labour Government of the day undertook. That is what I had in mind when I referred to short-term measures almost always being the wrong decisions.

It would be surprising if my right hon. Friend the Chancellor, having taken such pains in his autumn statment to protect the major parts of the Government's capital expenditure programme, were to reverse that decision and make such short-term and ill-considered reductions in beneficial expenditure, rather than having the fundamental review of the role of the public sector that my right hon. Friend the Chief Secretary is undertaking.

It will build on the initiative announced by my right hon. Friend the Chancellor and my right hon. Friend the Chief Secretary, which is aimed at a substantial transfer of both responsibilities and risks from the public sector to the private sector. That will have beneficial effects on public finances. We are not looking for cosmetic changes, but if there is a permanent shrinkage in the public sector and if risks that are borne in the public sector are taken on in the private sector, that is not cosmetic but a fundamental change in the role and the scope of the public sector.

Higher taxation is never my preferred option. I am sure that my right hon. Friend the Chancellor will review the progress of the economy in the run-up to his next Budget in November. While the recent growth in consumer expenditure is welcome to get the economy on the move, if that consumer spending growth is excessive and appears detrimental to the current account and the balance of payments because of a high propensity to buy imports, there may be a need to consider some increases in indirect taxation in that Budget. That would ameliorate the growth of consumer spending, if such a growth is becoming a problem, and would contribute usefully, in the short and medium term, to a reduction in the size of the deficit.

My preference is not for an increased burden of taxation as an objective of policy, but for a combination of lower spending and more rapid growth in the economy. That would be preferable and may well happen, especially if our major trading partners—in particular on the continent of Europe—get their economic acts together. Such a combination could present my right hon. Friend the Chancellor with real options in the later years of the medium-term financial strategy, one of which might be more rapid progress in implementing the Government's policy objective of a lower rate of direct taxation—a 20p basic rate of income tax. That objective is not shared by the other political parties.

No doubt many aspects of individual taxes will come under close scrutiny in Committee, both on the Floor of the House and upstairs, but there is only one specific tax measure to which I wish to refer today, and it is the petroleum revenue tax. In view of my right hon. Friend the Chancellor's need to raise revenue to reduce the deficit, it is not surprising that he should consider a tax that had begun to appear almost optional and no longer yielded the revenue that he could once have expected. Perhaps the previous tax regime was over-generous in its relief for exploration and appraisal expenditure. However, I hope that my right hon. Friend will think again about the proposed transitional relief.

As I understand it, many oil companies are committed through their licensing obligations to incurring expenditure. They entered into those commitments when the goalposts were such that they could expect E and A expenditure to be set against their PRT tax liabilities. However, such expenditure will no longer qualify for that relief and nor is it covered by transitional relief. Where expenditure is unavoidable and decisions have been made in the expectation of relief, transitional relief should provide for that.

The second matter—

Mr. Robert Hughes

Before the hon. Gentleman leaves the question of petroleum revenue tax, does he agree that it is ominous and sinister that the Chief Secretary, during his opening speech, said not a single word about PRT?

Mr. Watts

I find that neither ominous nor sinister. There are many matters to which my right hon. Friend could refer, but he cannot refer to them all.

In fact, my second point was not moving away from PRT. I wonder whether there are other ways in which the yield from PRT could be increased without entirely removing relief for E and A expenditure. One possibility would be to retain a higher rate of PRT and restrict the amount of expenditure that qualifies for relief in any one year. I understand from some oil companies that have been in touch with me that, typically, their E and A expenditure might be about 80 per cent. of their PRT liability. My right hon. Friend's understandable desire to increase the flow of revenue could be achieved by setting a cap of 50 or 60 per cent. on the amount of PRT that can be offset by E and A expenditure. That would increase the flow of revenue to the Exchequer, but would not entirely remove the fiscal incentive to continue exploration for valuable hidden natural resources.

I fear that, in swinging the pendulum from one extreme to the other, the Budget's proposals may have gone too far. I hope that my right hon. Friend will look again at the matter and with an open mind. It may not be until the November Budget that consideration can be given a different long-term regime for oil taxation, but transitional relief—

Mr. Alex Salmond (Banff and Buchan)

The hon. Gentleman was recruiting some support on these Benches until his final point, when he suggested that any change could wait until November. Does not the hon. Gentleman understand that, by November, thousands of people—some estimate tens of thousands—in the oil industry will be out of work? Would it not be better to make the appropriate change during the Committee stage of this Bill? Will the hon. Gentleman revise his thoughts about the timetable for sensibly adjusting PRT?

Mr. Watts

The hon. Gentleman intervened a little too early. I said that it might take time for a different long-term tax regime to be devised to meet the objective of a strong flow of revenue, while leaving some incentive for exploration to ensure that important national assets are fully exploited. As the hon. Gentleman intervened, I was saying that the issue of transitional relief was more urgent and needed to be dealt with in this Bill. If it is dealt with satisfactorily, those tens of thousands of people to whom he referred will still be in work, because the licensing obligations for companies relate to work that is to be carried out over a significant number of years. Therefore, there is time for the fundamentals of the long-term regime to be dealt with later in the year if it proves impossible to deal with them satisfactorily in this Bill.

I am conscious of Madam Speaker's request that all hon. Members be economical in their use of time. I intend to follow her stricture and conclude simply by saying that, overall, it is a good Budget based on sound judgment, and that it includes sensible measures to underpin sustained recovery.

4.56 pm

Mr. Denzil Davies (Llanelli)

The hon. Member for Slough (Mr. Watts), who is Chairman of the Treasury Select Committee, is, with the greatest respect, deluding himself if he thinks that in public accounts a clear line can be drawn between capital spending and revenue spending. I am sure that the Chief Secretary would confirm that. If a hospital cannot afford to pay its nurses, there is not much point in having capital, and vice versa. It is not such an easy solution as the hon. Gentleman, perhaps inadvertently, suggested.

The Chief Secretary made a Cambridge Union-style knockabout speech. I do not blame him for that, because he is a man with a problem, and the Red Book shows where it lies. There is a public sector borrowing requirement of £50 billion—8 per cent. of gross domestic product. As the hon. Member for Slough said, even on the best estimates that figure is not likely to come down by much over the next few years. The Government have signed up to the figures in the Maastricht treaty—apparently, we must get the PSBR down to 3 per cent. of GDP. Therefore, the Chief Secretary has a problem. It is in the lap of the gods whether he is still Chief Secretary if and when that 3 per cent. is achieved.

There is also a balance of payments deficit. Based on the Treasury's estimates, the Red Book says that this coming year the deficit will be £17.5 billion. Within that, the figures are even more horrendous. As my hon. Friend the Member for Peckham (Ms Harman) said, the manufacturing deficit is estimated at £13 billion. In addition, under the column headed "Other", there is another figure of, believe it or not, £9.5 billion.

I do not understand why the Treasury does not break down that "Other" figure. It is fairly large, at £9.5 billion. Most of it is probably accounted for by food imports. It is estimated that this country will be in deficit to the extent of £13 billion in the manufacturing sector and close to £8 billion or £9 billion in food. We are importing far more manufactures than we are making, and that is true of food as well. We can no longer pay for our food imports by exporting manufactured goods. We are in the appalling position of suffering major deficits in respect of manufacturing and food consumption.

Elsewhere in the table, a figure of £2 billion is shown in respect of oil, although no figure is given for energy. I am not an expert on oil taxation, but if half of what I hear is correct, that £2 billion deficit will probably disappear before long if no changes are made to the Bill. What about all the pit closures? I do not know where all the gas will come from—perhaps Norway or somewhere else. It will not be long before this country has an oil deficit also.

Invisibles account for £3 billion or £4 billion, but that figure fluctuates. This country has massive deficits in production and food that we cannot cover with anything else. The Chief Secretary is right to make a knockabout speech, because he is an intelligent man and I am sure that he is extremely worried about the situation.

It is said that we are now at the heart of Europe. Our gross domestic product per head is 90 per cent. of the rest of Europe. I do not care to talk about first and second divisions, but in terms of the economy—I mean no disrespect to these countries—we are down with Spain, Portugal, Ireland and Greece. Perhaps the figure will increase 1 per cent. in the coming year with the recession in Germany, but it will take a long time for our GDP to come even close to the EC average. Far from being at the heart of Europe, geographically we shall always be on its periphery, and it seems that we shall be so economically as well. There may be some correlation between the two.

Despite all that, the Prime Minister is a happy man. He does not worry about those things. He watches cricket, drinks warm beer, fills in his pools coupon, and gently strokes his favourite pit bull terrier. That is the Prime Minister for you. He is quite happy and thinks no more about it—the Committee stage of the European Communities (Amendment) Bill is over.

Mr. Hain

The Prime Minister can watch Neath beat Llanelli.

Mr. Davies

I do not think that is any more likely to happen than the Government coming near to meeting their Maastricht PSBR targets.

Progressive taxation went out of fashion in the 1980s. Adam Smith believed in it, thinking that progressive taxation was a good thing. Karl Marx probably thought the same thing, because he spoke of each according to his needs. With the Reagan and Thatcher revolution of the 1980s, progressive taxation ceased to be fashionable. I am not sure that it is fashionable now among my right hon. and hon. Friends on the Front Bench.

Our income tax and value added tax systems are extremely unprogressive, if that is a good and right word to describe them. I approve of the lower rate of income tax of 20 per cent. I am old enough to remember one and sixpence and six shillings and thruppence, and whatever else Roy Jenkins abolished in 1969—which may have lost us an election. I would argue for a rate even lower than 20 per cent.

The current banding is 20 per cent., 25 per cent. and 40 per cent.—but it stops there, with a jump from 25 per cent. to 40 per cent. when the individual's income reaches £23,000. If one considers allowances and the way the system is constructed, the individual must earn slightly more than a Member of Parliament to come within the 40 per cent. bracket—a salary of £31,000 or £32,000. Every pound after that is taxed at 40 per cent.

I believe that 40 per cent. is too high in some cases. In the late 1970s, there was talk of the middle manager. He is still there. The middle manager in the engineering industry does not earn that much. He may earn £40,000, or £50,000 in a medium-sized firm—although probably not during a recession. To tax that individual at 40 per cent. on everything he earns above £30,000 is wrong, unjust, and counter-productive. The Chief Secretary is gesticulating. I will give way if he wants to intervene.

Mr. Portillo

I was just thinking that the right hon. Gentleman's tax policies sound so similar to Conservative policies that he ought to come and sit on this side of the House.

Mr. Davies

The right hon. Gentleman has not heard it all yet, so he had better wait.

I mentioned Adam Smith and progressive taxation because I believe that there should be percentages. In Britain, the highest earnings are enjoyed not by those who work in manufacturing but by those in the financial sector, and by partners in firms of solicitors and accountants. I mean no disrespect, because they perform a useful function in society. High salaries are paid also to property developers in times of growth, and to people working in the media. Those are where the rewards are greatest.

Unfortunately, in the kind of society and economic system that we have in Britain, manufacturing comes lower down. The jump in taxation from 25 per cent. to 40 per cent. at an income of £31,000 or £32,000 militates against manufacturing. Young people consider such factors more than our generation did, and they note the kinds of employment which offer high earnings and lower tax rates. Partners in City accountants and solicitors firms think nothing of earning £250,000 a year and more. They pay 40 per cent. tax, as does a man making machine tools who is paid £45,000 or £50,000.

My scheme of progressive taxation is where I part company with the Chief Secretary. I would begin with tax at 10 per cent.—the right hon. Gentleman might agree —increasing in bands of 10 per cent. to perhaps 60 per cent. or 70 per cent. for the highest earners. That would be a much fairer system, which would lighten the burden on those in middle management who are working in the productive part of the economy, and it would tax more heavily those earning the highest incomes.

That view may be an unfashionable, and I can understand people arguing, "That would be terrible; there would be no investment," but it would be a more sensible system.

No one has jumped up and asked, "What will you do about capital gains tax?" It is most curious that capital gains tax under a Conservative Government is 40 per cent., which is the same as the maximum income tax rate for individuals. I accept that there is indexation, but in reality the figure is unlikely to be 25 per cent., even if the capital gain is not very large.

As to individual taxation, Conservatives do not recognise any difference between capital gains tax and income tax. That is most strange. When I first entered the House, splendid speeches were made by Conservative Members about acorns, oak trees, seeds, and the tree and the fruit. Nobody cared very much about all that in the 1980s. Investment did not mean anything. A buck was a buck was a buck, as a Canadian royal commission said years ago, when it recommended abolishing different forms of taxation or capital and income.

The Government tax capital gains at 40 per cent., which is too high. I do not believe that capital gains should be taxed at 40 per cent. I believe that the corporation tax is 33 per cent., capital and income. Obviously if one is going to change the system and have a progressive system of income taxation, one must consider capital taxation. I think that 30 per cent. is about right. I believe in the distinction between capital and income in a society that needs and wants to invest, and believes that investment and long-term growth are good things for the benefit of that society.

Value added tax is a terrible tax. Only someone from the common market would invent something called VAT. It is a dreadful bureaucratic tax, with thousands of civil servants sitting in their tower in Southend, churning out circulars. The tax is not to be found in the statute book; it changes every day as the commissioners of Inland Revenue put out press releases and circulars. One cannot find out or read about it. It is a terrible tax.

The Japanese and Americans at one time thought of introducing VAT. The Japanese are clever people and they decided they did not want to go down that road. When I was at the Treasury there was a proposal to send the permanent secretary to Japan and persuade them to have the tax and stop the Japanese economic miracle in its tracks. But the Japanese are very clever and decided not to have anything to do with this silly tax. However, we have got it, it is there, and we cannot change it.

Mr. Butterfill

The hon. Gentleman mentioned America. Perhaps he is not aware that America has a sales tax in almost every state, which funds most of the state expenditure.

Mr. Davies

I am aware of that. Years ago, in the state of Illinois, I can remember people going down to Indiana and coming back with the boots of their cars filled with television sets because Indiana had a lower sales tax. I do not understand the point that the hon. Gentleman is trying to make.

Mr. Butterfill

The hon. Gentleman was saying that this form of taxation was not popular anywhere else in the world. I was pointing out that in the largest single market in the world a sales tax, of one form or another, is very popular. The fact that people can move down the road to another state is fine. That tends to create a free market and make people average their taxes.

Mr. Davies

It is quite easy to pay it at the cash till. There is no bureaucracy; it is just added to the bill. It is very simple, very easy, and does not need 10,000 civil servants, circulars from the board of Customs and Excise, huge law reports and accountants making vast sums of money.

I seem to be arguing the case for the Conservatives. I think small business men especially would be delighted to get rid of VAT and have a simple sales tax as they have in Indiana, Illinois and other states in the United States; but we have got VAT. The Tories cannot cope with VAT: when Baroness Thatcher formed her first Administration, the first thing that happened was that they abolished the 8 per cent. rate and put VAT up to 15 per cent. To some extent that contributed to the surge in inflation which took place in 1979 and 1980 after the Conservatives got in. They did away with the 8 per cent. rate and imposed a 15 per cent. rate.

The 15 per cent. rate adversely affected many people. The Chief Secretary mentioned a VAT rate of 17.5 per cent. eventually on domestic heating and fuel; the relevant clause also mentions charities in that class. The same applies to construction, chapels and churches. I remember, as a Treasury Minister, receiving letters from ministers of chapels and churches which had to have their roofs repaired and had to pay 8 per cent. even then. Now 17.5 per cent. will be charged for construction and also for heating bills.

It does not make sense to have such a high, single positive rate when there is no lower rate at all. If it were 10 or 12 per cent., it would be just about defensible; I do not believe it is defensible to have a rate of 17.5 per cent. without a lower rate which can take into account cases such as churches, chapels and the disabled. I remember VAT being imposed on sanitary products for women, and women's groups quite rightly complained. Now it is 17.5 per cent.

My proposal—which again is entirely unfashionable; it is progressive, but unfashionable—is for a 5 or 6 per cent. VAT rate on fuel. This rate would also be imposed on—horror of horrors—manufactured food, if I may call it that. Much of our import bill for food is for manufactured food, and the profits made by the leading supermarkets come from manufactured food. I am sure it would be possible to devise a 5 or 6 per cent. tax on fuel and no tax on the other items.

That is my attempt at rewriting the whole of the tax system. I am sure that it falls on stony ground so far as the Chief Secretary is concerned, and I do not really know about my hon. Friends. It is not fashionable these days to attack or say anything about the mammon of finance and taxation. It is something that politicians on the Front Benches are not allowed to touch, but we on the Back Benches are responsible fellows and allowed to be radical—and that is how I would like to see our taxation system.

5.15 pm

Mr. Andrew Bowden (Brighton, Kemptown)

During the past 15 years, we have seen the general trend of taxation move from direct to indirect taxation. I would not argue with that principle or trend—because it increases personal choice and is no disincentive to earners—but, if they pursue that path, the Government have a responsibility to certain sections of our community. If the Government impose that amount of VAT upon domestic fuel, some sections of our community will be hit particularly hard. Therefore, in furthering this trend of indirect taxation—with my support—the Government should look carefully at one or two groups who are on the lowest incomes.

No one likes paying taxes; no one supports any increases because it is going to make them popular—it is going to do the opposite—but it is hypocritical for any politician or political party to continually demand more and more expenditure without saying where the Government of the day are to find the money to meet those bills.

A group whom I feel the Government must consider very carefully in relation to VAT on domestic fuel are the retired people of this nation, some 10 million to 11 million pensioners. Within that group there are two sections of special concern. There are some 700,000 pensioners who could be drawing income support but, for one reason or another, are not. They really are living—indeed existing—on the very lowest of low incomes. There are also about 2.5 million people who have very small incomes, only slightly over and above the income support rate. They are not eligible for income support and they too will face significant hardship as a result of VAT on domestic fuel.

I know that my right hon. Friend the Chancellor of the Exchequer and his colleagues are still considering the best way in which to help pensioners. I would like to make one or two practical suggestions to them—but first, perhaps, I should give a little more background.

Single pensioners spend between £8 and £9 per week on fuel and heating. Married couples spend between £10 and £11 a week on fuel. In the context of VAT at 8 per cent., that represents approximately 70p a week for a single pensioner and 85p a week for a married pensioner.

Those figures will seem very small to a very large number of people throughout the country. To many people, less than £1 a week is neither here nor there, but it is very much an item for the 700,000 pensioners who do not draw income support but who could do so and for the 2 million to 3 million pensioners who have a very small income over and above support rates.

We should also consider this section of the community from a different angle. We are talking about first world war and second world war pensioners, men and women, who were unable to earn large salaries or wages and who found it very difficult to save any money, but often did so. We are talking about a generation of people who are self reliant and responsible and who think in terms of service to others, not just of themselves all the time. Most of them adhere to standards and principles—loyalty, integrity and duty—which to some may seem a bit out of fashion. We owe a very great debt to that group of people, who saw this country through those two enormous conflicts.

My right hon. Friend may say that he understands the points that I am making but that there are a considerable number of pensioners who can pay VAT on fuel without any great hardship. I accept that. There are pensioners —an increasing number—who pay 40 per cent. tax and a significant number who pay 25 or 20 per cent. tax, but we have to balance that number against the two groups I mentioned earlier—the 700,000 who could claim income support but who do not and the 2 million to 3 million who have only a few pounds a week over and above income support level.

Therefore, I ask my right hon. Friend and his colleagues to think hard, when they review pensions expenditure and look at the figures for uprating the basic pension, to be announced in October or November, about increasing the basic pension uprating to meet entirely the cost of VAT on fuel. There would be a considerable clawback through the tax system. It would be efficient and effective to operate, and the administrative cost would be limited; the uprating would be part of the overall increase in pensions which will come about anyhow because of the increase in the retail prices index.

I have done some research into this, and I know that the difference in cost between compensating pensioners through income-related benefits—which the Government have already clearly said that they are thinking about and that they will do, although they have not yet announced the exact details—or through the state pension would be only about £150 million. I can almost hear some of my colleagues say, "Only £150 million!" I remind the House that this is a section of the community to whom the nation owes a great debt. Therefore, I ask my right hon. and hon. Friends on the Treasury Bench to think long and hard about the pensioners of our country?

Mrs. Roche

I sympathise with many of the points made by the hon. Gentleman. Does he agree that one of the other difficulties that face those pensioners is that many of them may, through no fault of their own, have inefficient methods of heating their homes, and that many studies also show that the homes of many pensioner households are not well insulated? I should be grateful for the hon. Gentleman's comments.

Mr. Bowden

During the past 10 years there has been a considerable number of schemes—certainly in my Brighton constituency, where there are about 20,000 retired people, many of them on low incomes—to help people to insulate roofs and double-glaze windows. One wants money to be found for that work to carry on. Although a great deal has been done, I agree that much more needs to be done in the years ahead.

To return to the debt that we owe this group of people, as the vast majority have only limited savings and were often unable to buy their own homes, they face the worst of all worlds. There can be no doubt that a significant section of retired people have not shared in the increase, proportionately, in the standard of living that the vast majority of us have enjoyed during the past 10 to 15 years. All of them moved forward, to a point, but it was this section of our community that benefited the least. I ask my right hon. Friend to consider that point.

I am conscious that many hon. Members in all parts of the House wish to speak, but before I sit down I shall say a word about petroleum revenue tax, an issue that has already been referred to by my hon. Friend the Member for Slough (Mr. Watts). When making these changes, we have to be careful not to build in a disincentive to explore even further the potential health of the North sea. There is strong evidence that it is only the very large oil companies that will gain from and welcome the changes and that the amount of revenue that they will produce for my right hon. Friend and his Treasury colleagues will be limited.

My worry is that the proposals will kill the incentive for medium-sized and small companies to follow a programme of aggressive, continuing exploration. We know that there is still a considerable amount of oil to be obtained from the North sea, not least on the basis of existing estimates. I do not claim to be an oil industry expert, but it is amazing that we have found over the years that, as fast as the world uses up oil, estimated oil reserves continue to increase rather than decrease, so it must be to our advantage, as a nation, to obtain every barrel of oil that we can from the North sea.

There is a serious danger that investment in the United Kingdom oil industry will be reduced by the proposed changes and that there will be loss of jobs and damage to the economy. Reduced investment could even bring about the premature demise of activities in the North sea.

I hope that my right hon. Friend does not think that I have been too negative. In conclusion, therefore, I shall say that, on the whole, I believe that the Budget is fundamentally sound. It will have my support. It is stimulating the recovery, and it will increase confidence. The nation will see the benefits of this Budget in the years to come.

5.29 pm

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

I hope that the Chief Secretary and his colleagues have listened to and will heed what the hon. Member for Brighton, Kemptown (Mr. Bowden) said about the impact of value added tax on pensioners, and his practical suggestions about an alternative way of solving the difficulty that the Government have created. I will deal with those suggestions later.

The debate has at least broken new ground. It is the first occasion that I can recall of a Minister addressing the House while holding his nose. It is usually a signal used when the person speaking wishes to express his distaste for what he has to say. It is the sort of thing that our former colleague Mr. Alan Clark used to manage to convey without actually holding his nose when reading out passages of Government policy that were distasteful to him. I think that there were parts of the Chief Secretary's speech that he could have read out while holding his nose for the same reason, rather than that which led him to do so on this occasion.

I do not suppose that I could persuade the Chief Secretary to feel real distaste for some of the policy decisions in the Budget and the Finance Bill, which I shall criticise later, but he might at least have held his nose when he said that the Government had a clear monetary policy and a clear medium-term financial strategy. Those two statements cannot conceivably stand up, and I am sure that the right hon. Gentleman must recognise that in his more serious moments.

We have had some welcome signs of recovery today, and one or two others in recent weeks. That has led Ministers into the sort of enthusiasm that might usually have been reserved for their own birthdays when they were much younger. There are signs that we are clambering out of the hole into which the Government pushed us, only to be greeted as we clamber out by the Prime Minister and the Chancellor standing with folded arms, saying, "Well, haven't we done well to get you out of that hole?" It is not very encouraging.

The signs mean that we should now apply ourselves to ensuring that we have a sustainable recovery—there is as yet no evidence that we have a sustainable recovery on hand—and that we do not return to some of the problems which got us so deep into recession in the first place. An appropriate corrective to an excess of enthusiasm is to be found in what I refer to as the "agreed parts" of the Treasury Select Committee's report published today.

There are some good parts at the beginning and the end of the report, which benefited from being especially heavily influenced by the Labour and Liberal Democrat members of the Committee, but which, unfortunately, did not command the support of the Conservatives. They are part of the report, they won the vote and they are a sound critique of the dishonest character of the Conservative's strategy at the election. In the agreed parts—those supported by all members or, in one case, by all but one —there are several issues of which the Government should take particular note.

The Select Committee warns of the continuing problem of high unemployment, which is likely to remain high, and of our very serious balance of payments position, which is almost inexplicably high for a country which has been in recession for such a long time. It also warns of the dangers of the public sector borrowing requirement which will still be £30 billion in four years' time, even if we have 2 per cent. growth, which not everybody believes. When Ministers rush to claim that 0.6 per cent. growth is wonderful news, they should bear in mind the fact that we have to achieve 2 per cent. growth to keep the PSBR at £30 billion. That is frightening.

The same report warns of the problem of not having a clear and satisfactory long-term policy to control inflation. It also points out that, if we are to have a genuine option to join European monetary union, we must prepare for it in advance. With the exception of one member of the Select Committee who was clearly not in favour of EMU, the Committee argued that we need to make progress on that and to have a regular review of progress if Britain is to have the genuine option of taking part in EMU. If it happens and we are out of it, that will be to our detriment.

It is also worth noting that the Finance Bill is an enormous document, certainly one of the largest that I have seen in many years of dealing with Finance Bills. It conjures up horrific prospects for our new procedure when we shall be considering the Finance Bill and Government expenditure in the autumn and shall probably have only the Christmas period for the country and the affected parts of the community to digest another probably quite large Bill. It should cause us to consider more carefully how we handle finance legislation, especially because some parts of it are wholly unexpected and cover aspects about which it would have been possible to consult widely before they appeared in the Bill. Again, I shall deal with some of them in a moment.

The Bill has 211 clauses and 23 schedules, which implement the largest every peacetime tax increase, proposed by a Government elected on a boast of record tax cuts and a promise of low taxes. I am entitled to say that, because I am speaking on behalf of a party which said that it might, in some circumstances, increase taxes. Indeed, we said that, given the opportunity, we would increase the tax on petrol, but we set out precisely how we would do it and what needed to be done with the money.

We said that if there were to be significant increases in the tax on petrol—and our proposals were lower than those which the Government are now introducing—there would have to be expenditure on public transport and compensation mechanisms for people in rural areas who are more dependent on motor cars. The party that said that our proposals were outrageous and that no one should vote for a candidate who would contemplate increasing the petrol tax has now suggested larger increases, without the compensation that we believe would be necessary. The tax will bear heavily on people in rural areas who are more dependent on the car, but they will receive no compensatory benefit.

Nor has there been any progress on one idea with which the Government were toying—road pricing in urban areas —which might have allowed a more effective transfer of costs and use of the fiscal system to discourage the use of the motor car where it can he avoided and where it is most environmentally damaging.

Domestic fuel is another instance of an issue on which the Conservatives purported to be against any increases. They ridiculed our proposals for an energy tax, which were directed at distinguishing between that which pollutes and that which does not. One of my criticisms of the use of VAT as an allegedly environmental measure is that it draws no distinction between the generation of electricity by oil, coal and nuclear power on the one hand and generation by wind or tidal power on the other. The same rate of tax is to be applied on all methods of generation.

The measure takes no account of the fact that poorer households spend a large portion of their income on fuel. The 1991 family expenditure survey showed that the poorest 20 per cent. spent 11 per cent. of their total income on fuel, whereas the average figure was only 5 per cent., and that the richest portion of the population spent only 3 per cent. of their income on fuel. The measure bears most heavily on the poorest, on pensioners, on tenants whose housing energy efficiency is not under their control, on families with children, on people with chronic sickness and disability, and on those in the colder parts of the country, such as Scotland and the north. It will also affect charities especially badly.

The proposal is not a sensible way of meeting the Government's alleged objective of using the tax system for environmental purposes. In practice, that is not what the Government were about. As the Treasury Select Committee concluded in its report, it was primarily a revenue-raising measure, and that is what the Chancellor said when he explained it to the Committee. He said that he first had to bear in mind the need to raise revenue. Indeed, if it were a more effective energy efficiency measure, and if it bore on the more elastic section of energy demand, it would not have the revenue-producing value which the Government derive from the measure.

It is because the measure is targeted at people who have the least choice about energy use that the Government hope it will produce large amounts of revenue, as it appears likely to do. It is not a genuine environmental tax and is not accompanied by adequate compensation or other measures to help those most affected. The hon. Member for Kemptown spoke of the particular problems of the large group of people just above the benefit level. Very often, they have saved a little, but certainly not enough to enable them to compensate for the effects of the new tax.

Income tax is another case of the Government raising taxation having said that they would not do so. One will look through the Bill in vain for a direct mention of an income tax increase. It is hidden away in a national insurance increase which is the worst, sneakiest and least fair way of increasing income tax. It hits directly those on the lowest incomes, but does not affect higher levels of income, perks or investment income. It has no effect at all on a whole range of income.

Mr. Butterfill

I am sure that the right hon. Gentleman will not have overlooked the fact that the freezing of thresholds and the disallowance of certain reliefs, as well as the reduction of relief to a 20 per cent. rate, will bear disproportionately heavily on those paying higher rate tax.

Mr. Beith

Yes, but although I am in favour of some of the adjustments of relief, they offer no compensation to people on lower incomes who bear the burden of disproportionately high rates of tax. That applies particularly to those who are being targeted because the increase is a national insurance increase. The increase has taken the form of a national insurance increase not primarily because it will have that bad effect—that is a consequence of it, rather than the reason for it—but because that will enable the Government to obtain the revenue that they would obtain from an increase in income tax without breaking the pledge, which they made in terms, that they would not increase income tax.

The Government now say, "We are simply adjusting the contributions to the national insurance fund to take account of a deficit in that fund." That is nonsense, and everyone knows that it is nonsense. The fund simply does not work that way. Moreover, a moment after he had used the alibi of a deficit in the fund to explain what is in fact a 1p tax increase, the Chancellor admitted that he would in any case be leaving the fund £2.8 billion in the red. In no sense are we talking about a careful actuarial balancing of the national insurance fund. We are talking about a disguised income tax increase, of the kind we shall probably see more of in future, as the Government find it necessary to increase taxes because of the public spending gap, but do not want to do so by formally increasing income tax.

The provisions affecting petroleum revenue tax have also caused considerable controversy. The Liberal Democrats felt so unhappy about that aspect of the Bill that, with the Scottish and Welsh nationalists, we voted against the relevant Budget resolution. On that occasion, we were not accompanied by the Labour party, but concern has now spread more widely among Labour and Conservative Members alike that what the Government are doing on PRT seems likely to tilt the balance away from exploration and against the smaller companies in the oil sector and in favour of the more rapid depletion of existing oil wells—the part of the oil sector that has already been explored. Clearly, unless some changes are made, that will have a severe impact on jobs. We have requested, and are to have, a debate on the Floor of the House on the main principles of the changes in PRT, and I expect that there will be a considerable amount of more detailed debate in Committee, too.

The Government seem also to have acted strangely—unless one assesses the provisions merely in terms of how much revenue they will raise—in introducing the provisions for advance corporation tax. I feel particularly aggrieved about that, as I was one of those who complained to the Government about surplus advance corporation tax—the amount that companies with substantial overseas activities pay in advance, to the detriment of their profitability, their shareholders and, ultimately, their employees.

What the Government have done has not solved that problem, although it has eased it slightly. The Government have gone out to consultation on surplus corporation tax. Meanwhile, they have simply taken the opportunity to rake in a great deal of revenue at the expense of pension funds, charities and all sorts of other bodies which were not consulted at all. The principle of consultation is being applied to the measure for which there was the most urgent demand, yet the Government have brought out of a hat a whole range of measures affecting a large proportion of the population through their pension funds and their investments, on which there has been no consultation at all.

It is a bit like taking one's car into the garage to get a particular repair effected and coming back at the end of the day to be given a bill for the addition to the car of innumerable extras—and probably various other bills for work elsewhere—and told that the original repair has not been done. I am sure that hon. Members have had that experience. Those at the garage say, "All the other things that we have done may help a little with your steering problem, but we haven't actually been able to repair it." That is what the Government have done in respect of advance corporation tax, and we shall need to consider the matter carefully in Committee.

Overall, charities will feel very aggrieved, because although there are improvements in respect of, for example, gift aid for which we asked, and a little on payroll giving, no attention has been paid to the anomaly of the charities' liability for VAT, to their problems with that or to the considerable addition to those problems that will be made by heating VAT, which will cost charities enormous amounts. Barnardo's estimates that £122,000 will be added to its heating bill, while Methodist Homes for the Aged expects its figure to be £143,000. Those are frightening figures for charities struggling in difficult circumstances to help people. Again, the Government's proposals will need to be examined carefully in Committee.

This is a Finance Bill to raise the taxes that the Conservatives said they would not need and would not raise. It clearly and directly breaks election promises by the Prime Minister. It is a Finance Bill to pay for the continuation of the recession, which the Conservatives said would end as soon as the polls were closed and they were elected. Moreover, It hands the bill for the Government's failure to those sections of the community least able to afford it.

5.44 pm

Mr. Michael Stern (Bristol, North-West)

I shall try to be brief, in view of the number of hon. Members who wish to speak. I agree with the right hon. Member for Berwick-upon-Tweed (Mr. Beith) that this is a long Bill, consisting, as it does, of 211 clauses and 23 schedules. Further to the comments that I made on Report last year, I hope that the Financial Secretary will tell us when he replies to the debate that the Bill will be no longer than that at the end of its passage through Parliament.

I shall concentrate on an important feature of the Bill —its relationship to what used to be known as the tax avoidance industry. It was in the 1960s and, in particular in the 1970s, under the last Labour Government, that that industry flourished to such an extent that, arguably, we became the tax avoidance capital of the world. People came from all over the place to go to the plush surgeries in the Harley street area or just off Oxford street to see their tax doctors. While they waited, they would pick up not a decaying copy of Punch but that day's copy of the Financial Times or The Wall Street Journal. They would buy at vast prices a scheme to avoid income tax, corporation tax, capital gains tax, estate duty, inheritance tax or even—jokingly—the dog licence.

This Government, with the assistance of some major court decisions, succeeded in killing off that industry. One of the major advances in tax legislation in recent years has been the extent to which a trend which, during the 1970s, appeared irreversible— that every time the Government announced a tax change, the highly paid brains in the industry would immediately find ways of getting round it —has been stopped. That is to the Government's credit.

Many people argued that the principal reason why that trend was stopped was that the tax avoidance industry had been bred of high rates of taxation and that, once the Government had brought down rates of taxation, the need for the industry disappeared. Until recently, that could have been argued. In the past couple of years, however, there have been worrying signs that tax avoidance has started again. It is to the credit of my right hon. Friend the Chancellor that, in the Budget and the Bill, he has taken early and severe steps to knock the re-emergent industry on the head.

I do not think that the re-emergence of the tax avoidance practices that were prevalent under the last Labour Government and before that would be to anyone's benefit. The fact that the present Bill contains so many measures designed to combat—in some cases, effectively, although I shall draw attention to one or two provisions which I feel could be strengthened—the latest outbreak of the industry is wholly to the credit of the Government, the Chancellor and the Treasury team.

Large parts of the Bill are devoted to combating tax avoidance: clauses 61 to 66, 81, 84, 88, 111, 112, 116, 117 and 188 all deal with individual aspects of tax avoidance. But those clauses are not the only way in which the Government are bringing steady pressure to bear. As was announced at the time of the Budget, there are other measures which are not in the Bill that are designed to deal with tax avoidance. For example, provisions in Customs and Excise press release No. 28 of 1993 deal with the growing practice of claiming VAT input tax relief on non-business supplies.

As a member of the Public Accounts Committee, I was delighted to learn in a recent evidence session with Customs and Excise that it is considering setting up a specialised unit to deal with the avoidance of VAT and other customs duties just as, to combat the excesses of the tax avoidance industry in the early 1980s, the Inland Revenue had to set up a special anti-avoidance unit which, in the end, was very successful.

While I welcome the Government's work to combat tax avoidance, I hope that they will not rest on their laurels. There is already evidence since the Budget that the Government may not have gone far enough. One of the Government's disadvantages in combating major and organised tax avoidance is that the organisation extends to ensuring that the Government do not find out about the tax avoidance until the last minute. I remember that, during the 1970s, many tax avoidance schemes were sold on the basis that timing the submission of the accounts or returns concerned was left in the hands of the organisers of the tax avoidance so that as little information as possible reached the Government as late as possible.

Clause 111 relates to a particular area of tax avoidance bashing. The clause deals with business expansion scheme relief and its abuse. As the clause is drafted, there is at least a risk that the Government have allowed through a considerable measure of tax avoidance which has not yet taken place.

Clause 111 deals, as I have said, with the abuse of business expansion scheme relief occurring through what is known as the non-recourse loan, under which someone makes a business expansion scheme investment, which is perfectly laudable, and then effectively sells that investment six months later in such a way that it is not caught by the legislation.

A great deal of that kind of investment occurred right up to Budget day. A recent article in The Times suggested that, in the tax year just ended, about £800 million was invested in business expansion schemes with the intention of taking advantage of what was then a loophole. The tax at risk was therefore a maximum of £320 million.

As clause 111 is drafted, most of that tax relief will still be available by actions that might be taken by the taxpayers concerned until September this year. In Committee or on Report, I will try to assist the Government to claw back even more of that tax relief, which was never intended by the legislation and which is still available to the Government to claw back.

That particular abuse, the non-recourse loan which is effectively a sale by another name, does not just extend to business expansion relief. It can also be applied to capital gains tax to enable a capital gain to be taken now, but declared when the gain is exempt from tax. In Committee or on Report, we may have to consider the extent to which that tax loophole needs to be closed in relation to business expansion scheme relief and capital gains tax.

Those abuses are examples of areas where it is the duty of hon. Members to assist the Government to achieve their objectives. No one in the country can benefit if we once again become the proprietors of a tax system under which the principal beneficiaries are lawyers and accountants rather than the Government. I hope that we will be able to ensure on a non-party basis that the measures that the Government have taken laudably in the Bill can be extended and made even more effective.

5.54 pm

Mr. Giles Radice (Durham, North)

It is a good custom, and helpful to the House, that we discuss the Treasury and Civil Service Select Committee report with the Second Reading of the Finance Bill. I will refer to the Select Committee report, because I believe that that would be useful to the House.

In response to the comments of other hon. Members, I want to make two brief points. I agree that the VAT extension to domestic fuel will have a severe impact on many communities, particularly in Scotland and the north, where the weather is most difficult. We made that point in the Select Committee report. In addition, that tax was introduced primarily for fiscal rather than environmental reasons. That point was supported by all hon. Members in the Select Committee report.

Rev. Martin Smyth (Belfast, South)

The hon. Member for Durham, North (Mr. Radice) could have included Northern Ireland in his comments. Does he accept that the average weekly income in Northern Ireland is 76 per cent. of that in the rest of the United Kingdom, but fuel bills there are currently £3.50 more than in the rest of the United Kingdom? Under the new VAT changes, they will be £4 more.

Mr. Radice

The hon. Gentleman is right, and we could have mentioned Northern Ireland. His point bears out what we said in the Select Committee report. The Government should bear that point in mind.

As part of the background to the debate, the Government have made much of the signs of recovery in the economy. Certainly, output is at last showing some signs of growth. There have been improvements in high street sales, and there has been some slight stirring in the housing market. All that is welcome, and a mild recovery may be in progress. However, if the American experience is anything to go by, it cannot be taken for granted yet.

Before the recovery is heralded as a great British triumph, however—I fear that the Prime Minister and the Chancellor of the Exchequer have not avoided that temptation, and the Chief Secretary to the Treasury went down that path earlier today—it is important to put this into context. After all, the signs of growth follow 10 quarters of falling or stagnant output, which is the longest recession of this century.

There has been a loss of £21 billion of output and there has been a sharp rise in unemployment as 1.3 million jobs have been lost. In addition, our public sector borrowing requirement has gone sharply into deficit, and will be £50 billion in the coming year, as a consequence of the increase in unemployment and falling tax revenues. We should bear that in mind.

We must also bear in mind the fact that it is a very British recession. The recession was caused by the mistakes of the Conservative Government. We must not forget the Lawson boom of 1977–78 and the over-expansion. Let us not forget the one-club policy that followed. Let us not forget that the economy was clobbered with high interest rates at the end of 1988. We suffered a long period of historically high interest rates.

I must point out that the exchange rate mechanism is not the main reason for our recession. We should remember that we had two years of high interest rates before we entered the ERM. We should also remember that we joined at too high a level in October 1990—as some of us said at the time. In addition, we were able to bring interest rates down until October 1991.

The unification of Germany made interest rates too high throughout the whole of Europe. Of course, that put strain on the ERM, and eventually we were forced out of it. I agree with the hon. Member for Milton Keynes, South-West (Mr. Legg) that our withdrawal from the ERM enabled us to reduce interest rates and devalue the pound. That has provided a sizeable stimulus to the economy. If there had not been some recovery after all that, I do not know what could have been done to improve the prospects of the British economy.

The problem is—this is the background to the Finance Bill—that any recovery will meet considerable difficulties. We underlined some of those difficulties in the Select Committee report, including the huge public sector borrowing requirement that we inherited. It is extremely difficult to bring down that requirement in any satisfactory way without aborting recovery at the same time. That is what the Government have tried to do in their sleight of hand when they promised tax increases, but not yet. That is a great difficulty, and we do not know whether the strategy will succeed.

We have a tremendous problem with the balance of payments deficit. Even in recession, we have a large balance of payments deficit. We should remind ourselves that we have a current account deficit of 2 per cent. of gross national product in the trough of a large and deep recession, compared with a 2.6 per cent. surplus in the trough of the 1981 recession. That is a worrying comparison. If I were responsible for running the British economy, it certainly would worry me.

It is all very well to say that we can continue to finance our balance of payments deficit—we have said that for a long time. The question that must be asked is whether we can continue to finance the balance of payments deficit at this level indefinitely. That is what has been put before the House in the Finance Bill.

We must then ask ourselves how much damage the recession has done to the economy. We have a high level of unemployment, which will be difficult to bring down. As we have discovered, it can choke the recovery by affecting confidence. We know that many business men have put off investment decisions during this period. It may well be that that has reduced the productive potential of the economy: we do not know yet. Certainly, that must concern Ministers as they try to bring about recovery.

Another problem is the fact that there is a recession in Europe. Those of us who thought that, with one bound, Jack was free, do not understand what has happened to our economy and how closely it is tied to what happens in the European Community. Sixty per cent. of our trade is with Europe. If there is a recession in Europe, or if there are high interest rates in Europe, they affect us. We should not believe that we can escape from what happens in Europe: we cannot.

We cannot have a short-lived consumer boom because we would immediately run into considerable difficulties and recovery would be choked. Recovery must be export-led and investment-led. It must be accompanied by measures to tackle the long-term weakness of the British economy which are well known to all hon. Members. We all know about the problems with education and training and investment in manufacturing industry, but we have not yet done enough about them. There is little in the Finance Bill to tackle those problems.

I must mention the position of the Chancellor—this matter is referred to in the Select Committee report. The Finance Bill contains a long-term taxation policy. We need a long-term policy to tackle the structural problems of the economy. Apparently, the policy will be sustained by a Chancellor who has used up his political credit. He has given us a false prospectus on the public sector borrowing requirement. Before the election, he told us that the public sector borrowing requirement in the coming year would be £32 billion. In fact, it will be £50 billion, as we pointed out in our report. That is the biggest single most glaring prediction made by the Government.

The Chancellor said that we would never devalue, yet we were forced to do so. We have devalued by well over 10 per cent.—it is nearer 15 per cent. During the general election, the Chancellor said that the Government would never increase taxes, yet the Finance Bill proposes an extension of VAT and increases in national insurance.

It is not surprising that the right hon. Gentleman, according to Gallup, is the most unpopular Chancellor this century. City experts have no confidence in him. Last week, the leader in the Financial Times said that he should be replaced. Those hon. Members on the Select Committee who said that the Prime Minister should replace the Chancellor were not being irresponsible—it is simply plain common sense, and we are absolutely right.

I do not lightly say that Chancellors should resign. Indeed, in 20 years in Parliament, I have called on only one Chancellor to resign—the present one. I genuinely believe that the best contribution that this Chancellor can make to recovery would be to make way for another Chancellor who would inspire more confidence.

6.5 pm

Mr. John Townend (Bridlington)

I am a little surprised by the remarks of the hon. Member for Durham, North (Mr. Radice). Clearly, when one is debating economics, one turns to attacking personalities when one cannot win the argument with economic arguments—that does not do any good in the House. The hon. Gentleman has a nerve to blame this Government for the length of the recession, the drop in output and the loss in employment when he and his party, last summer, advocated a policy of staying in the exchange rate mechanism without any change in parity. Undoubtedly, such a policy would continue to force the United Kingdom into deeper recession. If we had left the ERM a year earlier, much of the loss in output, many of the lost jobs and many of the businesses that went bankrupt would not have suffered that fate.

The hon. Gentleman mentioned that Europe is in recession. Is not Europe in recession because of the ERM? Why is France, with a low inflation rate and a balance of payments that is fairly satisfactory, forced to have very high real interest rates that are driving the country deeper into recession? It is because of its membership of the ERM.

Mr. Radice

The hon. Gentleman knows that, at the time we joined the ERM, I said that we went in at the wrong time for the wrong reasons and at the wrong rate. He has heard me say that in the House, so he cannot include me in any strictures. It is no good attacking me or my party; we were not in government. The Conservative party was in government and sustained that specific policy. The Conservative Government did not seek to devalue the pound within the ERM, as they were perfectly entitled so to do.

Mr. Townend

Yet the Labour party demanded that we go back into the ERM within seven days of withdrawing from it. The hon. Gentleman's arguments would be much more convincing if he had agreed with us when we pointed out the damage that membership of the ERM was doing to our economy. Of course, he did not agree.

As I said in the Budget debate, there is much in the Finance Bill to be welcomed. I shall make a relatively short speech and restrict my remarks to one subject—the time bomb that is ticking away under the Government's financial policy. If that time bomb is not defused, it could not only destroy the Government's electoral prospects but do long-term damage to the British economy.

I speak, of course, of the twin deficits: the budget deficit and the complementary balance of payments deficit. I appreciate that there is no automatic correlation between the two deficits, but undoubtedly Government spending on the European Community, overseas aid and defence contribute to both deficits. It is generally true that, when a country has a large budget deficit, it usually has a large trade deficit.

In the Budget, my right hon. Friend the Chancellor started to defuse that time bomb by announcing tax increases which will increase to £10 billion a year by 1995–96. I strongly support the overall strategy in the Budget. It would have been a mistake to increase taxes this year because that could have snuffed out the recovery for which we have waited so long.

However, even taking the tax increases into account, the deficit in 1995–96 will still be no less than £39 billion, or 5.5 per cent. of gross domestic product. According to the Red Book, the deficit will still be £30 billion by 1997–98. That is without allowing for any slippage in expenditure. If one looks back at the track record of the Government and, indeed, every Government, one finds that in most years spending plans are exceeded.

The danger of slippage is borne out by the recent announcement of the March figures for the public sector borrowing requirement, which were no less than £9.5 billion. That was the highest deficit recorded in one month, and it emphasises the seriousness of the situation. The PSBR was £1.5 billion more than was estimated only a few weeks ago in the Budget, as the hon. Member for Durham, North said. So the Red Book figure of £35 billion for the current year has been increased to no less than £36.5 billion.

That rise in such a short period is disappointing, especially when one considers that the unemployment figures fell in February and March. That should have reduced the upward pressure on the social security budget. It is particularly worrying because expenditure in March was £23.3 billion-–30 per cent. more than the expenditure in the same month last year.

In looking for the reason for the increase in spending, one significant factor is that spending Departments are completely ignoring the horrendous budget deficit we face. As usual, and as those of us who have served in local government or the health service know, towards the end of the year there is a bonanza of spending so that the Department can spend every penny of its budget and nothing goes back to the Treasury to reduce the deficit.

The Prime Minister needs to read the Riot Act to the Departments that have acted in that way. The size of the deficit, which is based on the plans in this year's Red Book, is unsustainable if we want a healthy economy. We are piling up debt which will have to be paid by our children and grandchildren. The cost of rising debt interest is cumulative. It builds up at a frightening rate.

The increase in the PSBR is set out in the Red Book for the six years to 1997–98. As has been said, it includes the benefits of increased growth of GDP. That increase is no less than £233 billion. With long-term interest rates at about 8.5 per cent., that builds up to an extra interest cost of no less than £20 billion a year. Do hon. Members realise the significance of extra spending on debt interest of £20 billion a year? It is equivalent to about 14p on the standard rate of income tax, or getting on for 8.5 per cent. on the rate of VAT.

The size of the borrowing that the Government will have to undertake and finance is so great that it is extremely unlikely that, over a period, they will be able to keep long-term interest rates down to 8.5 per cent. If that occurred, the cost would be even greater. If the Government are successful—I am sure they will be—in keeping inflation down, the real cost of interest on that debt will become unbearable. The speed of the deterioration can be illustrated by the ratio of net public sector debt to GDP, which in the Red Book will increase from 27.25 per cent. in 1991 to almost 50 per cent. of GDP by 1998.

I say to the House and to my right hon. Friends on the Front Bench that, having started to deal with the time bomb by announcing tax increases, it is vital that the Chancellor completes the job this year by tackling spending. He will be unable to achieve the necessary results without the unstinting and overwhelming support of my right hon. Friend the Prime Minister, who should spell out to the Cabinet that he will not preside over a Government who put Britain deeper and deeper into debt and that he will not put taxes up and up to pay for extra spending and debt reduction. He should tell the Cabinet that the problem will have to be dealt with by spending cuts large enough at least to match the tax increases already announced.

I hope that the latest disappointing figure for the PSBR in March will convince our spending Ministers how serious the position is. I strongly support my right hon. Friend the Chief Secretary to the Treasury in his important task. Indeed, the future of the Government and the economy of Britain depend on his success. What he will have to recommend will be painful, but it will be even more painful if we shirk taking tough decisions necessary for both the country and the long-term survival of our party in government.

Cuts will have to be made across the board. There must be no sacred cows. May I make a few suggestions? We were successful in reducing manpower in the public sector, but it is beginning to rise again. I suggest that the Government should look at the example of the privatised industries, in which efficiency has risen, overmanning has been eliminated, and the work force has been significantly reduced. If the public sector—the Government, the civil service and local government—could achieve only half the reduction in manpower that companies such as British Telecommunications, PowerGen, National Power and British Gas have achieved, the number of those employed would fall significantly and billions of pounds would be saved.

We can no longer continue to make so many of our benefits universal regardless of income. We must consider whether we can afford to keep troops in Germany and spend £2 billion a year in overseas aid. Should we not reduce public spending in Scotland, Ireland and Wales to the level of spending per head in England? Are we dealing with young offenders cost-effectively when it costs £100,000 each? Are we dealing with the mentally handicapped and disabled who have been decanted from our long-stay hospitals into the community, when costs can reach £80,000 per year per patient? Can we continue to achieve savings and economies through computerisation and modern management methods but spend those savings in expanding the services of our Departments? Should not a significant proportion be clawed back to help to pay for the large budget deficit?

I worry whether the Goverment have the backbone to tackle the problems of expenditure. Their record over the past four years does not give one confidence, especially after the most recent spending round. If they funk or fudge the issue, however, we shall see upward pressure on interest rates as the funding of billions of pounds of debt becomes more difficult, and we will face further tax increases in the run-up to the general election.

What worries me even more is that political pressures may prevent us from reducing expenditure or putting up taxation, so creating a great incentive to reduce the excessive burden and cost of debt by letting inflation rise. Given what we have suffered and what we have achieved under the Government, that would be an absolute tragedy. Compared with the long-term disastrous effects of that, the option of short-term pain caused by cutting expenditure must be preferred.

The Chancellor is right to be pleased with the economic recovery and, at a time when we are seeing the results of his economic policy, it was churlish of Opposition Members to make personal attacks against him and to demand his resignation. The Chancellor must reaffirm this success, however, with a commitment to cut spending and reduce the deficit by at least £10 billion by 1996. He should be assured, however, of my full support and, I am sure, that of my hon. Friends.

6.20 pm

Mr. Robert Hughes (Aberdeen, North)

I shall not follow the speech of the hon. Member for Bridlington (Mr. Townend) in detail, except to say that I thought that some of his proposed remedies for dealing with the Government's problems with their spending targets beggared belief. Perhaps he should reflect on what he said when he reads his speech in the cold light of day. In effect, he said that the mentally and physically handicapped should remain in institutions rather than lead a decent life outside in the community, because it was cheaper to keep them in those institutions.

Mr. John Townend

I asked whether a charge of £80,000 per person was cost-effective. I suggested that we should consider a more cost-effective means of treating such people.

Mr. Hughes

The hon. Gentleman has confirmed what I said—what matters to him is cost-effectiveness, not the dignity and life style of people who happen to be born mentally or physically handicapped.

The Chief Secretary, in between doing a bad impersonation of Pinocchio and Inspector Clouseau, had one odd moment of candour. He admitted that the Government's approach to the Budget and the Finance Bill were dictated by their difficulties with their spending plans and borrowing requirements. They, above all else, are the engine behind the Bill and the Budget—they are designed to deal with the Government's budgetary problems.

What the Chief Secretary did not admit—I rather suspected that he would not—was that many of the Government's problems are of their own making. They have failed to do anything to reverse the decline in our manufacturing sector, the economic base on which we depend. They let manufacturing go for years and years, and now they are reaping the whirlwind.

The Government have always said that they would never take the easy way out and would never borrow simply to meet their costs. The Government have done just that, however, because they have raised taxation in such a way as to make it appear that taxes have not been increased. VAT on domestic fuel will be phased in over two years, in the hope that people will forget all about it.

The Government's idea has always been that one should reduce direct taxation and increase indirect taxation, based on the dubious theory that, by reducing the former, people have more money in their pockets and can choose what to spend it on. In other words, less direct taxation means that people have more disposable income which they can spend on items of their choice.

By that test, however, the imposition of VAT on domestic fuel bills is an abject failure. People cannot choose whether to use electric lights, whether to eat hot or cold food or whether to heat their homes. I am not sure whether my next statement should be prefaced by an apology to the President of the Board of Trade or an acknowledgement to him, but VAT on domestic fuel means taxation before, during and after breakfast; taxation before, during and after lunch; taxation before, during and after dinner—in fact taxation for every hour, every minute and every second of the day, whether one is awake or asleep.

The decision to put VAT on fuel bills is a national disgrace. It is regressive taxation of the worst kind because it will bear most heavily on the lower income groups in our society. The VAT is also applied to the standing charges, which are themselves an imposition on the lower-paid.

It has already been acknowledged that the poor in our society spend a much higher proportion of their income on heating costs and domestic fuel bills. What is worse, the colder the part of the country, the greater the fuel bill and the greater the tax that one must pay. That is disgraceful. A great deal has been said about the possibility of a recompense for those on state benefits to help them meet the additional costs. It is clear, however, that the Government have not committed themselves to full compensation.

Even if that were done, there are many thousands, if not millions, of people, just beyond state benefits, who are on low incomes and will receive no help from the state. That is compounded by the fact that, this year, the Government have set a rigid maximum pay increase for public sector workers of 1.5 per cent. Without any changes caused by VAT on fuel hills or increases in national insurance contributions, that 1.5 per cent. increase is a pay cut and a cut in living standards.

The Government have tried to put up a smoke screen over the imposition of VAT with the paper-thin pretence that it has something to do with the Rio summit and global warming. That shows that, the Government hold public opinion in contempt. They believe that, if they say something to people often enough and long enough, the people will accept it as the gospel truth.

If there were a connection between the Rio summit, global warming and VAT on domestic fuel, a large proportion, if not all, of the revenue that the Government will raise would be spent on methods of energy saving. The Government could do something to protect houses from heat loss and on the more effective use of fuel in the homes. But we have not heard a word about that from the Chancellor, the Chief Secretary or any other Minister. No mention has been made of using that revenue to offset global warming and to save energy.

When the VAT change was announced in the Budget, I wrote to the Secretary of State for Scotland. I acknowledged that the change could not make any difference to the public expenditure programmes for this year, but I asked him what plans he had for an emergency campaign to promote energy saving in the home. I got a nice one-and-a-half page letter in response telling me everything that the Government had done in 14 years, but, in essence, his response was that there would be no expansion in such energy-saving programmes. Let there be no mistake: the Government's decision is based purely on revenue generation. They should be honest enough to admit that and should strip away all the excuses.

The other major item in the Bill is the change to petroleum revenue tax and its effect on North sea operations. What was so sinister and ominous about the Chief Secretary's speech was the fact that he said nothing about PRT. When the idea was first mooted, however, much concern was expressed and all sorts of grandiose promises were made by Government Back Benchers about their intention to speak about it to the Chancellor, the Chief Secretary, other Ministers at the Treasury and those at the Department of Trade and Industry. Yet not a single word comes from the Chief Secretary.

There is an old saying, which I am sure you know, Mr. Deputy Speaker: "Act in haste, repent at leisure." That is exactly what the Government have done. They have acted in haste, but, unfortunately, they show no signs of repenting at leisure. I am glad that at least the hon. Member for Slough (Mr. Watts), the Chairman of the Select Committee on the Treasury and Civil Service, said that something would have to be done soon, and that we could not wait until the November statement if there were to be any changes.

The Government, desperately casting around for increased revenue, decided to alter the tax regime without thinking it through. We know that there was no consultation with the industry. We know that there was no consultation with the Department of Trade and Industry, which has privately told journalists that it was horrified and that it knew nothing about the changes until they were sprung on it. It is more than that. The changes in the tax regime clearly show the folly of subsuming the Department of Energy in the Department of Trade and Industry, of losing the Department of Energy as a separate Department and of losing the Department's place at the Cabinet table. That was no accident.

The Government decided, with the privatisation of the electricity industry and of gas, to abandon all thought of an energy policy. They believed that the market could simply take care of itself and of our energy needs. The error of that belief is shown clearly in the still unresolved debacle of the coal industry. All that shows that the decision to downgrade the importance of the Department of Energy was short-sightedness of monumental proportions. It is yet another example of the short-termism which has been the hallmark of this Administration throughout their existence.

They are a Government whose rule is based on sloganistic rhetoric and whose actions are often in direct contrast to their spoken word. I am tired, for example, of hearing every Minister say—we heard some of this today from the Chief Secretary—that the Government want small industry to flourish and smaller companies to grow. The Government say that they are not simply looking after big business, but that they need smaller companies as well.

In the various licensing rounds in the North sea, much has been said about the need to involve smaller oil companies. One of the conditions of the licensing rounds is how many small companies are involved. Licence conditions are also attached to exploration. I concede that there is merit in diversification—in not having all one's eggs in one basket—yet the Government, in their frantic search for revenue, have ignored the effects of the petroleum revenue tax changes on smaller companies, and especially on exploration and development.

It is probably inevitable that there are winners and losers in any tax change and that is certainly true in this case. The larger companies with proven, established production wells will benefit greatly. The big companies will get windfall profits, which will be very beneficial to them. The Government's defence, which I have heard repeated elsewhere, is that the extra windfall profits going to the large companies will release money which they can then spend on exploration. It is the age-old trickle-down theory. The trouble is that there is no guarantee that the substantial extra funds will be spent in the North sea. There are other parts of the world where exploration and development will be far cheaper and those are often areas where there is a more benevolent tax regime. That is where the money is likely to go.

It is right that we should encourage companies to do more to extract every bit of oil from existing fields. We should all applaud that. However, if we do not have a repletion policy or a renewal policy as the reserves are depleted, we shall lose in the long run in terms of energy production and future Government revenue, which will fall.

The Government's defence so far—I am surprised that they have been so silent about the whole thing—is that the transitional effects will take care of the immediate future. That is not what the oil companies tell me. One company told me that it is capitalised at £75 million. It will not gain from the changes in the PRT. As a result of the removal of relief, it will have to pay an extra £2 million to £4 million a year in taxes over the next few years. That is money which has been earmarked for exploration in the North sea in fulfilment of the company's drilling obligations to the Government. The companies believe that they cannot simply walk away from those obligations. They are not simply a moral responsibility. The companies argue that the obligations are legally binding and that they cannot get out of them.

The companies accept that some changes are necessary. They accept that there might have to be a maximum allowance to be offset, which would benefit the small companies more than it would the large companies. There is great concern about the job losses that will follow if the Government do not change their mind. Estimates vary. In one of the mysterious, off-the-record briefings which are not supposed to happen, the Department of Trade and Industry has conceded that the Treasury is willing to accept 10,000 job losses. That is no small number. Others say that that figure is too low.

I believe that the estimates of 40,000 to 50,000 are probably too high. However, we cannot afford any more job losses in the industry. Already there is job-shedding in Aberdeen. I know that it is difficult for hon. Members to become excited about job losses in Aberdeen and I concede that Aberdeen has done well out of the oil industry, as has the surrounding area. However, Aberdeen is not immune from recession, and we are already feeling the draught.

The PRT changes have caused confusion among Government Back Benchers, to the extent that they are spreading disinformation in Aberdeen. I am told by prominent members of the oil industry in Aberdeen that unnamed Government Back Benchers—I might be able to name them if pressed—[HON. MEMBERS: "Name them."] They are all sitting quietly looking glum, so we can draw our own conclusions.

Mr. George Kynoch (Kincardine and Deeside)

As a Government Back Bencher who represents a constituency which is heavily involved in North sea oil, I ask the hon. Gentleman to accept that there is a major problem in the oil industry. He has quoted one individual company which is worse off as a result of the PRT changes. However, the oil industry has pressed for a long time for a reduction in PRT. The problem is that the companies reacted quickly immediately after the Budget. They have now reviewed their position, and they see that, in the long term, the PRT changes are clearly in their best interests. I might have some sympathy for the hon. Gentleman if he addressed his comments to a smooth transition to the new lower tax regime with lower tax allowances.

Mr. Hughes

It is a great pity that the hon. Gentleman has just come in, and has not heard the rest of the debate. If he had heard it, he would have heard the point made not only by Opposition Members, but by Conservative Back-Bench Members, including the hon. Member for Slough, the Chairman of the Select Committee on the Treasury and Civil Service. He said simply that the transitional relief was not good enough and that in the long run, the industry would be worse off.

Mr. Kynoch

rose—

Mr. Hughes

The hon. Gentleman will have to learn to take it as well as dish it out. I can understand his embarrassment. Within a few days of the changes, he issued an optimistic press statement to The Press and Journal in Aberdeen. He said that he had been to see the Chancellor who had said, "It is all right, old boy. We shall have a look at this and review it." In an optimistic frame of mind, the hon. Gentleman, during Prime Minister's Question Time, said that he was concerned about the changes. He seems to be all over the place.

The hon. Gentleman seems to be beginning to defend the Government; previously, he suggested that the Government had it wrong. I expected the Prime Minister to tell one of his own Back Benchers something along the lines, "I know that my hon. Friend the Minister has been engaged in discussions on this. We will take another look at it." Instead, the Prime Minister slapped him down.

I was talking about Conservative Back Benchers spreading disinformation around Aberdeen. I could offer many more examples of companies that will be on the wrong side of the tax change. A prominent member of the oil industry in Aberdeen phoned me in a panic to say that Conservative Back Benchers had told him that the prospects of achieving changes in the tax regime had been badly affected because of the activities of Labour Members. He told me that he had been told that, if Labour Members table amendments, the Government will dig in their heels and refuse to budge—so it will be our fault if the Government make no changes.

That is unadulterated twaddle. We shall certainly table amendments; if the Government want to table their own, they can do so. They can pass their own amendments if they want to. So let us hear no more of this nonsense: our tabling of amendments will not prevent the Government from tabling theirs. If we do not table any, the Government will be delighted. There will then be no debate on the details; they will rush the measure through, saying that everything in the garden is rosy.

Mr. Salmond

I wonder whether the hon. Gentleman has heard a slightly different version of a similar story? An oil company told me that Conservative Back Benchers had suggested that I should stop pushing for a debate on the Floor of the House on this matter, because that would act as a disincentive for the Government to make concessions of the sort for which the hon. Member for Kincardine and Deeside (Mr. Kynoch) has been pushing for so long.

Mr. Hughes

I know that Conservative Back Benchers are running like mad for cover, but I understand that the Opposition decided to take these matters on the Floor of the House for debate. Indeed, we will be happy to debate them there.

I fear that the Government have decided to ride out the storm, to steamroller through their proposals and to hope that their Scottish Back Benchers, and others, will fall into line. I should remind the House that not only Aberdeen and its surrounding areas will be hit by the job losses. Many people from all over the United Kingdom work in the oil industry, so almost every constituency, not just mine, will be hit. The effects will be all the greater in my area, however.

I doubt whether the Government will see sense. They will not be moved in the least by unemployment. Certainly, Ministers go north and make platitudinous, banal statements about how awful unemployment is, but they take no action.

Nothing in the Budget furthers our manufacturing industry or tackles the problems of unemployment. The Government have failed yet again, and I do not believe that they will be forgiven this time.

6.43 pm

Mr. John Butterfill (Bournemouth, West)

It is a sad reflection on the priorities of certain people in this place that no representative of the Liberal party is present. Perhaps Liberal Members are all too busy trying to persuade the electors of Newbury that they would be good at managing the economy. In any event, they are obviously too busy to participate in what is possibly the most important debate in the House at this time of year.

The one representative of the Liberal party who did grace us with his presence seemed to suffer an uncharacteristic attack of hyperbole when he referred to the black hole of depression into which the Government had got the country. I assume that he is unaware that the recession in the United States was a good deal deeper than ours. He may also be aware that most other western economies are still going into recession while we are coming out of it. In Germany and France it is deepening every day.

The right hon. Member for Berwick-upon-Tweed (Mr. Beith) overlooked the fact that we have been coming out of the recession, it now appears, since last June, whereas other countries have been moving into more severe recession. That is a result of the policies that this Government have been pursuing for some time—long-term policies to improve the productivity and competitiveness of British industry. Those policies are reinforced by the measures in the Bill.

I welcome the freezing in real terms of business rates. That is important to many of my constituents and to many small businesses throughout the country. I am also gratified that the Chancellor has doubled the threshold for stamp duty on house sales. That has contributed in no small measure to the recovery in the housing market.

For some time we have pursued policies to assist those involved in exports. The Bill increases the Exports Credits Guarantee Department cover, which is another contribution to the fact that our exports are at record levels.

I take a keen interest in the insurance industry, so I was particularly pleased to see the measures that my right hon. Friend proposed for improving the reserves of British insurance companies—for allowing them to retain more in those reserves. One of the elements that has held back British insurance companies from competing with their overseas, particularly their EC, counterparts, has been their inability to put into reserve as great a proportion of their gross premium income as their competitors have done, so they have not been able to build up to the financial strength of their competitors, particularly those in Germany.

I join many other speakers who have expressed their regret about the way in which the Government have arranged PRT affairs. Small companies face a particular difficulty here. I have been approached by a large number of them, explaining the difficulties that the Government's proposals will create for them. The whole industry, however, thinks that the change away from PRT is the right way to go. The difficulty comes with the transitional arrangements, as proposed. They pose a problem for small companies, especially those that have not placed the contracts with their contractors for work that they are obliged to carry out.

We must press the Government on the question of the licence obligation expenditure. There is no doubt that those who bid for licences did so on the assumption that they would be able to offset that expenditure against tax. I believe that Treasury officials have suggested that these are not contractual obligations—a view not taken by Department of Trade and Industry officials. I and other members of the Trade and Industry Select Committee will press the President of the Board of Trade on that subject when he comes before us tomorrow.

I hope that the Government will think about the possibility of phasing in the transitional arrangements in a fiscally neutral way by phasing the PRT changes at the same time. In that way we could achieve the objective in a short space of time and be fair to the companies that have undertaken these obligations. If we leave things as they are, those companies will be retrospectively disadvantaged. If the Bill is given a Second Reading, I propose to table a probing amendment that would have this effect and would maintain fiscal neutrality. The PSBR is at an all-time high and must be addressed by increasing taxation and, I hope, by reducing expenditure.

The Government could have increased income tax or alternatively corporation tax or they could have extended VAT and they chose the right option. An increase in personal taxation would have been a major disincentive at a time when we want the economy to continue to recover.

We must remember that much of the recovery has come from the unincorporated sector which undertakes considerable capital investment. If it was subjected to high marginal rates of taxation it would have to look at the risk-reward ratio and would be likely to take the view that the risk was not worth the net reward. Similarly, an increase in corporation tax would have given the wrong signal to the business community and would have been a disincentive to those who have been responsible for so much beneficial inward investment. An extension of VAT was the right approach, and it will not be anything like as harmful as some Opposition Members suggest.

There has been much discussion about the predicament of the elderly. As hon. Members know, my constituency probably has as many elderly people as almost any other, if not more. The damage that an extension of VAT might do to such people has been greatly exaggerated. Benefits will be uprated fully to compensate for the additional costs.

I share the concern of my hon. Friend the Member for Brighton, Kemptown (Mr. Bowden), who is not in his place. He made a powerful speech about those whose income from other sources takes them just above the benefit threshold and who feel that they may be uniquely disadvantaged by the proposal. They should consider the Budget package as a whole and look at the impact of the reduction in the lower rates of taxation from 25 to 20 per cent.

Over the two years in which VAT on electricity will be phased in, the rate reduction will also be introduced. It will mean that someone who pays just £1,000 a year in tax will save about £1 a week by the end of the second year. It is estimated that that is about half what the average elderly person will pay as a result of VAT on electricity.

Mr. Quentin Davies (Stamford and Spalding)

Does my hon. Friend agree that people should reasonably and rightly take into account not only his point but the fact that utility prices generally have been falling? For example, since the privatisation of British Gas, domestic gas prices have fallen by 20 per cent. in real terms. People should set that against the potential imposition of VAT to reach a balance and see exactly how their finances will be affected.

Mr. Butterfill

With his usual sagacity, my hon. Friend has anticipated me. In my constituency alone, Southern Electricity is reducing its prices in money terms by 2.5 per cent. in the coming year. That is in addition to the reductions about which my hon. Friend speaks. The matter must be viewed in the context of falling electricity prices as a result of privatisation.

Although elderly people have greater need of heat, they tend to live in much smaller homes—certainly in my constituency—than the average family. Pensions will be uprated by the average of the retail prices index, which will tend to be somewhat higher than the increased cost of heating their homes. As a result of the tax changes and the RPI indexation of pensions, some of my pensioner constituents may be better off as a result of the Chancellor's changes?

Mrs. Anne Campbell (Cambridge)

The hon. Gentleman speaks about older people living in smaller houses. Does he agree that many elderly people live in badly insulated houses and that one of the best ways to help them reduce heating bills and save energy is to invest in home insulation?

Mr. Butterfill

I agree that some elderly people live in badly insulated houses. However, in recent years the Government have funded substantial programmes for insulation. Many elderly people in my constituency live in modern or warden-assisted flats which are exceptionally well insulated. People in such small units of accommodation will probably be better off as a result of the changes. I accept that it may be a minority, but it is a growing minority.

The Government are right to raise revenue at present. I agree with my hon. Friend the Member for Bridlington (Mr. Townend) that the corollary is the worrying level of the PSBR and the need to reduce Government expenditure. I hope that the Chief Secretary will conduct his review robustly and vigorously. It is easy to say that there must be more public expenditure. We are used to such calls from the Opposition, but they are not prepared to take the painful decisions that arise from funding such expenditure. Usually, they fudge the issue when they are in power and create enormous taxation. The Government have not been prepared to fudge it and I hope that they never will be.

If there is a need for increased taxation, we should face it, however unpopular it may be, because at the end of the day we have some political integrity. [Interruption.] Opposition Members laugh, but when they were in power they did not display that same degree of integrity. Perhaps that is why they lost the last three general elections. The public have rumbled them.

Mr. Nicholas Brown (Newcastle upon Tyne, East)

How much of what the hon. Gentleman says was in his address at the general election?

Mr. Butterfill

I have consistently advocated the need to maintain a curb on public expenditure and to increase taxes when it has been necessary to do so. I do not believe in borrowing and I have said publicly time after time that it is immoral to mortgage the future of our young people and future generations. Today we must earn what we spend. What distinguishes us from the Opposition is that they are never prepared to do that.

Mr. Brown

Will the hon. Gentleman give way?

Mr. Butterfill

No. I must conclude my speech.

The Budget is admirable and well suited to the prevailing economic conditions. It shows that our measures over the past two years are beginning to bear fruit because our economy is coming out of recession faster than most other western countries. If we maintain a curb on public spending we shall continue to prosper at a greater rate than those economies.

6.58 pm

Mr. Jim Cunningham (Coventry, South-East)

The hon. Member for Bournemouth, West (Mr. Butterfill) spoke about cuts in public expenditure and accused us of wanting to increase it. Over the past 14 years, and even in those years which, according to the Government's definition, were good years, there were major cuts in public expenditure. Therefore, the argument is not about vast increases in public expenditure but, as it has been over the past 14 years, about maintaining certain levels of public expenditure. Nobody is advocating hefty increases in public expenditure but, even in the good years when there has been no necessity to make cuts in public expenditure, the Government have seen fit to impose vast cuts. I have said before, but it is worth saying again, that Coventry city council has lost £200 million over the past 10 years, and that included the good years of the Tory Government.

Mr. Butterfill

Will the hon. Gentleman give way?

Mr. Cunningham

No, not at this stage.

Mr. Butterfill

Will the hon. Gentleman give way on this point?

Madam Deputy Speaker (Dame Janet Fookes)

Order. The hon. Member for Coventry, South-East (Mr. Cunningham) has made it clear that he will not give way.

Mr. Cunningham

Tory Members have used the events of 1976, when we had a Labour Government, in support of their arguments. However, they omit the facts. 'What happened in 1976 was the aftermath of the three-day week imposed by a Tory Government, and inflation in the United States was running, between 26 and 28 per cent. Those factors worked their way into the British economy but are ignored by Tory Members now.

The nearest parallel to the events of 1976 were the events of September last year. In a roundabout way, the bankers, the money lenders or the Government creditors —whatever language one wants to use—were telling the Government that they wanted them to put their house in order, put the economy in order and start paying off some of the debts incurred before September. We must look at the Budget against that economic background.

Mr. Butterfill

Will the hon. Gentleman give way?

Mr. Cunningham

No.

Another major factor that must be taken into consideration when we look at the future and at the Budget is the balance of payments problem. In a recent interview the Prime Minister, when asked what he was going to do about that problem, said that he would think about it. That is no substitute for an economic strategy. My fear about the Budget is that, although we have seen one or two green shoots, 18 months down the road we may find ourselves in another economic crisis because the Government have failed to take measures to deal with the balance of payments problem. That problem will not go away, and it will come back to haunt the Government.

The Government's strategy on VAT has been disguised. Because they have set their face against massive direct tax increases, they will use increases in VAT to fund their borrowing and debt requirements, and they will extend it to other goods and services beyond fuel.

Mr. Butterfill

Will the hon. Gentleman give way?

Mr. Cunningham

I have said that I will not give way. I want to limit my speech as much as possible so as to allow others to speak.

Mr. Butterfill

On a point of order, Madam Deputy Speaker.

Madam Deputy Speaker

Is the hon. Gentleman sure that it is a point of order?

Mr. Butterfill

Yes, Madam Deputy Speaker. I know that you are anxious to protect the reputation of hon. Members. In my speech, I referred to the increase in public expenditure. As the hon. Member for Coventry, South-East (Mr. Cunningham) said that there had been no such increase, he was implicitly saying that what I said was untrue. He knows that there have been substantial increases in public expenditure under the Government. Therefore, I hope that you will defend the integrity of hon. Members and allow them to redress comments made by Opposition Members.

Madam Deputy Speaker

That is very ingenious, but it is a point of substance, not a point of order.

Mr. Cunningham

I can answer that last point. I said that the real argument was about maintaining levels of public expenditure against a background of cuts.

To return to the subject of VAT, one could live with the Budget—

Mr. Butterfill

I was right. Public expenditure has increased in real terms every year.

Madam Deputy Speaker

Order. I recall that the hon. Member for Bournemouth, West (Mr. Butterfill) is keen on points of order. Let me tell him that it is not in order to make seated interventions.

Mr. Cunningham

The fundamental question about VAT that the Government have not answered, although it has been repeatedly put to them, is whether the people affected by increases in VAT—pensioners, single-parent families, needy families and those on low incomes—will receive full recompense for those increases. All that the Government have given us on that is nods and winks.

There is nothing in the Budget about the provision of crèche facilities to allow one-parent families to retain a bit of dignity and get employment or training where necessary. There is nothing for women. In particular, nothing addresses the social problem of battered wives. The Budget could have introduced measures to encourage better voluntary services to deal with such issues. Many voluntary organisations do valuable social work among the ethnic communities, unemployed young people and others, but the imposition of VAT on such charities would impose a tremendous burden on them.

We should welcome any measures in the Budget aimed at reducing unemployment and helping small businesses. However, there is no recognition of the heavy costs for industry of research and development. The directors of large firms all say that they badly need Government assistance in that sector.

When trying to judge the Budget in social terms, we must look at the other side of the coin. A cost will have to be paid for the lack of measures to ensure safer inner cities. Safer city projects and urban aid grants are being phased out in Coventry, even though they play a tremendous part in dealing with some of the inner-city problems of cities such as mine. There has been no attempt to deal with education, with proper training for young people or with providing a proper education service. Outside the Budget, but in a way still part of it, is the confrontation between the Government and the teachers. The Government should be conciliatory and sit down with the teaching profession, parents' organisations and all other interested parties to try to resolve the frictions in education.

The Budget was a golden opportunity to help industry. If Britain is to retain a role in Europe as a major industrial power, it has to restore its manufacturing base, but that can be done only with co-operation between the interested parties and organisations which play a part in the maintenance of the manufacturing base. I am disappointed with the Budget. For the sake of the unemployed, I hope that it will succeed, but I am worried that 18 months down the road the erosion of our manufacturing base will continue and we shall still have a major balance of payments problem, when all those problems should be addressed now.

7.8 pm

Mr. Matthew Carrington (Fulham)

The real test of the Bill is the effect that it will have on, and the help that it will give to, the recovery of our economy. The purpose of the Finance Bill is to ensure that the groundwork is laid to encourage the recovery that is now so apparent in our economy.

We heard from my right hon. Friend the Chief Secretary to the Treasury that the last three quarters have shown growth in our economy. That is greatly to be welcomed because it supports, in a concrete form, with statistics from the Central Statistical Office, the anecdotal evidence, which has been clear all around us for some time, of how economic activity is picking up.

Let me give one example of that from my constituency. House prices have started to go up, houses are starting to sell and activity among estate agents and surveyors is starting to pick up.

My constituency, which is in inner London, has been badly affected by the recession. Some of the measures in the Bill designed to help house purchase, such as the raising of the stamp duty threshold, will have relatively little effect on the average house purchase in inner London. Therefore, it is good that anecdotal signs of recovery are beginning to become apparent in statistics. The economy is now poised for a period of fairly rapid economic growth.

Of course, it is not enough simply to help economic growth through the Finance Bill; external factors are also necessary. The USA economy needs to recover from recession, and there are now unmistakable signs that its growth rate is recovering and that the USA will come out of its recession strongly. That will help our exports. Indeed, our exports to non-EC countries have risen by 12 per cent. over the past year, which shows the effect that the USA economy has on our economy and exports.

Most important of all is what happens in Germany and other EC countries, whose economies are already in recession and heading into even deeper recession. We need to encourage our European partners to take the measures necessary to come out of recession. One of those measures is a reduction in German interest rates, which are now being cut month by month. Those cuts affect the strength of the deutschmark, which has been far too strong, to the disadvantage of other EC countries. As the deutschmark weakens, that will do nothing but good to all our economies.

Britain already has a great deal in place to facilitate our recovery, such as lower interest rates—

Mr. Salmond

At what stage of the recovery would Britain have been in if the Prime Minister and the Chancellor had had their wish and kept Britain within the exchange rate mechanism at the rates previously set? What is the hon. Gentleman's estimate of how that would have impacted on economic recovery?

Mr. Carrington

The hon. Gentleman has asked me to support something that I have never supported—our position inside the ERM. I always felt that the mechanism was not sustainable and would break apart, for the very reasons that eventually caused that to happen. I was pleased when Britain left the ERM, although I am sure that we would all have wished that to happen under different circumstances.

Mr. Ken Purchase (Wolverhampton, North-East)

The hon. Gentleman is singing in his bath.

Mr. Carrington

If the hon. Gentleman had ever heard me sing, he would welcome the fact that I do not sing in the bath.

Britain's low interest rates are now having the desired effect on our economy, and our competitive exchange rate is beneficial to business recovery. However, we need to be concerned about the level of interest rates. Given the nature of the housing market and of housing finance, if interest rates are too low, the market will take off again, just as it did in the 1980s. None of us wants that.

I hope that the Government will bear in mind the need to keep relatively high interest rates. I was glad to note that Ministers have said that they believe that the current level of interest rates is about right for the economy. I strongly support that view.

The problem in our economy is one of timing. Most of the elements necessary for recovery are now in place, but we must wait patiently for the reduction in interest rates and the competitive exchange rate to work through. That will result in a stronger economic, industrial and commercial base.

The other problem is the public sector borrowing requirement, with all the inflationary pressures that that causes, and the great danger it poses to the health of the economy in the short and medium terms. I am glad that the Government have taken steps to ensure that, first, there is nothing in the Budget to damage the recovery; and secondly, that the right signals are given to ensure that people understand that the Government take seriously the need to reduce the PSBR. That is in everybody's interest.

There are three ways to reduce the PSBR. One is economic growth, and I hope that growth will be even faster than projected in the Red Book, so that the PSBR will be reduced even faster. The second way is to keep public sector spending under tight control. It must be more efficient and targeted more effectively, so that the taxes raised are used to produce the greatest benefits for those in need.

The third way, which is regrettable but necessary, is to raise taxation. The measures to do so contained in the Bill are, sadly, inevitable but correct. It is also right that, by and large, they will not impact this year—the big increases in taxation have been deferred until the recovery has gained a proper foothold. Industry needs to build up its strength before the imposition of the increased taxation necessary to reduce the PSBR. The measures will start to bite next year and the year after.

No tax increase is ever popular. The Government had a choice, and they correctly chose to increase two taxes. First, there is to be an increase in the national insurance contribution, which is another form of direct taxation. The extra revenue from that will impact directly on the increasing burden of the social security budget. It is right to increase that form of taxation—

Mr. Ronnie Campbell (Blyth Valley)

The hon. Gentleman did not say that during the election.

Mr. Carrington

During the election, the economic problems in the world generally were not envisaged to be as great as they have proved to be subsequently. It was always implied that Britain had to come out of recession, and that if it continued for longer than expected, the Government—indeed, any Government—would have to take whatever measures were necessary to correct the imbalances in the economy.

The other tax to be increased is VAT, through its extension to domestic fuel. When coming out of a recession, it is right to increase indirect rather than direct taxes, because an increase in direct taxes has a direct effect on people's incentive to work. In general, people see what they get in their pay packet as the reason for working, so it would be wrong to affect that position through an increase in direct taxation.

The imposition of VAT on domestic fuel has another benefit. As my right hon. Friend the Chief Secretary said, as well as reducing the PSBR, it will help to meet Britain's commitments under the Rio convention. The extension of VAT will assist the environment and is to be greatly welcomed. To some extent, it reverses the reduction in the real costs of domestic fuel under privatisation during the past few years. I believe that most people will be able to tolerate that increased tax, even if they do not welcome it.

Many people will find, however, that change painful and hard to afford. I look forward to measures in the autumn to make certain that those hardest hit by the imposition of VAT on domestic fuel will receive assistance with paying their bills. The most vulnerable will be those whose incomes are just above income support level, whom the present scheme does not assist. They must be given help in overcoming the substantial burden that they will be asked to bear.

The Bill's provisions a re needed in our present economy. It does relatively little in the current year, which is right at this stage in our economic recovery, but sends all the right signals, to the markets in particular, that the Government are determined to reduce the massive public sector borrowing requirement, and take that task seriously.

This year, we have the advantage of another Budget in November. Having seen how the recovery shapes up over the next few months, I hope that, in November, the Government will reconsider some of their Budget decisions, will think hard on whether they are the right measures at that time, and will take whatever further steps are necessary in November—possibly even increasing taxation more—to ensure that the PSBR comes down and that the recession continues apace—I mean, that recovery from the recession continues apace.

7.21 pm

Mr. Alex Salmond (Banff and Buchan)

The hon. Member for Fulham (Mr. Carrington) made a slip at the end of his speech, but at least he did not make the same mistake as the hon. Member for Bournemouth, West (Mr. Butterfill), who described borrowing as immoral. If the hon. Gentleman holds to that view, he must fear for the future of the Treasury team in the after-life, because its members are some of the biggest borrowers of all time.

Mr. Butterfill

The hon. Gentleman completely misinterprets my remarks. I said that it was immoral to build up borrowing that has to be paid off by future generations. It is moral only if we pay it off ourselves.

Mr. Salmond

By either test, the Treasury team would stand condemned. The hon. Gentleman may not have studied the alarming PSBR statistics in the current Budget. I do not know what tax changes the hon. Gentleman would propose to get rid of that borrowing quickly. Also, if he studies the Good Book, he will find arguments that the lenders of money are also immoral—so perhaps there is no hope for any of us.

I will concentrate my remarks on petroleum revenue tax. Right hon. and hon. Members who attended the Budget debate will know that on that occasion I commented on the general shape of the Budget. No doubt the Treasury team has been poring over my remarks in the past few weeks. Tonight, I shall comment only on PRT changes.

For the Treasury team, there is a big difference between tonight's debate and that on the Budget. Those changes were not considered the most controversial in the Budget, and when it came to the vote—as the deputy leader of the Liberal Democrats pointed out earlier—only Scottish National, Liberal Democrat and Plaid Cymru Members moved against the PRT changes. There was no recognition at that stage of the general concern that is evident now in contributions from hon. Members on both sides of the House.

All but three of the right hon. and hon. Members who have spoken so far made reference to PRT changes. I hope that the Treasury team is fully aware that if the issue were put to the test again—one hopes that it will be in Committee—the Government will not have anything close to the 264 majority that they managed to clock up when that measure was tested at the end of the Budget debate. There is general recognition now of the implications of the PRT changes.

I will examine the Government's three arguments for those changes, to test whether there is anything to be said for them. The Government argue, "We can't continue PRT as it now is because it has become a negative tax." In 1991–92, it actually cost the Exchequer £200 million. The Government say that it is ridiculous to retain the present form of PRT.

There are three contrary points to that argument. In 1991–92, the picture was much affected by what was, one hopes, the one-off Piper Alpha disaster and the tax treatment of the insurance claims that followed—so it seems unfair to pick that year as representative. In that year also, oil taxation as a whole was not negative, but raised more than £1,000 million for the Treasury.

Because PRT is a profit-related tax, it is sensitive to oil prices. When oil prices are high—they have been for long periods of Conservative Government—one would expect the Treasury to draw in vast sums from a profit-related tax such as PRT. Conversely, when oil prices are relatively weak, one would expect the PRT return to be relatively modest. A wise Government and Treasury would take the rough with the smooth. I did not hear any member of the Treasury Bench complaining, when oil prices were high and the Treasury was raking in up to L14 billion—as much as £20 billion per year at current prices—about the nature of the PRT system. At a time when oil prices remain relatively modest, the Treasury should accept a low tax take as an investment in the North sea's future profitability.

Petroleum revenue tax is sensitive also to development and exploration levels. It is mistakenly thought by many people, particularly in the Treasury, that the North sea is a declining oil province, but that is not the case. By no measure could the North sea be fairly described as an oil province in decline. On the contrary, oil and gas production levels are increasing and are expected to peak in 1996 or 1997.

The Minister for Energy himself stated in a Department of Trade and Industry press release dated 27 January: While the overall level of exploration and appraisal drilling fell last year—not surprising in difficult times of low oil prices and record levels of expenditure on field developments—such activity continued to bring home results. Better than one well in four proved to be a discovery. Historically, since drilling began in the North Sea, the ratio has been roughly one in five. In other words, the current strike rate is better than the historical average. One well in four is successful in terms of a hydrocarbon accumulation being found. Although it is true that accumulations found today are smaller than before, by no standard for qualifying or judging an oil province can it be said that the North sea is a province in decline.

Therefore, it is an act of ultimate folly to devise a tax system that benefits continued production from existing accumulations at the expense of discouraging the exploration of future accumulations, when the statistics give every indication that such explorations would be very beneficial and productive. The Government's argument that the PRT was not doing its job is far from proven.

The second argument deployed by Treasury Ministers since the Budget is, "What's the point of giving money to international oil companies? Why should anyone support that prospectus?" But one consequence of the Government's tax changes is that certain, highly selective oil companies will be given lots of money.

There is something highly incestuous about the way in which some companies have commented on the changes. British Petroleum representatives said that they are wonderful, but given that BP is one of the companies, because of its production profile, that stands to benefit by tens or even hundreds of millions of pounds, it is hardly surprising that it is enthusiastic about them. Very few companies, if offered tens or hundreds of millions of pounds by the Treasury, would not say, "Yes, these are tremendously good tax changes."

For the Government then to cite BP's reaction as proof that the industry supports the Government's approach is at best disingenuous and, at worst, incestuous. The Government should be able to quote some independent advice to support the position that they have taken. Of course, that independent support would be very difficult to obtain at the present time.

The idea of winners and losers is very misleading. I hope that Treasury Ministers have studied the excellent letter in the Financial Times on 2 April from 10 managing directors of the smaller and highly active exploring companies in the North sea at the moment. A great deal of wisdom is found in that letter. The phrase that impressed me most was: Finally, the polarisation of companies into winners and losers is not really accurate. Almost any company can become a 'winner' by cutting UK exploration That is the fact of the matter in these oil tax changes. To be a winner under the fiscal regime proposed by the Treasury team, it is necessary only to stop exploring; it is easy to become a winner in terms of the tax changes.

Wood Mackenzie, the respected oil analysts, suspect that taxation windfall and gain that the Treasury anticipated from these changes will not come about because it has failed to understand the impact of these changes on behaviour. This is not just a matter of the petroleum revenue tax giving dollops of cash to international oil companies. It is a misunderstanding of who is going to feel the consequences of the oil tax changes. It will not be the international oil companies. If exploration in the North sea province becomes unattractive, they will move their exploration budget elsewhere in the world. It is an international industry and they can move their exploration activity to other oil provinces.

The people who will lose from the oil tax changes are not the international oil companies but the service companies and the workers in the North sea. Thousands of jobs are on the line as a result of these apparently ill-thought-out proposals in the Budget.

The third and final argument of the Treasury team is that the long-term tax regime being put forward for the North sea is very attractive and that international investment will be sucked in to take advantage of that tax regime. That is a fundamental misunderstanding. A tax regime that applies only a 33 per cent. corporation tax rate on an oil province is attractive in international terms—and would be looked upon as such—but very few people in the oil industry actually believe that, if there was a hike in oil prices, that tax regime would stay in place. What the Treasury is sowing in the current tax regime are the seeds of its own destruction; there will inevitably have to be further changes in the future.

We do not need a crystal ball to prove that point. All we need to do is look at the track record in the United Kingdom. One of the first acts of the present Conservative Government, when they came to office in 1979—facing a sharply increasing profile of oil prices—was to increase taxation in the North sea, as, indeed, any sensible Administration would have done at that time. They sharply increased the taxation regime that had been formulated by the right hon. Member for Chesterfield (Mr. Benn). So a Conservative Government were increasing taxes set by one of the demons of the Labour Government.

No one in the oil industry believes that if we have a sharp increase in prices, as is quite likely towards the end of this decade, any Government would leave in place a 33 per cent. corporation tax rate pick-up from the North sea. Therefore, not even the incentive of a low tax regime is going to be effective in the impact of these overall tax changes. All three arguments put forward by the Government fall down very badly.

There are specific questions that I wish to ask because the Government, in written answers, have been carefully avoiding giving the information that many hon. Members require. We want to know if there was any consultation between the Treasury and the two Departments immediately concerned—the Department of Trade and Industry, responsible for energy policy, and the Scottish Office, which presently has some responsibility for the impact on employment north of the border.

As the hon. Member for Aberdeen, North (Mr. Hughes) said, the indication that has been creeping out from these closed briefings is that the DTI and the Scottish Office were not consulted; that this was a big shock and surprise to them. The best way to describe their reaction to these briefings is, "It wisnae me; somebody else is to blame. It was all the idea of the Treasury team."

It is an extraordinary prospect. Here is a tax change which is going to affect a minimum of perhaps 10,000 jobs north of the border and the Secretary of State for Scotland is allowing it to be known that he was not even consulted before the tax change was put in place.

One of my predecessors for the old East Aberdeenshire seat—Bob Boothby—perfectly described the position of the Secretary of State for Scotland as the "scullery maid" of the Cabinet. Here is a fine example of that reduced position if it is true that the Secretary of State for Scotland had no knowledge before the Budget of a tax change that put in jeopardy 10,000 jobs or more north of the border.

Mr. Robert Hughes

And all over the country.

Mr. Salmond

Of course, it is all over the country; I have developed that point.

The point that I am particularly making—I am sure the hon. Member for Aberdeen, North understands it—is that a Secretary of State who has a particular responsibility for Scottish industry and employment, according to the briefings that he is allowing people in his Department to give out, is indicating that he had no knowledge of this taxation change, which will have an enormous impact on Scotland.

These briefings are very curious. The Press and Journal is the local paper of many hon. Members in the north-east of Scotland and I think that everyone would accept that its coverage of this matter since the Budget has been first class in terms of the detailed examination it has given to the impact of the taxation changes. It reported—appropriately, on April fool's day, 1 April—the briefing given by a senior Treasury official. The direct quote from that briefing reads: For 10,000 (job losses) we are securing £400-£500 million a year in taxation. When we heard the President of the Board of Trade and the Prime Minister last autumn—in a callous, indifferent, almost casual way—announce the impact of the coal closures in terms of the overall job losses and the impact that that would have on communities, and the furore, uproar and political controversy that followed, many of us thought then that the Government might have learnt their lesson. However, we see from the briefing by senior Treasury officials that 10,000 job losses are a price well worth paying so that the Treasury can achieve its objectives in terms of the overall shape of the oil industry taxation proposals.

I will conclude my remarks by focusing on the economy of the north-east of Scotland. The hon. Member for Aberdeen, North noted that many parts of our area have enjoyed a comparatively good time throughout the recession—although it has to be said that there are pockets in my constituency, in Moray and elsewhere, which have very high levels of unemployment—but it seems that the Government are determined to level out economic development throughout the country by making sure, just as the rest of the country is emerging from recession, that the north-east of Scotland is plunging into recession.

The key industries in our area—farming and fishing —are already experiencing difficulties. If oil, the third key pillar of the economy of the area, is plunged into major job catastrophe, as is threatened by these Budget proposals, we have a triple whammy being visited on the north-east of Scotland by the Conservative Government.

The big increases in taxation on petrol, the taxation increase which is threatened on domestic fuel, the prospect of people in the most energy-rich area in the whole of the European Community being unable to afford to turn on their electric fires, and these taxation increases on the oil industry, will have a very severe impact on the energy-producing areas of the country.

There are ways out of the mess that the Government have landed us all in. Suggestions have been put forward by, among others, Professor Alexander Kemp, the adviser to the former Select Committee on Energy. I hope that the Government have taken on board the measures suggested by Professor Kemp in his North sea study occasional paper No. 41. He suggests that we extend the transitional arrangements for relief in such a way as to avoid the effects on exploration.

Let me end on a cautionary note. I do not think that any Opposition Member will embark upon the fool's errand upon which the hon. Member for Kincardine and Deeside (Mr. Kynoch) has apparently embarked. He has been told by the Treasury team that if only he, in Kincardine and Deeside, can think of some means of achieving the same results, in terms of Treasury revenue, by applying a different shape of taxation change, the Treasury team will be only too anxious to look at it. I am certain that it would. The Treasury's objectives have nothing to do with employment in the north-east of Scotland and elsewhere, but everything to do with the amount of money that it can grab from the North sea oil industry. I am certain that the Treasury would be glad to look at another way of getting an extra £700 million out of the North sea.

That, however, is not the issue that we wish to debate. We wish to debate whether the proposed taxation changes are sensible and whether they will have the impact that even the Treasury itself admits is possible in terms of the number of jobs lost. We do not want to embark upon finding another way for the Government to get an extra £700 million, thus damaging the North sea oil industry at a time when prices are not strong and when the industry needs investment for the future. I am confident that the Government will be forced to respond to the concern expressed by hon. Members on both sides of the Chamber as people come to understand the potential damage that will be done to the industry, in terms of the loss of tens of thousands of jobs. In Committee, we shall expect a climbdown by the Chancellor on this taxation proposal.

7.41 pm

Mrs. Angela Browning (Tiverton)

The 1993 Budget is different from Budgets of previous years, not least because of the economic background against which the Chancellor had to work—in particular, his need to address the public spending borrowing requirement problem. It has also set a new precedent, in that measures have been announced in this Budget not just for the forthcoming year but for future years. That is important. It is helpful when planning economic policy to be able to look further ahead than 12 months. The Chancellor has taken a bold initiative.

Many constraints were placed upon the Chancellor when he outlined his Budget. It was apparent that it would not be a giveaway Budget. I was pleased to be able to make representations to the Chancellor before he made his Budget statement and tell him that it was particularly important that the axe should not fall on the small business community. Many small business organisations—for example, the Forum for Private Business—have paid tribute to the way in which the Chancellor managed his Budget and allowed the small business sector the opportunity to grow and to increase the economic prosperity of this country, which we are now beginning to see.

I intend to draw attention to other matters, particularly those that affect people in my rural constituency of Tiverton in Devon. My hon. Friend the Member for Brighton, Kemptown (Mr. Bowden) made a compelling case for the grievous impact that VAT on domestic fuel will have upon certain groups in the community. I know that my right hon. Friend the Secretary of State for Social Security has promised that those who are on means-tested benefits will be properly cared for in the autumn statement and that their benefits will be uplifted. There has also been a promise to take into account the impact of VAT on fuel in the retail prices index increase, which will also have an impact on other benefits, such as the state retirement pension.

My hon. Friend the Member for Kemptown referred to the fact that certain groups spend much more on domestic fuel than other groups. It is important that that should be recognised when benefits are uplifted. It would be impracticable to promise that everybody who is affected in this way will find that there is a mechanism for dealing with the increase, to the nearest penny, in fuel bills. Whatever averaging formula is used to measure the effect on fuel bills of VAT, account must be taken of the greater amount of fuel that is used by the elderly and the housebound.

My hon. Friend the Member for Kemptown made a strong case for the elderly. I agree with him. I attended a meeting of Tiverton Age Concern on Saturday last. When I entered the hall where the meeting took place, I was hit in the face by the heat. However, the temperature needed to be high because the elderly, the frail, those who are confined to wheelchairs or who are otherwise immobile feel the cold far more than those who are mobile?

Mrs. Roche

I have followed the hon. Lady's argument with great interest. The Institute for Fiscal Studies estimates that the poorest 10 per cent. spend 13.25 per cent. of their budget on fuel, compared with the richest decile, who spend only 3.46 per cent. of their budget on fuel. Does that not lead her to believe that this provision in the Finance Bill is completely wrong and will have a tremendously damaging impact upon those groups about whom she spoke so eloquently?

Mrs. Browning

I am grateful to the hon. Lady. She endorses my plea that due account should be taken of the fact that there are certain groups in society who necessarily have to use a lot of fuel because of their state of health or mobility.

I want also to draw my right hon. Friend's attention to those people who do not claim benefit. Reference has already been made to them. Some of them are on low wages. A high proportion of my Tiverton constituents earn less than the national average wage. Reference has also been made to pensioners who have only a little money in savings. Many of those people exercised thrift during their working lives in order to provide for a small private pension, or they have some savings. When the state retirement pension is uplifted in line with the retail prices index, there should be recognition of the true effect of VAT on fuel prices.

May I also ask my right hon. Friend to discuss with the Secretary of State for Social Security some of the non-means-tested allowances, for that will almost certainly bring into this category people who face high fuel costs? I refer, for example, to those in receipt of invalidity care allowance and disability living allowance. One ought to investigate how those people will be affected by this proposal.

It is important also to put on record my views on petroleum revenue tax. I fully understand why my right hon. Friend the Prime Minister committed this country at the Rio conference to reducing CO₂ emissions between now and the year 2005.

However, in my constituency—650 square miles of rural Devon—ownership of a car is vital. That is reflected in the latest census figures, which show that 81 per cent. of my constituents are car owners. In rural Devon, we do not use a car only for driving around to look at the beautiful scenery. It is essential that people have a car to get to work and for access to employment and training. It is also important for people who have to take children to school, to go shopping or to gain access to primary care facilities. They are all essential uses.

I can also think of many examples of elderly people who live independently in a rural community, and who find that their legs can no longer carry them to the village shop or the local doctor but are quite capable of driving a car. In those cases, the ownership or use of a car gives them continued independence and helps them to live in their own home for longer. The impact of such a tax on people in rural areas must be appreciated, especially as we are now implementing care in the community. If one considers the census figures, one sees immediately the difference between car ownership in rural constituencies and constituencies that are primarily urban.

I know that there is a strong argument for the tax in terms of the environmental impact of CO₂ emissions, but I draw to the House's attention information given to me by the Library. It shows that emissions in this country between 1990 and 2005 are forecast to rise by 19 per cent. That is the lowest forecast in the European Community, and compares with the forecast for Portugal of a rise of 63 per cent. and the average EC figure of 31 per cent.

I hope that such a pattern of taxation on environmental grounds will not continue in Budget after Budget, because it has a different effect on people in rural and urban areas. I suggest that we consider instead tax incentives involving cleaning up fuel and the motor car.

I realised that the Budget was not going to be a giveaway Budget. It would have been condemned as irresponsible and profligate by the Opposition, who criticise it now, had my right hon. Friend the Chancellor made it a giveaway Budget. The small business sector has welcomed the Budget, and I wish to draw attention to two aspects that are important to business and especially to manufacturing.

The first is capital taxation. The Chancellor has allowed those with more than a 5 per cent. interest in unquoted companies to roll over the gain if they purchase and move more than 5 per cent. into another company. I hope that that is the first of many measures to allow the transfer of interests between companies.

At the moment, there is no movement of capital, especially in the corporate sector affecting the smaller unlisted company. As the recession lifts, it is important that expanding companies can attract new investment, and I hope that the measure will be built on, as it is greatly needed in the small business sector.

Many hon. Members have mentioned the importance of manufacturing. In the autumn statement last year, the Chancellor allowed, for one year, 40 per cent. first-year capital allowances on an unrestricted sum. That year will be up by the time of the Budget in November, so, before my right hon. Friend makes a further announcement next autumn, I urge him not only to abolish the one-year break, which has been extremely helpful in lifting the economy and in bringing about the movement that we now see in business and manufacturing, but to take account of the fact that very small businesses find it extremely difficult to carry forward profit and capital to allow for periodic capital expenditures such as the purchase of a new vehicle, which they may make regularly every two or three years.

I do not ask my right hon. Friend to consider making it an unlimited tax benefit, but to consider putting a ceiling on it. Ideally, I should like a ceiling of £100,000 in any tax year, but I suppose that I could settle for £50,000 if he would consider that. In any event, it should be a 100 per cent. allowance, because the continuation of that allowance will be instrumental in helping small companies which now have increased orders on their books and which are looking forward to further growth.

7.54 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

I apologise for not being here for much of the debate, Madam Deputy Speaker, but there was a meeting of the Public Accounts Committee which was considering the expenses of the Gulf war. However, I heard the Chief Secretary's opening remarks. I should have been especially interested to hear what he was going to devise as an economic reassessment following black Wednesday.

You may remember, Madam Deputy Speaker, that we were promised a reassessment shortly after black Wednesday, but that was seven months ago. The Budget was certainly not the reassessment of economic policy that we might have expected, so I thought that, even at this very late stage, we might have heard something from the Chief Secretary about it today, but we did not.

That day in September was very important. It was the day that Thatcherism came to an end; it was the day that the Government had to face the reality that an economic policy which had lasted for 11 or 12 years had finally run into the sand. It was when the Government realised that something had gone wrong, and their hopes, dreams and expectations that they had fundamentally changed this country's economic position were seen as the nonsense that they always were.

We all know that Governments make mistakes, but the striking feature of the 1980s was the combination of the scale of the mistake and the long period for which it persisted. The Government were incapable of learning from their errors. Part of the reason for the errors were the wonderful days of North sea oil, which replaced imported fuel. However, the revenue was dissipated in the consumer-led boom which eventually led to the problems and troubles of last year.

The folly was compounded by the belief that the myth of prosperity was the result of clever Conservative economics. That has all been washed away, along with the money that could have been used in the seven fat years to prepare for the seven years of famine, which have some way to run. Unfortunately, the Government believed that the windfall was proof of an economic miracle, but now we have to live with the reality for which we were unprepared. How are we responding?

I regret to say that the Government's economic policy does not make sense. The Government now regard success as getting people into shops to spend money, most of which will go on imported products. Our balance of payments deficit is bad enough, but such a move will increase it. The Red Book shows a 1.25 per cent. increase in gross domestic product for this year, together with the same increase in consumer expenditure. At the same time, the Government are levying value added tax on fuel.

I have a personal interest in VAT on fuel because, while I was Financial Secretary to the Treasury, we held the presidency and it was my lot to negotiate the sixth VAT directive. I argued that VAT was a progressive—or reasonably progressive—tax, but that it would be a regressive tax without zero rating. At a stroke, the removal of zero rating makes it a regressive tax. It is a tax on the poorest people, and the argument that we have been able to use in the Councils of Europe will not be available to us any more because we have conceded the principle that there is a need to retain it as a non-regressive tax. The Government are giving an open door to shoppers to spend their money before the tax comes into effect. That is not a sensible way to proceed.

The Government must produce a policy for the whole decade. There are long-term dangers because we have frittered away the benefits of previous years and must now be called to account. The £50 billion budget deficit and the £17.5 billion balance of payments deficit will take all those years to recover.

There are two ways in which the Government can proceed with an economic policy that makes some sort of sense. First, they can reduce the value of the pound and go for exports and the growth that comes from them, while increasing investment incentives. My proposals for the latter would be somewhat different from those of the hon. Member for Tiverton (Mrs. Browning). I do not think that they would apply to motor cars and I do not agree with the limit that the hon. Lady suggests. Nevertheless, the idea of substantial investment initiatives is a correct one.

We must give manufacturing industry something: we must reverse what happened to it throughout the 1980s. Even 100 per cent. allowances would not be as disastrous as our doing nothing. The 40 per cent. figure will have to be renegotiated this autumn and I expect that to continue, but the figure should really increase to 60, 70 or 80 per cent.—even 100 per cent. would not be impossible, as I said. That would rapidly have an effect. Education and training will take some time to get right; that will need to be done on a rather longer-term basis, but we must begin the long haul to economic viability. The need for that must be impressed upon the Government.

I have outlined the sensible approach first. The other approach—the approach that I fear will be adopted by the Government—might accept a stronger pound. We have seen the pound rising in the past few weeks. That will please the Bank of England, which loves a dear pound, and will reduce the living standards of our people. That is fundamentally the Conservatives approach; there is no question about that. The Conservatives accept implicitly that the living standards of the British people throughout the 1980s were built on sand. The Government feel that they must reduce them to make sense of their economic policy. Whatever happens, the Government will reduce living standards. They hope that, as a result, imports will fall relative to exports.

That will still leave the problem of the budget deficit, and that is where the Chief Secretary and his Thatcherite partner, the Secretary of State for Social Security, will start their emasculation of the welfare state—and "emasculation" is the word. I am thinking not just of the common retirement age of 65 for men and women; with a Conservative Government in power, I regard that as inevitable. I am sure that that is what they will do—at the very least. The amount of the retirement pension and the qualifications for it will fall under the axe. Disability payments and a whole range of state benefits are all now under threat, and in addition to those cuts will be the cuts in the national health service.

The history of the welfare state under this Government and under all Conservative Governments has followed a depressing pattern. General nods in the direction of the post-war consensus which began under the first post-war Conservative Government gave way later to cuts disguised as changes, then to cuts accepted as necessary, now to the real 1990s version of the Geddes axe. The public expenditure cuts of the 1930s created a bitterness whose effects we can still feel, 60 years later. They led to a torrent of dissent that changed the political landscape of our country. The great pity is that that approach is not merely divisive; it is cruel and unnecessary.

The only claim that the Government can make is that they have kept inflation under control. That claim is not true, but they make it anyway. The price of that claim has been an overvalued exchange rate. The reason why inflation has not been as high as it would otherwise have been has been the very high—the absurdly high, the ruinously high—level of the pound, and the levels of interest rates that have accompanied it. It is the greatest condemnation of our economic inadequacy that the Government entered the ERM at a disastrous level. The Government watched our balance of payments react calamitously and used billions of pounds worth of taxpayers' money in a fruitless attempt to defend the rate. It was the greatest economic incompetence of our age to throw away those valuable moneys on a worthless venture. Never had we seen our resources used so profligately.

Finally, when the money—our money—ran out, the rate was allowed to fall and business sighed with relief. It should have happened long before, yet the Government claimed credit for it—for the fact that now we have a realistic exchange rate. Now that all that money has been squandered, the exchange rate is realistic and the Government appear to be proud of the part they played in the process.

Complaints about a cheap pound come from down the road in the City. The City has advocated a dear pound and high interest rates, both of which affect our vital companies in Manchester, Birmingham, Glasgow and our industrial centres on which we depend. If we cannot have financial devolution, we should at least listen with greater care to what industry really needs, and we should meet those needs, one of which is large investment incentives for plant and machinery. Such incentives will not only help industry to modernise itself. The hon. Member for Macclesfield (Mr. Winterton) is absolutely right and I am sorry he is so readily brushed aside by those on the Treasury Bench.

The advantage of investment in new plant and machinery is that it modernises the workers as well as the plant itself. New equipment leads to new methods of manufacture and new forms of operations in which many can play their part.

Mrs. Browning

The right hon. Gentleman referred to my comment about capital allowances. I hope that he would agree that, in the case of large conglomerates, which have an open-ended opportunity to invest—they can invest and benefit from tax breaks on millions and millions of pounds—there comes a point at which such a provision could be abused. That is why I propose a ceiling, rather than the open-ended offer that he appears to favour.

Mr. Sheldon

I would accept that if it applied to the present definitions that qualify for investment incentives. I am thinking purely of plant and machinery, and investment in plant and machinery leads to modern methods and practices and modernises workers as well as equipment.

Our industrial strength used to lie in the manufacturing skills of our people and in their inventiveness. Our manufacturing skills have been overtaken by those of scores of other countries in the developing as well as the developed world. Our inventiveness at least remains, and, although it is not enough to ensure the predominance of our manufacturing industry today, it is nevertheless a talent of great value. But it, too, is under threat because Germany, Japan and now France now produce more patents than we do. Our one residual advantage is now disappearing. What is more, those countries actually use their patents to produce articles.

Although the Government are beginning to talk as though manufacturing is important, precious little is emerging from their talk. The Prime Minister appears to have a new-found love of manufacturing industry. It is a great pity that he did not discover his affection for it years ago when there was more time to make use of it.

What the Government are doing for manufacturing industry is wholly inadequate. They need to reassess training and education and to run the economy in the interests of manufacturing industry, and therefore in the interests of prosperity and of our people. The tragedy is that the Government will be trying to retain a high pound when we have a real opportunity to obtain the benefits from a truly competitive pound. In my view, the pound should be considerably lower than it is at present. It is with great sadness that I view the attempts to jack it up.

Because of our high unemployment levels, we have an excellent opportunity to meet the inflationary pressures that arise from a low pound. That high unemployment will be the greatest assistance to us in producing expansion without inflation. There are not the constraints that we have had in the past and, although the deskilling of our people is serious, I believe that training can be expedited, as it was in the early days of the war when training centres played such an important part in producing for wartime conditions.

People want to work. A lower pound can reduce imports and promote exports and that should receive the support of the country. It is a terrible indictment of the Thatcher and post-Thatcher years that such a policy is not proposed. I have always been impressed by the French experience of 1958 to which I keep returning. Under President de Gaulle, the French combined devaluation with deflation and that provided a limitation to import and an incentive to export. Deflation provided the room to achieve those obectives.

We have no need for further deflation in Britain today. We already have an excessive degree of inflation and such a high level of unemployment. The way is now clear to achieve what France achieved more than 30 years ago. Now that the myths of monetarism and the constrictions of the ERM have been banished, we might have expected a fresh analysis of our economic situation. Indeed, that is what we were promised following black Wednesday. What has happened? We are planning—at least for the time being—a life outside the exchange rate mechanism. In addition, the Government are certainly not going to give the Bank of England the independence that it dearly wants.

The Government are right in that respect. The Bank of England is like the other nationalised industries. It wants to be privatised because a privatised monopoly is a comfortable institution in which to reside. The first thing that happens is that salaries are jacked up; then share options are introduced; and, finally, both are justified on the basis that the new monopoly profits are a sign of good management.

So, we have no ERM and no privatised Bank of England. There is a reduction in living standards and exhortation after exhortation to export. That is the revised agenda of the 1990s. The great strength of our democracy has been that Governments have eventually learnt from their mistakes. The learning process certainly needs to begin soon.

8.11 pm

Mr. Barry Legg (Milton Keynes, South-West)

In some ways, we have had a curious debate so far. We started with some shadow boxing from the Opposition Front Bench. We then heard a few ideas and some glimmerings of a strategy from the Opposition Back Benches. The right hon. Member for Llanelli (Mr. Davies) put forward some kind of strategy and we have just heard a strategy from the right hon. Member for Ashton-under-Lyne (Mr. Sheldon). However, there was a dearth of strategy from the Opposition Front Bench.

In debate after debate, no matter how carefully we listen to hon. Members such as the hon. Member for Peckham (Ms Harman), we come away with no idea of what those on the Opposition Front Bench would like to see in respect of the total level of public spending, the total level of taxation, the borrowing requirement, the level of interest rates or the level of the currency.

Mr. Quentin Davies

They do not know themselves.

Mr. Legg

As my hon. Friend makes clear in that valuable intervention, they do not seem to know. So long as those on the Opposition Front Bench lack a strategy, they will continue to be a most ineffective Opposition. The British people will regard them as an ineffective Opposition who are incapable of being an alternative Government.

My right hon. Friend the Chief Secretary to the Treasury identified some very encouraging indicators in respect of the British economy that have appeared in the past few weeks. Those encouraging signs include the reduction in unit wage costs of 2 per cent., the latest increase in manufacturing output per head of 7.8 per cent., the improvement in the non-EEC trade balance and the 2.5 per cent. rise in manufacturing output in January and February. There are many other examples which show that recovery is finally getting under way.

I hope that the Government will continue to watch our economic indicators carefully, because I do not believe that it will be plain sailing from now on. Many hon. Members have identified problems in the economy. I urge my right hon. and hon. Friends on the Government Front Bench to watch the indicators and to take the appropriate action to ensure that we get the sustained and lasting recovery which is so much needed in this country.

As my right hon. Friend the Chief Secretary rightly said, we are leading Europe out of recession. Although the projections of our growth for this year are meagre, they are much better than those of our European partners. In its most recent projection in respect of Germany, the Deutsche Bank projects a 2 per cent. decline in gross domestic product. Britain is leading Europe out of recession and it is good that the Government have taken advantage of the freedom and flexibility that the markets provided last September.

The Government have taken advantage of that freedom and flexibility to let the pound float and to reduce interest rates. The British economy is now moving back to a better balance. Many hon. Members wanted to know what the Government are doing for industry. By leaving the exchange rate mechanism and reducing interest rates by 4 per cent., the Government have reduced the interest charges of British industry by £4 billion. That is more than has been contributed by the Budget and more than any of the suggestions, however vague, from Opposition Members.

It also behoves British politicians to encourage British industry and commerce to look widely for markets and to raise their eyes across the world. The economic pattern across the world is changing. Unfortunately, Europe is currently stagnating. I fear any moves to create a fortress Europe in respect of trading arrangments. I am sure that my colleagues on the Government Front Bench will be ever vigilant in that respect.

At the present time, the developing economies in the Far East are doing better; they are growing and becoming stronger. The Asian Development bank has projected growth in GDP in the developing economies of the Far East for the coming year of 7 per cent. at a time when growth in Europe is flat. Several of the economies in the Far East are growing at higher rates than that. In addition, the Chinese economy is growing at a rate of 10 per cent. per annum according to the Asian Development bank.

Business men in this country must see that as an opportunity. The growth in the Chinese economy means that the Chinese are exporting more and also importing much more. It is projected that imports into China in the next 12 months will increase by 20 per cent. or 25 per cent. There are certainly markets out there which British industry should take advantage of and there are opportunities which can help Britain to have a prosperous and successful future.

Several hon. Members have referred to the Treasury and Civil Service Select Committee report on the economy. We produced a report on the Budget statement, and last week we produced a report on monetary union. Quite a lot of work went into the former report and it was unfortunate that some of its impact was diverted by one or two Labour members of the Committee who sought to take cheap political advantage of it. However, overall a lot of worthy evidence was taken and sound conclusions were drawn.

One of the more important questions about which many hon. Members are interested is when Britain is likely to return to the ERM. I must admit that I am not altogether encouraged by the evidence that we received from my right hon. Friend the Chancellor of the Exchequer when he appeared before the Select Committee.

My right hon. Friend saw the criteria for our returning to the ERM as follows: first, that we are clearly out of recession in the United Kingdom—that moment is rapidly approaching—and, secondly, that the economies of Germany and the United Kingdom are more closely synchronised. I am not quite sure what he meant by that, but if he means interest rates coming closer together, that is also happening. However, I do not believe that that should be a reason for returning to the ERM.

Mr. Iain Duncan-Smith (Chingford)

What about the fault lines?

Mr. Legg

I was coming to the fault lines.

The Chancellor of the Exchequer and my right hon. Friend the Prime Minister rightly identified fault lines when we left the ERM in September. Since then, we have had a report from the governors of the European central bank which says that they cannot find the fault lines. It is not surprising that governors of the central bank cannot find the fault lines in the European exchange rate mechanism system. If they admitted that there were fault lines, they would have to throw even more money at defending the artificial exchange rates that they have set across Europe.

The real fault line in the exchange rate mechanism is that the former anchor currency and anchor economy in Germany are no longer financially stable. Fixed exchange rates can run successfully for various periods. For example, under the Bretton Woods system, we ran a successful fixed exchange rate system across the western world for a number of years. One of the reasons that we were able to maintain the system was that the United States was the major economy in the western economies. It is worth remembering that the United States economy is five times larger than the Germany economy.

The fixed exchange rate system ran successfully because currencies were linked to the major economy and the major economy had sound and stable financial policies. The major economy did not run big budget deficits and it did not have high inflation. When it started to run big budget deficits with the coming of the Vietnam war in the 1960s, that destroyed the Bretton Woods system of fixed exchange rates.

We have seen the same thing happening in Europe in the past few years. Germany has ceased to be an effective anchor because it no longer possesses the financial stability that it had in the 1960s and 1970s. Germany faces a prolonged period of large budget deficits and reconstruction with the unification that is taking place there, so it no longer possesses the stability that it had previously.

Germany has massive problems on the competitiveness front. It is no longer the competitive country that it was in the 1960s and 1970s. German wage costs per hour are substantially greater than in the United Kingdom. To imagine that Germany will once again become the anchor and that Britain should, in the near future or the medium term, fix sterling against the deutschmark will simply lead to a repeat of the problems that the United Kingdom has faced over the past five years with inappropriately valued exchange rates and interest rates being set at the wrong level for domestic conditions. If that happens, we shall not see success in our affairs. There is a great danger economically for the United Kingdom in returning to the exchange rate mechanism.

Hon. Members would do well to draw on recent experience and say that, broadly speaking, floating exchange rates provide the best means of establishing the level at which currencies should operate. If central bankers and politicians think that they know better than markets and that they can overrule markets and set exchange rates, that is a grave mistake and the people and taxpayers in many countries suffer as a result. There should be no return to the exchange rate mechanism in the lifetime of this Parliament.

We have heard comments from several hon. Members, including my hon. Friends the Members for Bournemouth, West (Mr. Butterfill) and for Bridlington (Mr. Townend), about the high level of public spending and the high level of the public sector borrowing requirement in the United Kingdom. Certainly, for a Conservative Government to be running a deficit of some £50 billion, which equates to some 8 per cent. of gross domestic product, requires vigorous action in the coming months and years to achieve a proper financial balance and bring our public finances into better order.

My hon. Friend the Member for Bridlington highlighted the level of public expenditure of some £23.3 billion in the past month. He rightly said that that was some 30 per cent. greater than in the same month the previous year. Certainly, Treasury Ministers have a great deal to do in maintaining firm control of public expenditure and substantially reducing the deficit.

Several hon. Members have noted that the Finance (No. 2) Bill is a substantial document. It has more than 200 clauses and 19 schedules. It may be in danger of running against that well-known cannon of taxation—that taxation should endeavour to be as simple as possible. Conservative Members have often advocated that taxation should be simplified.

The Bill is weighty. It contains measures which all of us support, such as the raising of the threshold for stamp duty. It also contains extensive measures which will puzzle hon. Members, such as those relating to the taxation of vans. There is a schedule of some 10 pages concerning the tax on vans used by directors and other persons. The Inland Revenue goes into tremendous detail about these vans—the requirements and the definition of a van. In fact, the definition of "van" is any vehicle which conveys goods, provided that it is not a motor cycle as defined in the Road Traffic Act 1988 and it is less than 3,500 kg. If one is an employee or director who is in the habit of driving a three-tonne lorry, the schedule will bring the lorry within the taxation provisions as a benefit in kind.

I strongly support the Government's strategy for reducing regulation on business, but the Government, the Inland Revenue and Customs and Excise should be mindful that Bills and Acts of Parliament are also regulation. I wish the Committee well in its work on the Bill. I hope that it will be able to reduce some of the volume and help to achieve some simplification.

In conclusion, I hope that my right hon. Friends on the Front Bench give as much time, energy and ability as they can to tackling the main matters within the Government's control. They should get public expenditure under control so that overall tax levels can be reasonable. They should not spend too much time delving into economic forecasts, second-guessing the markets and working out the correct exchange rate between the deutschmark and sterling or other currencies but should address the fundamental matters which come within their responsibility or control. If the Government do that, we shall have a strategy which will be good for the country, the Government, and our party.

8.27 pm.

Mrs. Anne Campbell (Cambridge)

I do not think that there is an hon. Member on either side of the House who does not sincerely hope that we are seeing the end of the recession. It is the longest recession since the war. We have been told that manufacturing output has started to rise, that consumer confidence is rising and that the gross domestic product will grow by about 1.3 per cent. this year and 2.5 per cent. in 1994.That should make us all feel better.

When the economy was falling like a stone, I remember an economist saying that even a stone bounces. Unfortunately, stones do not bounce far, but tend to settle down to the lowest level. For two consecutive months, we have seen slight falls in unemployment. Yesterday in The Observer, William Keegan described it as a "Group 4 recovery". He said: They seem to be losing the unemployed". Even the tabloids do not seem to believe what is happening. Last week, the Evening Standard had the headline, "Shock fall in unemployment", as though that somehow was bad news. But so long as it is real, it is welcome.

I believe that employers over-reacted to the gloom and uncertainty in the autumn and are now beginning to recruit again. Instability is bad for industry because, when employers make people redundant, we lose vital skills which are not replaced. The skilled people we lose are often in their late 40s and 50s, and they find it extremely difficult to get work again when the economy begins to turn up.

The problem is that, on the basis of the Government's previous record, it is difficult for people to have confidence in what the Conservative Government are doing. Last autumn, the Government seemed intent on doing their utmost to destroy British manufacturing industry. We had record interest rates and an unsustainable exchange rate. The housing market was described as flat, but, in reality, house prices were plummeting.

Despite their best efforts, the Government were ejected from the exchange rate mechanism and forced to devalue the pound. That led to an 18 per cent. devaluation and lower interest rates. That is what has led to recovery. It is not something which the Government intended to happen, although they now pretend that it is what they intended all along and that they are responsible for the welcome signs of upturn that we are now seeing.

However, as many hon. Members, but especially Opposition Members, have said, there are dangers in the upturn. That is well illustrated by the circumstances that arose in the early 1980s. When we came out of recession then, the balance of trade was positive. It led to several years in which consumer demand exceeded the growth in exports before the trade deficit grew to unacceptable limits. However, that is not a luxury that we can allow ourselves on this occasion. It is not sustainable. The balance of trade is already in deficit to the tune of £12 billion, and is projected to grow to £18 billion as we come out of recession.

So we must either restrain consumer demand or encourage exports—preferably both—to bring the deficit back into balance. In the current circumstances, any Government would find it extremely difficult to do so. Manufacturing is only 21 per cent. of GDP. When we compare that with levels in our competitor countries—31 per cent. in Japan and 35 per cent. in Germany—we begin to realise what a weak state British manufacturing is in. Britain, where the industrial revolution began, is in the appalling position of deriving only a small proportion of its GDP from manufacturing industry.

More help is needed for manufacturing. Opposition Members have said that on numerous occasions. It has only recently been recognised as important by the Government. We need to provide more help in investment. I agree with the hon. Member for Tiverton (Mrs. Browning), who is no longer in her seat, that we must give more help to people who are prepared to invest in resources for research and development.

We certainly need more investment in our education and training. We should also seriously consider an attempt to cure the short-termism which cripples British industry. High-tech firms, which are the backbone of recovery in a modern technology-based industrial environment, also need their own special encouragement, but the Government are not interested in increasing skills or encouraging research and development; nor do they seem particularly interested in raising levels of investment.

The Conservative philosophy is simplistic: keep down inflation and wages and in the free market everything will beautifully come all right. We will automatically improve our skills, raise our investment and increase our research and development and that will help us to become an innovative and competitive country. Well, I am sorry to say that that has not happened in the past 14 years, and the electorate are beginning to realise that the Government are pulling a great con trick in pretending that they know how to manage the economy.

I have more than 1,000 high-tech firms in my constituency. I spoke to one of them this morning. It is a highly innovative firm employing a great many people with valuable skills. It is losing work as a result of declining defence contracts. It has skills which could well be used in civil engineering and consultancy work. It asked me for my help with a specific problem.

After an exchange of correspondence with Ministers I eventually directed the firm to the regional office of the Department of Trade and Industry for the help that it needed. It reported to me this morning that the DTI was not interested in addressing its problems seriously. It simply tried to push the DTI schemes at it. The schemes were not suitable, but the DTI showed a lack of regard for what the customer wanted. That is one of the basic problems that we have not addressed.

Mr. Robert Ainsworth (Coventry, North-East)

Does not the response that we get from the DTI show that there is a lack of strategy on how we should diversify out of the defence industry into other industries? The answer that we are always given in this place is that there is a straight choice. If we are not prepared to accept the forces of the market, we support the propping up of lame ducks. But we have always advocated the adoption of a strategy. If there is not a strategy, what on earth is the role of the Government? But Conservative Members never appear to agree with that.

Mrs. Campbell

I am grateful to my hon. Friend. He has reminded me that another difficulty of which the firm in my constituency complained was that there was a lack of strategy in the Ministry of Defence. There is no way in which a firm can know in advance whether its project or proposal will have a good chance of success. Encouraging noises from MOD officials are not usually sufficient. A company may put a great deal of work into a proposal and find that it is turned down at the end of the day. Small firms cannot afford that luxury. They need to be reasonably sure that, if they put a great deal of time, energy and effort into a project proposal, it will have a reasonable chance of being accepted.

The other major problem that growing firms in my constituency face is finance. Many small firms—I am talking about very small firms consisting of perhaps only half a dozen people—have great difficulty in expanding. Sometimes they obtain the initial finance successfully, but have tremendous difficulty in moving on to the next stage.

I welcomed the increase in the percentage that the DTI guarantees under the small firms loan guarantee scheme. That could be useful in some circumstances. However, the problem with that scheme is that often the banks refuse to operate it or make it difficult for firms to get hold of the money. The British banking system does not understand high-tech firms. It has no basic understanding of scientific innovation and ideas. That is the problem.

I suggest that the Chancellor should make the scheme available through science parks. Science parks are usually run by people who understand small high-tech businesses and are prepared to come to grips with the scientific issues at stake. If the Chancellor took up that suggestion, I should like to put forward the St. John's Innovation Centre of Cambridge, which would be delighted to run a pilot project.

There are two ways in which the country can go. We can either strengthen the supply side, exploit British skills and expertise, invest in people and regain our competitiveness, or we can follow the route for which the Government seem to want us to opt. Under that option, we would lower wages, reduce skills and offer no help with investment and research and development. No attempt would be made to overcome short-termism. That second option will inevitably lead to third-world wages and skills. We would become the world's cheapest conveyor belt, making cheap goods at low prices, which would generate low consumer demand. We would have an even larger proportion of Europe's poor than we have now.

That is the future for Britain under the Conservatives, but there is an alternative. The people have the ability, the skills and the enthusiasm to make Britain great again. I hope that we can do that.

Several hon. Members

rose—

Mr. Deputy Speaker (Mr. Geoffrey Lofthouse)

Order. I understand that the winding-up speeches will commence at 9.20 pm. Four hon. Members, who have been in the Chamber for most of the day, are seeking to catch my eye, and with a bit of co-operation from everyone, I may be able to call them.

Mr. Maxton

On a point of order, Mr. Deputy Speaker. I thought I had clarified with you on an earlier point of order that there is no reason why any hon. Member should not speak, because the vote does not have to take place at 10 o'clock, but at any time thereafter.

Mr. Deputy Speaker

We shall have to wait to see what happens at 10 o'clock. At present four hon. Members wish to catch my eye.

8.41 pm

Sir Michael Grylls (Surrey, North-West)

The hon. Member for Cambridge (Mrs. Campbell) made some interesting and constructive points about some of the smaller high-tech firms in her constituency, with which I agree. It was good to hear what she had to say. The Finance Bill is good news for small and medium-sized firms, and I agree with the hon. Lady that the amended loan guarantee scheme will help those firms as they come out of recession and start to take advantage of the expanding economy.

I want to speak about an issue which has been before the House for a long time: unitary tax. Eight years ago, the House included a retaliatory clause in the then Finance Act to put pressure on the United States Government. I have been concerned about this issue for some time. I have an interest to declare. I feel passionately that we must resolve this issue before too long. On 18 February 1980, Peter Rees, now Lord Rees, said about the United Kingdom/United States double taxation treaty: To those concerned about the unitary question, I say that there is no disposition on the part of the Government to let the issue die … the United States were left in no doubt by what I told them Thirteen years later, we are still no further forward. The blame must be put, fairly and squarely, at the door of successive United States Administrations, who have not addressed the issue effectively. I shall not go into detail about what unitary tax is; suffice it to say that it means taxing companies on a worldwide basis rather than on the basis of the state or the country in which they operate. It is used by some American states—in particular, California —and it has been internationally condemned by the United Nations, the OECD, the 12 members of the European Community, Japan, Switzerland, Finland, Australia, Canada and many other countries.

Today marks the deadline for the United States Administration to submit an amicus curiae brief in support of Barclays bank, which is leading the way in trying to get a judicial decision on this issue against the California Franchise Tax Board. According to the press —I believe this to be true—the United States Administration have now decided that they will not support Barclays bank in its litigation. I know that the House will be disappointed by that news, and I am aware of the feelings of the 213 hon. Members, many of whom are present now, who have signed early-day motion 1489.I believe that we are justified in being outraged al: the American Administration's decision not to support Barclays' case.

It would appear that that American Administration have gone back on their promise to the House that they would use their best endeavours to resolve the issue. The chairman of the California Board of Equalisation has stated publicly that the decision not to file a brief is a clear signal to the Supreme Court that the Administration does not want the case heard. My hon. Friend the Member for Faversham (Sir R. Moate) and the hon. Member for Newcastle upon Tyne, East (Mr. Brown) who is sitting on the Opposition Front Bench this evening, recently visited Washington as part of a delegation. They were informed by the acting Secretary for tax policy at the United States Treasury: Failure to file the brief"— in support of Barclays— will be considered a decision not an oversight". Although it is still feasible that the United States Supreme Court will take the case, the failure of the United States Government to support it significantly jeopardises the chances of a court hearing. By failing to support Barclays, the Administration have destroyed the foundation on which their international tax treaties are based. The House should note that, for the first time in their history, the American Administration are admitting that a tax system radically different from the international standard of arm's-length reporting has a place internationally.

There is a real danger that the use of worldwide unitary tax will break out, like measles, all over the United States. That could send a damaging signal to other countries, which might be encouraged to adopt that as a standard form of taxation because the American Administration no longer seem to regard the OECD model as the accepted standard.

Other American states are looking to adopt worldwide unitary tax, as demonstrated by the letter sent by the American Governors Association to President Clinton on 15 April stating that the worldwide unitary system offered advantages from which the federal system could benefit. In a far-sighted letter of 24 March to Treasury Secretary Bentsen, the president of the United Kingdom section of the American Chamber of Commerce stated: I regard this matter as potentially the most important to arise in transatlantic commercial relations in a very long time. This is an issue that should be allowed to exhaust the US legal process in the hope that it can avoid becoming a major political dispute. Today it has become such a dispute. It has been suggested that the Clinton Administration's reason for not backing Barclays is that they regard the issue as solved, since California enacted legislation giving companies the option of being taxed either on a worldwide basis or on what is known as the "water's edge". The companies are only given that so-called solution on payment of a fee—often a substantial one. It is worth reminding ourselves that neither our Government, the Unitary Tax Campaign nor the Confederation of British Industry supported that legislation.

It is morally outrageous that a company should be punished for the right to be taxed on an equitable basis. It is quite clear that that so-called solution is not a solution in practice. According to the California Franchise Tax Board, an estimated 2,500 foreign and domestic companies were eligible to elect for the water's edge option in 1990 and that just over half did so. Of that number, only 8 per cent. of British companies—68—elected to do so. That represents less than a quarter of British companies operating in California.

The fee for the water's-edge election is not insubstantial, and California estimates that it will collect between $40 million and $60 million from that election fee. To charge a fee for the right to file under accepted international practice is surely akin to the highwayman's charge to his victims for the use of the road. The staff of the California Franchise Tax Board have consistently attempted to undercut the legislation.

The House must be under no illusion that while the 1986 legislation in California was a small step in the right direction, it does not provide a solution to this issue. Given the fee and the throw-back provisions that British companies must face, without a right of appeal, that legislation is morally indefensible.

I now look quickly to the future. The House passed retaliatory action in 1985, now in the form of section 812 of the Income and Corporation Tax Act 1988.The time has come—I believe that the Opposition agree—for decisive action against the United States to show that we are serious and that we are angry. We have waited too long for the Americans to solve the problem. The House took the words of the United States on trust and, frankly, the United States has let us down.

Our credibility in negotiations with the United States on all future economic issues will be undermined if we do not follow through and retaliate as we have always said we would. How wide or how narrow the retaliation is is a matter for debate. To deny payment to United States companies of British tax credits could give the Inland Revenue an extra £200 million. In view of the way in which the Americans have behaved, that is a very attractive proposal.

Many people say that the treaty may be torn up by the United States. The House should remember that the treaty is outdated. It benefits United States companies substantially. The United States would not abandon a treaty which benefits it, especially if retaliation was targeted finely against United States companies which have a presence only in a unitary state—California. The Clinton Administration have made a political decision to protect themselves domestically. The British Government must now protect their own national interest and our own British companies operating in America. The British Government should no longer tolerate the antics of California.

Although the opportunity for the successful conclusion of legislation has been in the Californian courts since 1984, the United States once again backs away from a meaningful solution. It is British companies and British businesses that are directly affected by the United States Administration's sudden decision to turn turtle. We cannot allow that to happen. The only thing that a United States President can do unilaterally is file an amicus brief, which he has apparently not done to date.

The United States system differs from the United Kingdom parliamentary form of government. The President cannot guarantee legislation or, as we know from bitter experience, even a treaty. There is no sign that the United States Administration would support any effort to limit the states. Any attempt to ignore the litigation in favour of some new solution would jettison Barclays and all the other companies which have borne and fought the tax.

There is no doubt that the Government must now retaliate. Our Government must show the Clinton Administration that we will not tolerate their showing disregard for their international obligations and for their promises to the House. I hope that my hon. Friend the Financial Secretary will take this message back to the Treasury and that, as soon as possible, the Government will commence implementation of the retaliatory clause.

8.52 pm

Mr. Gordon Prentice (Pendle)

I shall be brief, because I am conscious that many hon. Members wish to take part in the debate.

This week marks a milestone because it was this week a year ago that the Prime Minister's predecessor said that there was no such thing as Majorism. She also threw in for good measure the fact that the Prime Minister was not his own man. At the time, I thought that those were curious statements, but in the year that has passed, I have realised that Majorism has been given a definition.

To many of my constituents, Majorism means soaring unemployment. Unemployment in Pendle has risen by 80 per cent. since November 1990.To many of my constituents, Majorism means slump, broken election pledges and the collapse in manufacturing. We know that Majorism means massive borrowing of £50 billion, way above anything ever mentioned by the Conservatives at the time of the general election. It means an enormous trade deficit in manufacturing, running this year at £13 billion. Under a Conservative Government, this country in 1983, for the first time since the industrial revolution, had a deficit in manufacturing.

The Budget is not only the Chancellor's Budget, but the Prime Minister's Budget. It will be remembered not only as the last Budget before the Government introduce the unified Budget in November, but as the Budget that comprehensively and cynically ditched a raft of election pledges which were made solemnly to the British people on 9 April. It will be remembered—a point picked up by the hon. Member for Tiverton (Mrs. Browning)—as a Budget with a delayed-action fuse. It is a ticking time bomb. The hon. Member for Tiverton said that it was an innovative Budget because it proposed tax increases in later years. Those words will come back to haunt the Government in later years because the tax increases are built into the Budget. Conservatives will never be able to say again with a straight face that they are the party of low taxes and that Labour always wants to put taxes up.

It is one of the great ironies that the Government seem to have built up a reputation for economic competence. The hon. Member for Milton Keynes, South-West (Mr. Legg) referred to that belief when he tried to mock the Labour party for lacking a strategy. The Government's whole strategy was turned on its head on 16 September 1992 when we pulled out of the exchange rate mechanism and lost £5 billion in the process.

There was also some reference to the British national interest. Again, it strikes me as strange that Conservatives are constantly seen as the party that defends the British national interest, whereas the Labour party is seen as incapable of doing so. That attitude was taken furthest by the right hon. Member for Henley (Mr. Heseltine), the President of the Board of Trade. He told The Guardian on 27 November 1991: Some of us would rather see the Budget handed over to the Common Market than to the Labour party. Yet the Conservatives wasted £14 billion on the poll tax fiasco and hiked up VAT by 2.5 per cent. to pay for that.

The Budget runs counter to a series of specific pledges. We may be tired of hearing about them in the House, but they bear repetition so that people outside can hear them. There was a specific pledge on national insurance contributions, and that was broken. The Prime Minister said during the election campaign: I have no plans to raise the top rate of tax or the level of national insurance contributions. There was a specific pledge not to increase taxes and that was broken.

During the election campaign, the Chancellor of the Exchequer said on 31 March 1992: We will not have to increase taxes. I cannot see any circumstances in which that will be necessary. The pledge on VAT was broken and that is perhaps the most cynical action of the lot. It is mean, and it will have an adverse impact on the poorest in our community. We still do not have an assurance from Ministers that the poorest members of our community will be adequately compensated.

I am not talking only about pensioners and those on income support. I am talking about the many millions of poor families whose incomes take them just above the income support level. Some Conservative Members posed questions about that, and I hope that the Financial Secretary will tell the House what special provision will be made to ensure that those just above income support level will not be affected adversely by the hike in VAT.

We know why VAT on fuel was increased. My regional daily, the Lancashire Evening Telegraph, told its readers a few days after the Budget on 18 March that VAT on fuel was a desperate pledge-ditching step to service the huge deficit that the Government has run up, many would say by its own economic incompetence … it would only need the dissent of just 11 Tory MPs for the measure to be undermined. Such action in our opinion would have the force of probity behind it, in contrast to the attempt by the Government to portray this new VAT imposition as a green anti-global warming tax, fulfilling Britain's international environmental obligations. The Chief Secretary tried to sell this line again today. We were told that the Government were committed to the development agenda at the Rio earth summit, which was why it was right for Britain to try to curb pollution by the year 2000.That was the justification offered for hiking up fuel taxes.

Why then was it not equally right for Britain to join France in moves to agreeing a timetable to reach the United Nations target of 0.7 per cent. of GDP to be spent on overseas aid by the year 2000? France has committed herself to that target. The Lancashire Evening Telegraph was spot on when it said that VAT on fuel was forced on the Government by an exploding deficit which had to be paid for.

The Chief Secretary displayed tremendous optimism about the state of the British economy, but his optimism is not shared by many people in this country. I was amused to hear the hon. Member for Fulham (Mr. Carrington), whose constituency I know well, detecting signs of recovery from the increased house prices in Fulham. I am not worried about house prices in Fulham; I am worried about what is happening to the real economy—and that means manufacturing and those who work in it making things.

The Chief Secretary said that the Labour party would have us believe that manufacturing is dead. It is not dead: it is on a life support system. There have been huge losses of manufacturing jobs this year in my constituency. Rolls-Royce has shed 5,000 jobs nationwide and 175 in Pendle. Smith and Nephew has laid off 574 people this year. Wadkins of Colne is closing. Progress Engineering is closing and the latest victim, only a couple of weeks ago, was Baxter Healthcare, which makes medical products, such as intravenous drips. It is closing its plant in my constituency and transferring production to Malta. The NHS trust in my constituency spent £128,000 on Baxter products last year. Ludicrously, highly skilled jobs are being exported to Malta and the Burnley health care trust is expected to import those products in future, now that 200 skilled and loyal workers are to be laid off by this American multinational.

Beyond the boundaries of my constituency, things are terribly bleak. The last colliery in Lancashire, Parkside, is closing down. Leyland DA F is fighting for its existence, while the Government stand idly by, expecting Lancashire county council to do what is necessary to save it.

The Governor of the Bank of England has told people what they already know. Speaking to the Treasury and Civil Service Select Committee last month, he said that Britain faced a fundamental weakness, in the form of its large trade deficit, which will take many years to correct. The fact is that we are rapidly losing our manufacturing base. We are importing more and more of the goods that we used to make here. The Governor confessed himself a little worried by the Treasury prediction that our trade deficit would reach £13 billion this year, but went on to say that the trade gap reflected a lack of competitiveness and that there were problems with productivity, training, education and innovation.

The weakness in our manufacturing is a systemic weakness in the British economy that has not been properly dealt with for the past 14 years. Manufacturing is in decline and the evidence of that decline is plain in the constituencies of hon. Members who represent industrial areas. I can only urge Conservative Members to open their eyes and see the extent of the chaos and the devastation that Government policies have wrought in this country. This Budget does nothing to deal with the real problems facing the nation; tragically, it is not a Budget for jobs.

9.4 pm

Mr. Quentin Davies (Stamford and Spalding)

I shall begin by declaring my interests. I am an adviser to NatWest Securities, which is the investment banking arm of the NatWest group, a director of Dewe Rogerson Consultants, and parliamentary consultant to the Institute of Taxation.

The hon. Member for Peckham (Ms Harman), the Opposition Front-Bench spokesman, made an appalling speech. She called for reductions in taxation or the abolition of some taxes and then complained about the size of the PSBR. She completely failed to recognise the obvious contradictions between those two, which is an insult not just to the intelligence of the House but to the intelligence of those outside. Such speeches do not deserve to be taken seriously, nor will they be.

I should like to pay a sincere tribute to the Chancellor. Few politicians in my time in the House, perhaps none, have been subjected to such a sustained and often malicious campaign of abuse. The Chancellor took up office in difficult circumstances two and a half years ago and set himself two tasks—to reduce inflation and to restore growth in the economy. He has been triumphant in the first—there is general recognition of that—and it is becoming increasingly clear that he is succeeding in the second.

It would be futile to expect Opposition Members to pay tribute to a Conservative Chancellor. They will go on mindlessly calling for his resignation whatever happens to the economy. I am not so naive as to suppose that the animal will change its spots, but I hope that fair-minded and perhaps better informed people in the country who had lost patience during the recession and criticised the Chancellor, will be magnanimous enough to recognise their errors.

The Chancellor's Budget is courageous. He decided that it was necessary to increase taxes, and I am sure that he is right. He was also right to avoid raising direct taxes such as income tax and capital gains and corporation tax, which are the most economically damaging taxes of all. Having decided to focus on indirect taxes, he was also right to widen the tax base rather than to increase the rates. I hope that he will be emboldened to go further and spread the VAT net even wider in the next Budget. Perhaps he might like to start by extending it to books, magazines and newspapers.

Many hon. Members have rightly recognised that the economy is now reviving, and have asked whether the new growth will be sustainable. It is essential not to return to the cycle of inflation followed by retrenchment and recession, which is often exacerbated by counterproductive if well-intentioned attempts by Governments to fine-tune the economy. Such attempts have characterised much of our history since the second world war.

The Chancellor is concerned about the danger of inflation—he said so recently to the Select Committee on the Treasury and Civil Service—and about the need to address it and see it off. Fortunately, there is a weapon to hand which is very appropriate in present circumstances. Interest rates on the continent are falling, but we must resist the always present temptation further to reduce our interest rates, and instead allow sterling to appreciate. I hope that the Government will take the opportunities that are presented in the next few months to do this.

One cannot have it both ways about devaluation. If it is conceived as an attempt to gain a permanent competitive advantage, it must be accompanied by measures that will retrench demand and release resources for export. That is the only way to ensure that the increase in import prices is not accommodated by demand, which must lead to a general increase in prices. That has not been the position over the past six months, because devaluation has been accompanied by a reduction in interest rates and a relaxation of fiscal policy until this Budget.

Devaluation has thus been conceived not as an attempt to gain a competitive advantage in export markets, or in domestic markets in internationally traded goods and services, but rather as a necessary concomitant of the reductions in interest rates over the past few months—the price we have had to pay for those reductions. That being so, it is right that, when the international situation permits it, we should allow that devaluation to be reduced, and thereby minimise or lessen the potential impact on price inflation of the rise in import prices. I hope that that will be done.

There are many good things in the Budget and I approve of the content of the Bill, but I fear that I cannot say the same thing about its drafting. It is almost an object lesson in how a Bill should not be drafted. It is far too long. I know that there is a great tradition in Finance Bills of low standards of bureaucratic obfuscation and prolixity, but the position is getting a great deal worse. My hon. Friend the Member for Milton Keynes, South-West (Mr. Legg) —I endorse his excellent remarks on the subject—drew attention to the absurdity of the passage about vans. I notice that the sensible and welcome changes in the rules for roll-over relief for business assets are spun out into 26 pages, with a text longer than that in which the original relief was cast some years ago.

Parts of the Bill are simply incomprehensible. Let me give the House one small nugget. Clause 138(1) says: An amount is available for relief under section 136 above for an accounting period if amount A is exceeded by amount B or (if amount C is lower than amount B) amount A is exceeded by amount C; and the amount available for relief for the period is the amount of the difference between amount A and amount B or (as the case may be) between amount A and amount C. That is disgraceful. Violence is done to justice because, if a citizen cannot understand the law—the central assumption of the law is that the citizen understands and knows it—then the citizen will be disadvantaged. In this case, people will not be able to claim the reliefs to which they would be entitled, or they will be penalised for making mistakes in their filing because they cannot understand the law. Economic damage will be done because the cost of compliance with such nonsense will increase. There will no doubt be an enormous improvement in the revenues of tax accountants and lawyers, but the burden will be borne by businesses and individuals.

I hope that the Chancellor will enjoy a well-deserved and general congratulation on having stuck to his policies, which are now coming right, through thick and thin. However, I hope that he instructs the Inland Revenue to hire a new parliamentary draftsman.

9.13 pm

Ms Tessa Jewell (Dulwich)

The concern of the House about the effect of the imposition of VAT on domestic and charities' fuel and power has rightly focused on the plight of elderly and poor people who live at home and who will now face increased bills. However, I should also like to draw attention to the problem that the measure will cause to charities, and particularly those serving the needs of the many people who can no longer live on their own but require the care of a residential nursing home or hospice.

The recession has had a serious impact on the ability of charities to respond to real needs through reductions in donations—a 67 per cent. fall according to a survey by the Charities Aid Foundation—and a significant increase in the demand for help from charities. The increase in the level of irrecoverable VAT that is paid by charities makes their vital job even harder. The Government have argued that charities should bear VAT on fuel and power for their non-business use, along with the rest of society. They also contribute to global warming, and therefore should be encouraged to save energy.

Such an argument reflects a blatant lack of understanding of the reality of such care provision. It is an inescapable medical fact that elderly, ill and disabled people need higher temperatures if they are to be cared for properly. Indeed, one of the ways in which cancer manifests itself is through the need for extra warmth, even in the height of summer. Thus, because of the direct needs of people in their care, the charities that provide the care are high energy users. They have a duty of care to their residents. We cannot, as a simple economic choice, ask them to reduce their energy consumption.

Of course, residential care providers are not the only charities that will suffer under the Government's measures —grant-making charities will also be affected. They too have had a significant increase in demand on their resources during the recession. Ill, elderly and disabled people on low incomes increasingly turn to charities for help. Their numbers are growing, and no doubt will grow even further with rising fuel prices. The Cancer Relief Macmillan Fund disbursed more than £3 million in patient grants in 1992, of which about £850,000—by far the largest category—was for grants for fuel.

It is also important not to ignore the effect of the measures on other charities that provide vital services. Equally hard hit will be organisations such as the Imperial Cancer Research Fund, which will lose £170,000 a year; Barnado's, which estimates a loss of £122,000 a year; and the Royal National Lifeboat Institution, which will lose about £80,000 a year.

The overall figure for the 300 members of the Charity Tax Reform Group is estimated to be about £27 million. Do not the Government realise that charities will have to spend vast amounts of money on VAT on fuel, instead of spending it on their primary purpose of provision of services? It is also fair to say that those who volunteer their help to charities do so to support those services; they do not stand on windy street corners rattling their collection boxes to raise money for VAT.

The problem should not be viewed in isolation from the wider context of the tax burden of charities. Whereas local authorities and commercial organisations can recover VAT, the services provided by charities are either exempt from or outside the scope of VAT. Charities are in a uniquely disadvantaged position, which will be made worse by the Government's proposal to levy VAT on fuel and power.

The Government's policy—which they claim encourages charitable giving—rather than offering what they call indiscriminate tax relief from the VAT that charities pay, is just a feeble attempt to face reality. While the measures on gift aid and payroll giving are welcome, what is really needed is a solution to the problem of irrecoverable VAT, which currently amounts to about £300 million a year.

The obvious solution would be the introduction of a VAT rebate scheme, under which charities could recover an agreed percentage of the presently irrecoverable VAT. That system already exists in Canada, where it works well. The Government have produced excuses for rejecting that proposal, which is popular with charities, including the excuse that it would be unacceptable to the European Community. When the Minister replies, perhaps he will confirm that that is the advice that the Government have received, which is in direct contradiction to the independent advice given to the Charity Tax Reform Group.

The Budget undermines the position of charities and their long-standing traditional reliefs. We cannot afford to lose the invaluable contributions they make to the well-being of those who are most disadvantaged in society, and to the community life of our nation. We want the Government to listen, to withdraw their proposal to charge VAT on fuel to charities, to undertake a long-term review of charity taxation, and to give renewed consideration to the introduction of a VAT rebate scheme for charities—which must no longer be penalised by the tax system. They deserve even this Government's help.

9.19 pm

Mr. Nicholas Brown (Newcastle upon Tyne, East)

They key issues that the Chancellor had to address in this year's Budget were problems caused by previous policy errors—negative economic growth, lack of performance in the British economy, and a substantial public sector borrowing requirement.

The Chancellor's policy for growth—showing him to be the Keynesian child of the 1960s that we all know him to be—is to cross his fingers and hope that devaluation and a high Budget deficit will provide sufficient stimulus for recovery. Since neither were his pre-election policies, there are those who allege that the Chancellor has stumbled into his present policy by accident. I do not take that cynical view. I can see a future for the Chancellor on his eventual retirement—lecturing at the London School of Economics and writing Tribune group pamphlets on demand management.

I am pleased that the Chancellor is now back on the radio, replacing the Home Secretary as the Government's principal spokesman on economic affairs. The Home Secretary was probably warned off by a passage in the Budget speech in which the Chancellor made special mention, in a sinister way, of his regret at sticking four and a half pence on a packet of live of the small cigars that the Home Secretary smokes.

Although the Chancellor's policy for economic growth cannot truly be called Conservative in the sense that the previous Prime Minister would have understood it. the right hon. Gentleman's policy for deficit reduction can truly be called Norman, in the sense that his 11th century namesakes would have understood it. The Chancellor is raising money by taking it from the poor. Of all the revenue-raising options open to him, he chose the most regressive.

This would not be an economic debate without Conservative Members seeing signs of economic recovery. In fact, The Economist provided some of the latest evidence of that. I noticed the Chief Secretary leaning on it a little. A recent article in The Economist reported that manufacturing output in February increased 2.5 per cent. on a year ago; business men are more optimistic about sales than at any time since 1989; new car sales were up 13 per cent. in the year to March; domestic air travel also increased 5.5 per cent. in the year to March—and even The Economist did not attribute that to rail strikes.

One must, however, be cautious about forecasting economic recovery on the basis of evidence provided by The Economist. Business men may be more optimistic about sales than at any time since 1989, but in 1989 similar wild optimism was followed by the economy shrinking 1.5 per cent. in the following 12 months. The Chief Secretary spoke about new car sales, but failed to make the point that, as the economy dipped into recession, those sales fell 45 per cent. before registering the more modest 13 per cent. increase that he did tell us about.

More significantly, today's GDP figures offer harder evidence of the recession coming to an end. I am surprised that the Chief Secretary did not make more use of them. Instead, breaking the habit of a lifetime, he even quoted with approval a survey by the AEEU.

In common with my hon. Friend the Member for Cambridge (Mrs. Campbell) and all my right hon. and hon. Friends, I hope that recovery is under way. The real issue is that 10 successive quarters of a shrinking economy have left a devastating and enduring legacy. It is no use Conservative Members talking about manufacturing output resuming growth when they are unwilling to acknowledge the 8 per cent. fall in output before growth resumed.

The recession has had a deep and lasting effect on the British economy. Any recovery will be from a lower base. Something like 3 per cent. of GDP has been permanently lost—a point well made by my hon. Friend the Member for Durham, North (Mr. Radice). Of course recessionary forces are at work in the international economy, but there are peculiarly British dimensions to our own recession—exacerbated by Government economic policy. The recession started earlier and has lasted longer, ran deeper and caused more lasting damage than recessions elsewhere in Europe or in the United States.

Between 1989 and 1994, according to the OECD forecast, growth in the G7 economies will average 9 per cent. The figure for the British economy over the same period is 1 per cent. That is an indication of the peculiarly British dimension to the problem. Even the Government admit to having presided over five years of stagnation in the British economy—although, in fairness, they tend not to express it in quite that way.

If the Government's growth forecasts are to be believed—like their pledge to stay in the exchange rate mechanism, and their promises to preserve the value of the currency, not to put up taxes and not to increase the rate or broaden the base of VAT—output in the British economy will not return to the level that it reached in the second quarter of 1990 until some time in 1995.Surprisingly enough, the Government's forecasts were much more optimistic before the general election, when a much stronger recovery was foretold. Before the election, the Chancellor told the House and the British electorate that output would grow by 2 per cent. in 1992–93, by 3 per cent. in 1993–94 and by 3 per cent. in 1994–95, and that there would be stronger growth than the Government now anticipate in the following years. That promise has turned out to be as well founded as all the others.

I know that, in politics, it is normal to look for points on which our opponents may not have been totally honest with the electorate, but—when we examine the Government's pre-election statements on economic policy—it is difficult to find a single significant issue about which they have told the truth. This lack of candour is designed to conceal the devastating effects of the last five years of economic stagnation. The delay in economic recovery has meant that capital has been strapped, and growth has been constrained by capacity at much lower levels without hitting the constraints of inflation or the balance of payments.

Before the general election, the Government were telling the British people that, in 1996–97, the economy would be 16 per cent. larger than in 1992.This year, that forecast has been revised downwards to 10 per cent. That revision downwards suggests that the Government concede that they were over-optimistic before the general election; no doubt, they hope that no one will attribute unworthy motives to them. They claim that an economic recovery is under way, and they reduce their growth forecast rather than increasing it. The truth is that, on the Government's own figures, by the end of this Parliament—should it run its course—output will be some 6 per cent. lower, and the country will be some £40 billion poorer —that is, £700 per year for every man, woman and child.

Mr. Butterfill

Will the hon. Gentleman give way?

Mr. Brown

I cheerfully give way to the hon. Gentleman.

Mr. Butterfill

Can the hon. Gentleman name another OECD country whose forecasting has been any more accurate? Does he think that Chancellor Kohl in Germany was any more accurate—particularly when he told the German people that unification would not cost them any more?

Mr. Brown

This is not an error of forecasting, but something a little more substantial. It is not a forecast which worries me so much—although, of course, it is possible in every speech to make fun of forecasts. I am worried about the outcome. Why are the other G7 countries able to do so much better in regard to growth rates up to 1994 than we are? Why is their figure 9 per cent., while ours is 1 per cent.? That is not a forecast; it is now almost a foreseeable outcome. The problem has a peculiarly British dimension. I do not think that the hon. Gentleman addressed it in his speech, but I shall be happy to give way to him again, although it is almost madness to do so.

Mr. Butterfill

The hon. Gentleman is traditionally over-generous. Perhaps he should look at the possible outturn for the other G7 countries in the next couple of years. I suspect that they are on a delayed path towards what has happened here.

Mr. Brown

I prefer to take a reasonable look at the cycle, rather than picking and choosing as the hon. Gentleman clearly does. I look forward to debating these matters with him in Committee: I can see that he is fighting hard to get on to the Committee, but he will be aware that, since the general election, the ratio between Government and Opposition is slightly smaller. As the hon. Gentleman has not always been a reliable vote for the Government in the past, I think that some pretty firm pledges will have to be given to those who organise these matters in the Conservative party before we can enjoy exchanges such as this late into the night and, indeed, into the early morning.

The Government's fibs about growth are as nothing compared with what they said about tax, in particular what they said about value added tax. I should like, however, to deal with two other matters.

The hon. Member for Surrey, North-West (Sir M. Grylls) mentioned unitary tax. There have been press reports today of the American Administration's decision. Although there is no difference in principle on this issue between the Opposition and the Government, we take it very seriously indeed and will seek to explore the Government's position in Committee. Amendments will probably be tabled to the clauses dealing with advance corporation tax. They will be designed to probe the Government's commitment to the retaliatory clauses.

Mr. Hugh Bayley (York)

I know that my hon. Friend is aware that the ACT proposals will have a bad effect on charities which enjoy income from investment in equities, but is he aware that the Joseph Rowntree charitable trust, based in my constituency, found that, if those provisions had applied last year, its income would have been cut by £110,000? Many of the projects which it co-funds with the Government would have gone by default. If the Government tax charities in that way, they will lose money for public welfare schemes. Will my hon. Friend give an undertaking that he and other Labour Members will press this point in Committee?

Mr. Brown

I can most certainly give my hon. Friend the assurance that he seeks. It would be peculiar to structure the changes that the Government intend to make in such a way as specifically to disadvantage charitable institutions. We intend to explore that issue in detail in Committee. My hon. Friend was right to raise it.

A number of hon. Members, most notably my hon. Friend the Member for Aberdeen, North (Mr. Hughes), referred to the petroleum revenue tax provisions. Again, we shall explore those provisions in detail in Committee. It will set the tone for those debates if I say now that we oppose the Chancellor's proposals for two reasons. First, we do not believe it right to rely solely on corporation tax as the mechanism for raising taxation from the North sea. If profits have fallen since 1986, that does not necessarily mean that they will not rise again. Relying on corporation tax may mean that the Exchequer is deprived of future revenue. Secondly, we should not like provisions to be enacted which could lead to a drop in North sea exploration, particularly when one appreciates that the North sea is in competition with other parts of the world for the interest of oil companies.

I turn now to a matter that every hon. Member, without exception, has mentioned either directly or indirectly—clause 42. If clause 42 were a poster, it would be used by Benetton to advertise its products. Clause 42 is a betrayal of a specific commitment, given by the Government before the election, so it may help Conservative Members, particularly those who have expressed reservations about it, to explore how it came about by following the progress of pledges given by those on the Treasury Bench in the run-up to and after the general election.

As early as 17 October 1991, the Financial Secretary's predecessor, Francis Maude, said in response to my hon. Friend the Member for Derby, South (Mrs. Beckett): I will give the hon. Lady a straight answer. That set the tone for what came afterwards. He continued: In the middle and late 1980s, we managed at the same time to increase spending … to run a substantial budget surplus and to reduce tax, and we shall be able to do so again."—[Official Report, 17 October 1991; Vol. 196, c. 426.] One out of three is not bad, but I am not sure that increased spending was the one out of the three that the hon. Gentleman would have chosen.

History continues. On 13 February 1992, John Maples, another member of the Treasury team who failed to get re-elected at the general election, told the House: We have no problem in this regard; we do not need to raise taxes"— apparently, hon. Members then shouted, "You have," and he continued: We have set out our tax and spending plans for the next three years. That was in February 1992, so it should have taken us through 1993, 1994 and 1995.He said that the Government did not need to raise taxes, but that turned out not to be true.

During the same extravagant Treasury Question Time Mr. Maples said: My right hon. Friend the Prime Minister has made it clear that we have no intention of raising the rate of VAT either before or after the election. That did not turn out to be true either. He later said: My right hon. Friend … has made it perfectly clear we have no intention of increasing VAT. We have made our plans on spending and tax perfectly clear. We do not need to raise VAT".—[Official Report, 13 February 1993; Vol. 203, c. 1106–08.] He said it often enough but, as we know, it was not true.

The present Secretary, of State for Employment was also at it. On 12 March, she said: I am happy to repeat the categoric pledges given by my right hon. Friends the Prime Minister and the Chancellor"— rope them all in— that there will be no increase in the standard rate of VAT either before or after the election. We have no need and have no plans to extend the standard rate or to put up other taxes." —[Official Report, 12 March 1992; Vol. 205, c. 961.] The latter part of that statement did not turn out to be true either, did it?

On 11 June 1992, after the general election, the present Paymaster General told the House: We have no plans and no need to raise or extend VAT, as my right hon. Friends have said on numerous occasions." —[Official Report, 11 June 1992; Vol. 209, c. 440.] On 10 December 1992, the Paymaster General was again asked whether the Government intended to increase or extend the standard rate of VAT or to increase other taxes. Referring to the general election, he told the House: Those categorical pledges stand as they did at that time." —[Official Report, 10 December 1992; Vol. 215, c. 986.] By 4 February 1993, however, the Government were getting coy. At Question Time, the Paymaster General tried to finesse a question by pretending that he thought that we were asking about the previous rather than the next Budget. In response to a question on 4 March 1993 —let us remember that the Budget was on 16 March—the Economic Secretary to the Treasury said that he could give the assurance that all these matters are carefully taken into account in assessing the Budget strategy."—[Official Report, 4 March 1993; Vol. 220, c. 446.] The Government resiled pretty late from a range of promises.

Lest anyone think that the Liberals have anything to be proud of, during the long exchanges about the rate and breadth of VAT, the Liberal spokesman asked about VAT, racehorses and the bloodstock industry, so he may be happy with the outcome and regard it as helpful in that narrow respect. In the more significant matter of VAT on fuel, charities and domestic consumers, however, they have rather missed the boat.

My hon. Friends the Members for Dulwich (Ms Jowell) and for Coventry, South-East (Mr. Cunningham) said that extending the VAT base was a highly regressive measure. If all zero-rated categories were included, it would raise about £10.7 billion for the Exchequer, but the poorest 10 per cent. of households would be £7 a week worse off. The richest 10 per cent. would be £11 a week worse off but, as proportions of household incomes, those figures represent 7 per cent. and 2 per cent. respectively.

Clause 42 is structured in such a way that it would be possible for it to be followed—next year, for example—by further extensions of the VAT base. Sewerage and newspapers, for example, might appeal to the Chancellor. When considering such matters, it is important that the House should realise that increases in the VAT rate and the shift from direct to indirect taxation have already had a regressive effect. The poorest 10 per cent. of households are 4.4 per cent. worse off than they would be if VAT were at its 1979 level—that is the case now, without taking these changes into account—while the richest 10 per cent. of households are just 2.9 per cent. worse off as a result of increased VAT.

It is true that the recession has taken its toll on the public as well as the private purse. On the question whether the tax increases will solve the problem, my hon. Friend the Member for Pendle (Mr. Prentice) rightly pointed out some flaws in the Conservative party's case. Public borrowing last year was more than £8 billion higher than the Chancellor expected at the time of the last Budget, and even turned out £1.5 billion higher than announced in this Budget in figures released just one month later.

Given the short-term problem of lack of demand in the economy, I can see why the Chancellor delayed some of his increases in taxation. But even when the sizeable increases announced in the Budget for future years have fully come into effect in 1995–96, they will reduce public borrowing by only one fifth. Even with five years of growth and three years of above-trend growth, on the Government's forecast public borrowing will still be 3.75 per cent. of GDP by 1997–98.Public sector debt will have increased from £150 billion to nearly £400 billion and will continue to increase. I think that we can therefore probably expect further regressive tax increases, perhaps even later this year.

In an excellent speech, my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said that we needed a policy for the long term—something more than is implied in an answer that the Chancellor gave my hon. Friend the Member for Wrexham (Dr. Marek) on 28 November 1991: He asked how we are going to pay for the borrowing. We shall pay for the borrowing by borrowing—that is the normal way in which one pays for it."—[Official Report, 28 November 1991; Vol. 199, c. 1062.] Clearly, the former Prime Minister was no longer in office, as she would not have let the right hon. Gentleman get away with that.

Every Opposition Member who has spoken has referred to the Conservative party's election pledges—that there would be no tax increases, no national insurance increases, no cuts in mortgage tax relief, no increase in value added tax, no broadening of the value added tax base, no devaluation; that there would be continued membership of the ERM; that the recession would come to an end a year ago—and to the phoney pre-election growth forecasts.

At the election, the Conservative party lied about our tax policies; now the electorate can see the extent to which it lied about its own tax policies. When the Conservatives said, "Labour will cost you an extra £20 a week," they did not go on to say, "whereas the Conservative party will only cost you £8.50" The Bill is constructed on dishonesty, and I urge the House to reject it.

9.43 pm

The Financial Secretary to the Treasury (Mr. Stephen Dorrell)

There is a relatively narrow strip of common land in the Budget and I want to begin on it following the speech made earlier by my hon. Friend the Member for Surrey, North-West (Sir M. Grylls) on the subject of unitary tax. My hon. Friend has played a distinguished part in leading the expression of the long-standing concern that exists on both sides of the House about that subject. I take this opportunity to state clearly that the Government continue to share my hon. Friend's view that the unitary tax concept legislated for in California is not one that we can recognise within a recognisable system of double taxation treaties.

The House should be in no doubt about the basis of the case that Barclays is bringing within the American courts. It is arguing, with our support, that any state tax system in the United States that collects an arbitrary share of the worldwide profits of a company is contrary to the existing double taxation treaty between Britain and the United States. We had understood that that view was shared by the American Federal Government. It appears that that is not the case, and the Government must therefore now review their position. I do not believe that a double taxation treaty can continue to exist indefinitely between two Governments who believe that it means different things. My right hon. Friend the Chancellor will be seeking clarification of the American Government's views when he is in Washington later this week.

On another matter on which there is a widely held view, let me comment on the opinion expressed by my hon. Friend the Member for Bristol, North-West (Mr. Stern) and several other of my hon. Friends who drew attention to the length of this year's Bill. My hon. Friends will be aware that the ambition of short, brief and clear legislation has been shared by Governments of all political complexions dating back to Oliver Cromwell, a distinguished predecessor of my right hon. Friend the Prime Minister as the Member for Huntingdon.

Oliver Cromwell once expressed an ambition to reduce the laws of England to the size of a pocket book. He did not make much progress in that direction and I suppose that we are some way behind. However, I give my hon. Friend the Member for Bristol, North-West the assurance that he sought: we shall resist, where humanly possible, the temptation to add further to the length of what we recognise is already a long Bill.

I want now to consider petroleum revenue tax, an issue in respect of which there is rather less agreement between the two sides of the House. We shall, of course, return to that subject in detail in Committee. However, it is essential to restate the elements behind the Government's proposed changes. Those elements have now gained a significant level of support in all parts of the oil industry.

Our approach is to cut by one third the marginal rate of petroleum revenue tax on existing fields, because we recognise that that will encourage development and therefore bring forward jobs in the development sector on existing and proven reserves and also because we recognise that the lower rate of PRT on existing fields will prolong the life of those fields.

It can therefore be said to be a measure designed to ensure that we recover the maximum economic reserves out of the North sea. We are also proposing to abolish PRT on future fields. As we are abolishing the tax on future fields, we are also abolishing tax allowances on future fields. The House should pause for a moment and recognise that it is rather strange to argue that we should keep a tax in place in order to operate a system of allowances. That is exactly the kind of system that we have now in many respects, and it has two characteristics which should not command support in the House.

The system has led me into the rather remarkable position—I suspect almost uniquely among tax Ministers —of being responsible for a tax system which, instead of raising money for the Government, actually costs the Government money. On figures published by the oil industry itself, in respect of a typical new field, the system has led to a subsidy from the taxpayer for oil production running at a rate of about £1.60 a barrel.

There is widespread recognition within the industry that that system cannot endure. Of course, the Government recognise that we must avoid unnecessary dislocation, and we shall seek to do that. However, the Government believe that it is equally obvious that the existing system cannot endure and must be changed.

Mr. Salmond

The Financial Secretary is quite wrong: the proposal in the Budget is losing support all the time, as is clear from the oil industry press. However, will he answer the question about consultation? Was there consultation with the Department of Trade and Industry and the Scottish Office before the proposal was announced in the Budget? Is it a piece of collective irresponsibility, or is the Treasury alone responsible for this shambles?

Mr. Dorrell

I certainly will not refer to the discussions that go on within Government. However, I will comment on the proposition that there should be consultation with the industry. It seems to be a rather odd proposition that, before a Government consider raising tax, they must engage in consultations to give notice of their intentions so that the industry can bring forward its activity to take advantage of the tax system that we are seeking to remove.

Mr. Robert Hughes

Will the Minister give way?

Mr. Dorrell

No, I want to move on to another issue that was raised by several hon. Members—the Government's proposals on VAT.

The Opposition's reaction to the VAT proposals has been interesting. In the months or six weeks since the Budget, they have launched a number of arguments against the proposals. They have been extremely fleet of foot moving from one argument to another as they discover that the arguments that they first mounted do not work.

The Opposition began by claiming that the distributional effect of t he Budget was unfair. That argument was shot down by the Institute of Fiscal Studies, which made it clear that the Budget raised roughly the same share of income across the income scale. Therefore, they cannot use that argument.

Labour Members then said that the Government would not make good the effect of the VAT changes on the poorest sections of the community. That was a clear scare, which was shot down by the words of my right hon. Friend the Chancellor in the Budget, when he made clear our commitment to provide extra help for those on means-tested benefits. The next argument was—

Mr. Nicholas Brown

Can the Minister tell the House whether the Government will compensate in full those people on state benefits for the cost?

Mr. Dorrell

Since Budget day, we have said clearly that we shall take account of the VAT changes in the benefit upratings which will be announced next autumn.

Labour Members then argued that the Government were not interested in fuel prices. Understandably, they moved off that quickly when they were reminded that, in the past 10 years, electricity prices have fallen by 8.5 per cent. and gas prices by 15 per cent., both of them in real terms. That is in sharp contrast to the 30 per cent. increase in real terms in electricity prices which was introduced by the Labour Government between 1974 and 1979—the period when the Leader of the Opposition was an Energy Minister. Labour Members had to move off that argument quickly as well.

Mr. Brown

Will the hon. Gentleman give way?

Mr. Dorrell

No.

Today, Labour Members argued that, because the VAT changes are revenue raising, they cannot also be motivated by the environmental considerations. That is a completely absurd argument. It calls to mind the words of former President Johnson when he was describing someone who he alleged could not do two things at once. He said that that politician was so dumb that he could not walk and chew gum at the same time. That may be true of some Labour Members: it is not true of Conservative Members. The VAT changes are part of a revenue-raising plan. We are not raising £3 billion by accident. The changes are part of our commitment to deliver the Rio objective, which is strongly endorsed, at least in theory, by the Labour party.

Mr. Brown

I am pleased that the Financial Secretary can make a speech and give way at the same time. I ask him again to give the House an assurance that people on state benefits will be compensated in full for the cost of the Chancellor's VAT exactions.

Mr. Dorrell

I have already responded to that point My right hon. Friend's Budget addressed the need to do two things. He clearly said that he needed, first, to sustain the recovery that was under way and, secondly, to take action to reduce the Budget deficit. The signs of recovery are clear. Even the hon. Member for Peckham (Ms Harman) brought herself to say through clenched teeth that every sign of recovery is welcomed. She carried conviction. The words passed her lips, but she moved on to the next business as quickly as she reasonably could.

Last week was a black week for the Labour party, because we announced that industrial production is growing here when it is falling elsewhere in Europe. We announced that retail sales are up by 3 per cent., car registrations are up by 12 per cent. and house sales are up by 15 per cent. on the same period last year. When surveys are taken of business opinion, they do not share the views of Labour Members. As though to underline the gloom of the Labour Front Bench, on Thursday we announced a drop in the level of unemployment for the second consecutive month. Clearly, it is too soon to say that it is the beginning of a trend. However, we know that it is not, in the words of the Opposition employment spokesman, a freak or a fiddle.

Mr. Brown

Every Opposition Member hopes that the recession is coming to an end. Will the Financial Secretary explain why the Chancellor found it necessary to revise his growth forecasts down and not up?

Mr. Dorrell

We shall be able to consider such issues in the Committee.

Against that background, my right hon. Friend concluded that it would be wrong to impose a tax increase this year. I welcome the endorsement of my hon. Friends the Members for Bridlington (Mr. Townend), for Slough (Mr. Watts), for Bournemouth, West (Mr. Butterfill) and for Milton Keynes, South-West (Mr. Legg) of that strategy. However, my hon. Friends rightly made their endorsement subject to two conditions, both of which the Government accept.

The first condition is that, while there will be no tax increase this year, there must be action to bring down the deficit in the medium term. That is why the Bill provides for what my right hon. Friend the Chancellor described as a tax wedge to address the budget deficit.

Mr. Jeff Rooker (Birmingham, Perry Barr)

Will the Minister give way?

Mr. Dorrell

No. I am dealing with some remarks made by my hon. Friends.

The second condition that my hon. Friends made clear was that action must not be confined to the revenue side of the balance. They said that public expenditure restraint was essential. The Government agree with that and wholeheartedly endorse it. The Government share with my hon. Friends a commitment to control inflation. We shall not inflate our way out of debt. They also share with my hon. Friends a commitment to control the burden of taxation. We shall not tax our way out of debt.

Given those two commitments, the iron laws of arithmetic determine that we shall have to deliver—and deliver we shall—our commitment to restrain public expenditure within what can be afforded in the medium term. All that is in sharp contrast to the Labour party. Like my hon. Friend the Member for Milton Keynes, South-West, I came to the debate keen to know what was the economic policy of the Labour party.

On monetary policy, is the Labour party in favour of going back into the ERM or not, and under what terms? Is it still in favour of economic and monetary union? Does it believe that monetary policy is too tight or too loose? Its monetary policy used to be to fix interest rates at 2 per cent. below the level fixed by the Government. What is its monetary policy now?

Not only on monetary policy are the questions unanswered. What is the Labour party's fiscal policy? Is the level of borrowing too high or too low? [Interruption.]

The shadow Chief Secretary, the hon. Member for Peckham (Ms Harman) says that it is too high. That is an interesting proposition. How will she deliver her commitment to reduce the spending plans of the Labour party to bring the Budget deficit down? How will she do that against the background of the commitment given by the hon. Member for Dunfermline, East (Mr. Brown) on "The World this Weekend" in January, when he said: I'm not talking about raising income tax or national insurance or VAT". He seems to have cast a large share of the burden for dealing with the deficit on the shadow Chief Secretary.

Either way, it is bad news for the hon. Member for Peckham. She cuts a rather sorry figure. There she sits —the political heir to Joel Barnett. Her job is to say no. Her job is to address the language of priorities and choices. Yet she prefers to live in a soft-focus world where to want is to have, where there are no choices, no difficult decisions, no priorities and no disappointments.

I remember well the days when the hon. Member for Peckham was a health spokesman. She would speculate about Labour's plans for spending on the NHS. Those speculations were expensive enough. Now she speculates not only about health but about education, training, employment measures and overseas aid. All that is against the background of the commitment made by the shadow Chancellor that there would be neither tax increases nor borrowing increases. The House and the country want to know who speaks with authority on behalf of the Labour party.

Labour's economic policy is like a much-loved ancient monument. It is a familiar part of the landscape. It undergoes the occasional face-lift, but its essential elements are passed lovingly from generation to generation. Like all such creations, it was never designed. Its distinctive shape, its higgledy-piggledy charm, are testament to the creative genius of the composite resolution. But the essential elements of the confection are clear. It was designed for a bygone era. The planners insist that successive generations maintain a range of adornments, the purpose of which is lost in the mists of time. Its maintenance would cost very large sums of public money. It has no relevance to today's economic needs. It is in sharp contrast to the Bill, which addresses today's needs and which I commend to the House.

9.59 pm

Mr. Jeff Rooker (Birmingham, Perry Barr)

rose—

Madam Speaker

Is this a point of order?

Mr. Rooker

It is not a point of order, Madam Speaker. I stood up to be called.

The Financial Secretary did not have an opportunity to give way to me, and I should like to spend a couple of minutes to make the point that I would have made had he done so.[Interruption.] If Conservative Members do not realise by now that the Second Reading of the Finance Bill is not subject to the 10 o'clock rule, they have now found that out. Incidentally, the Financial Secretary is no Robert Sheldon either.

I should like to take up what the Minister said about no tax increases this year. I was late arriving at the House today, because I took a few hours off to visit one of the shire counties in middle England. The local people, on the margin of the low-paid, asked me why I had not operated my tax law and why they will pay more taxes. I said that I would take the first opportunity to correct the record.

The Chancellor of the Exchequer is deliberately increasing taxes for 500 people in every constituency—that is the effect on the low-paid of freezing the tax allowances. It is no good the Financial Secretary saying that the Government are not raising taxes. How can it be justified for 500 of the lowest-paid people in every constituency, who would not normally pay tax, to be called upon to pay tax in order to pay for the tax reliefs to business? How can that not be called an increase in taxation? It is dishonest of the Government to claim that there has not been a tax increase when 300,000 people will pay tax in this tax year. They are some of the lowest-paid people, and the Government should be damn well ashamed of themselves.

The Government have said that the recovery is here, and they have quoted a catalogue of good news. How can we justify, therefore, the lowest-paid people being expected to face an increase in their tax burden from zero to 20p in the pound? That imposition is in addition to the added burden of VAT on domestic fuel.

We will debate this issue at some length in Committee. That is all that I wanted to put to the Financial Secretary. How can he justify the immorality of taxing 500 of the lowest-paid people in every constituency when the good times are now here?

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

The House divided: Ayes 310, Noes 266.

Division No. 249]	[10.3 pm
AYES
Ainsworth, Peter (East Surrey)	Burt, Alistair
Aitken, Jonathan	Butler, Peter
Alexander, Richard	Butterfill, John
Alison, Rt Hon Michael (Selby)	Carlisle, John (Luton North)
Allason, Rupert (Torbay)	Carlisle, Kenneth (Lincoln)
Amess, David	Carrington, Matthew
Ancram, Michael	Carttiss, Michael
Arbuthnot, James	Cash, William
Arnold, Jacques (Gravesham)	Channon, Rt Hon Paul
Arnold, Sir Thomas (Hazel Grv)	Chapman, Sydney
Ashby, David	Churchill, Mr
Aspinwall, Jack	Clappison, James
Atkinson, David (Bour'mouth E)	Clark, Dr Michael (Rochford)
Atkinson, Peter (Hexham)	Clarke, Rt Hon Kenneth (Ruclif)
Baker, Rt Hon K. (Mole Valley)	Clifton-Brown, Geoffrey
Baker, Nicholas (Dorset North)	Coe, Sebastian
Baldry, Tony	Colvin, Michael
Banks, Matthew (Southport)	Congdon, David
Banks, Robert (Harrogate)	Conway, Derek
Bates, Michael	Coombs, Anthony (Wyre For'st)
Batiste, Spencer	Coombs, Simon (Swindon)
Bellingham, Henry	Cope, Rt Hon Sir John
Bendall, Vivian	Cormack, Patrick
Berestord, Sir Paul	Couchman, James
Biffen, Rt Hon John	Cran, James
Blackburn, Dr John G.	Currie, Mrs Edwina (S D'by'ire)
Bonsor, Sir Nicholas	Curry, David (Skipton & Ripon)
Booth, Hartley	Davies, Quentin (Stamford)
Boswell, Tim	Davis, David (Boothferry)
Bottomley, Peter (Eltham)	Day, Stephen
Bottomley, Rt Hon Virginia	Deva, Nirj Joseph
Boyson, Rt Hon Sir Rhodes	Devlin, Tim
Brandreth, Gyles	Dickens, Geoffrey
Brazier, Julian	Dcrrell, Stephen
Brooke, Rt Hon Peter	Douglas-Hamilton, Lord James
Brown, M. (Brigg & Cl'thorpes)	Dover, Den
Browning, Mrs. Angela	Duncan, Alan
Bruce, Ian (S Dorset)	Duncan-Smith, Iain
Budgen, Nicholas	Dunn, Bob
Burns, Simon	Durant, Sir Anthony

Dykes, Hugh	Knight, Mrs Angela (Erewash)
Eggar, Tim	Knight, Greg (Derby N)
Elletson, Harold	Knight, Dame Jill (Bir'm E'st'n)
Emery, Rt Hon Sir Peter	Knox, David
Evans, David (Welwyn Hatfield)	Kynoch, George (Kincardine)
Evans, Jonathan (Brecon)	Lait, Mrs Jacqui
Evans, Nigel (Ribble Valley)	Lamont, Rt Hon Norman
Evans, Roger (Monmouth)	Lang, Rt Hon Ian
Evennett, David	Lawrence, Sir Ivan
Faber, David	Legg, Barry
Fabricant, Michael	Leigh, Edward
Fairbairn, Sir Nicholas	Lennox-Boyd, Mark
Fenner, Dame Peggy	Lester, Jim (Broxtowe)
Field, Barry (Isle of Wight)	Lidington, David
Fishburn, Dudley	Lightbown, David
Forman, Nigel	Lilley, Rt Hon Peter
Forsyth, Michael (Stirling)	Lloyd, Peter (Fareham)
Forth, Eric	Lord, Michael
Fox, Dr Liam (Woodspring)	Luff, Peter
Freeman, Roger	Lyell, Rt Hon Sir Nicholas
French, Douglas	MacGregor, Rt Hon John
Fry, Peter	Maclean, David
Gale, Roger	McLoughlin, Patrick
Gallie, Phil	McNair-Wilson, Sir Patrick
Gardiner, Sir George	Madel, David
Garel-Jones, Rt Hon Tristan	Maitland, Lady Olga
Garnier, Edward	Malone, Gerald
Gill, Christopher	Mans, Keith
Gillan, Cheryl	Marland, Paul
Goodlad, Rt Hon Alastair	Marlow, Tony
Goodson-Wickes, Dr Charles	Marshall, John (Hendon S)
Gorman, Mrs Teresa	Marshall, Sir Michael (Arundel)
Gorst, John	Martin, David (Portsmouth S)
Grant, Sir Anthony (Cambs SW)	Mawhinney, Dr Brian
Greenway, Harry (Ealing N)	Mellor, Rt Hon David
Greenway, John (Ryedale)	Merchant, Piers
Griffiths, Peter (Portsmouth, N)	Milligan, Stephen
Grylls, Sir Michael	Mills, Iain
Hague, William	Mitchell, Andrew (Gedling)
Hamilton, Rt Hon Archie (Epsom)	Mitchell, Sir David (Hants NW)
Hamilton, Neil (Tatton)	Moate, Sir Roger
Hampson, Dr Keith	Monro, Sir Hector
Hannam, Sir John	Montgomery, Sir Fergus
Hargreaves, Andrew	Moss, Malcolm
Harris, David	Nelson, Anthony
Haselhurst, Alan	Neubert, Sir Michael
Hawkins, Nick	Newton, Rt Hon Tony
Hawksley, Warren	Nicholls, Patrick
Hayes, Jerry	Nicholson, David (Taunton)
Heald, Oliver	Nicholson, Emma (Devon West)
Heath, Rt Hon Sir Edward	Norris, Steve
Heathcoat-Amory, David	Onslow, Rt Hon Sir Cranley
Hendry, Charles	Oppenheim, Phillip
Heseltine, Rt Hon Michael	Ottaway, Richard
Hicks, Robert	Paice, James
Higgins, Rt Hon Sir Terence L.	Patnick, Irvine
Hill, James (Southampton Test)	Patten, Rt Hon John
Hogg, Rt Hon Douglas (G'tham)	Pattie, Rt Hon Sir Geoffrey
Horam, John	Pawsey, James
Hordern, Rt Hon Sir Peter	Peacock, Mrs Elizabeth
Howard, Rt Hon Michael	Pickles, Eric
Howarth, Alan (Strat'rd-on-A)	Porter, Barry (Wirral S)
Howell, Rt Hon David (G'dford)	Porter, David (Waveney)
Howell, Ralph (North Norfolk)	Portillo, Rt Hon Michael
Hughes Robert G. (Harrow W)	Powell, William (Corby)
Hunt, Sir John (Ravensbourne)	Rathbone, Tim
Hunter, Andrew	Redwood, John
Jack, Michael	Renton, Rt Hon Tim
Jackson, Robert (Wantage)	Richards, Rod
Jenkin, Bernard	Riddick, Graham
Jessel, Toby	Rifkind, Rt Hon. Malcolm
Johnson Smith, Sir Geoffrey	Robathan, Andrew
Jones, Gwilym (Cardiff N)	Roberts, Rt Hon Sir Wyn
Jones, Robert B. (W Hertldshr)	Robertson, Raymond (Ab'd'n S)
Jopling, Rt Hon Michael	Robinson, Mark (Somerton)
Kellett-Bowman, Dame Elaine	Roe, Mrs Marion (Broxbourne)
Key, Robert	Rowe, Andrew (Mid Kent)
Kilfedder, Sir James	Rumbold, Rt Hon Dame Angela
Kirkhope, Timothy	Ryder, Rt Hon Richard
Knapman, Roger	Sackville, Tom

Sainsbury, Rt Hon Tim	Thornton, Sir Malcolm
Scott, Rt Hon Nicholas	Thurnham, Peter
Shaw, David (Dover)	Townend, John (Bridlington)
Shaw, Sir Giles (Pudsey)	Townsend, Cyril D. (Bexl'yh'th)
Shephard, Rt Hon Gillian	Tracey, Richard
Shepherd, Colin (Hereford)	Tredinnick, David
Shersby, Michael	Trend, Michael
Sims, Roger	Trotter, Neville
Skeet, Sir Trevor	Twinn, Dr Ian
Smith, Sir Dudley (Warwick)	Vaughan, Sir Gerard
Smith, Tim (Beaconsfield)	Viggers, Peter
Soames, Nicholas	Waldegrave, Rt Hon William
Speed, Sir Keith	Walden, George
Spencer, Sir Derek	Walker, Bill (N Tayside)
Spicer, Sir James (W Dorset)	Waller, Gary
Spicer, Michael (S Worcs)	Ward, John
Spink, Dr Robert	Wardle, Charles (Bexhill)
Spring, Richard	Waterson, Nigel
Sproat, Iain	Watts, John
Squire, Robin (Hornchurch)	Wells, Bowen
Stanley, Rt Hon Sir John	Wheeler, Rt Hon Sir John
Steen, Anthony	Whitney, Ray
Stephen, Michael	Whittingdale, John
Stern, Michael	Widdecombe, Ann
Stewart, Allan	Wiggin, Sir Jerry
Streeter, Gary	Wilkinson, John
Sumberg, David	Willetts, David
Sweeney, Walter	Wilshire, David
Sykes, John	Winterton, Mrs Ann (Congleton)
Tapsell, Sir Peter	Winterton, Nicholas (Macc'f'ld)
Taylor, Ian (Esher)	Wolfson, Mark
Taylor, John M. (Solihull)	Yeo, Tim
Taylor, Sir Teddy (Southend, E)	Young, Sir George (Acton)
Temple-Morris, Peter
Thomason, Roy	Tellers for the Ayes:
Thompson, Sir Donald (C'er V)	Mr. Timothy Wood and Mr. Andrew Mackay.
Thompson, Patrick (Norwich N)

NOES
Abbott, Ms Diane	Cann, Jamie
Adams, Mrs Irene	Chisholm, Malcolm
Ainger, Nick	Clapham, Michael
Ainsworth, Robert (Cov'try NE)	Clark, Dr David (South Shields)
Allen, Graham	Clarke, Eric (Midlothian)
Alton, David	Clarke, Tom (Monklands W)
Anderson, Donald (Swansea E)	Clelland, David
Anderson, Ms Janet (Ros'dale)	Clwyd, Mrs Ann
Armstrong, Hilary	Coffey, Ann
Ashton, Joe	Cohen, Harry
Austin-Walker, John	Connarty, Michael
Banks, Tony (Newham NW)	Cook, Frank (Stockton N)
Barnes, Harry	Cook, Robin (Livingston)
Barron, Kevin	Corbett. Robin
Bayley, Hugh	Corbyn, Jeremy
Beckett, Rt Hon Margaret	Corston, Ms Jean
Beith, Rt Hon A. J.	Cousins, Jim
Bell, Stuart	Cryer, Bob
Benn, Rt Hon Tony	Cummings, John
Bennett, Andrew F.	Cunliffe, Lawrence
Benton, Joe	Cunningham, Jim (Covy SE)
Bermingham, Gerald	Cunningham, Rt Hon Dr John
Berry, Dr. Roger	Dalyell, Tam
Betts, Clive	Darling, Alistair
Blair, Tony	Davidson, Ian
Boateng, Paul	Davies, Bryan (Oldham C'tral)
Boyce, Jimmy	Davies, Rt Hon Denzil (Llanelli)
Boyes, Roland	Davies, Ron (Caerphilly)
Bradley, Keith	Davis, Terry (B'ham, H'dge H'l)
Brown, Gordon (Dunfermline E)	Denham, John
Brown, N. (N'c'tle upon Tyne E)	Dewar, Donald
Bruce, Malcolm (Gordon)	Dixon, Don
Burden, Richard	Dobson, Frank
Byers, Stephen	Donohoe, Brian H.
Caborn, Richard	Dowd, Jim
Callaghan, Jim	Dunnachie, Jimmy
Campbell, Mrs Anne (C'bridge)	Dunwoody, Mrs Gwyneth
Campbell, Menzies (Fife NE)	Eagle, Ms Angela
Campbell, Ronnie (Blyth V)	Eastham, Ken
Campbell-Savours, D. N.	Enright, Derek
Canavan, Dennis	Etherington, Bill

Evans, John (St Helens N)	Jones, Martyn (Clwyd, SW)
Ewing, Mrs Margaret	Jowell, Tessa
Fatchett, Derek	Kaufman, Rt Hon Gerald
Field, Frank (Birkenhead)	Keen, Alan
Fisher, Mark	Kennedy, Charles (Ross, C&S)
Flynn, Paul	Kennedy, Jane (Lpool Brdgn)
Foster, Rt Hon Derek	Khabra, Piara S.
Foulkes, George	Kilfoyle, Peter
Fraser, John	Kinnock, Rt Hon Neil (Islwyn)
Fyfe, Maria	Kirkwood, Archy
Galbraith, Sam	Leighton, Ron
Galloway, George	Lestor, Joan (Eccles)
Gapes, Mike	Lewis, Terry
Garrett, John	Litherland, Robert
George, Bruce	Livingstone, Ken
Gerrard, Neil	Lloyd, Tony (Stretford)
Godman, Dr Norman A.	Llwyd, Elfyn
Godsiff, Roger	Loyden, Eddie
Gould, Bryan	Lynne, Ms Liz
Griffiths, Win (Bridgend)	McAllion, John
Grocott, Bruce	McAvoy, Thomas
Gunnell, John	McCartney, Ian
Hain, Peter	Macdonald, Calum
Hall, Mike	McFall, John
Hanson, David	McKelvey, William
Hardy, Peter	McLeish, Henry
Harman, Ms Harriet	Maclennan, Robert
Hattersley, Rt Hon Roy	McMaster, Gordon
Henderson, Doug	McNamara, Kevin
Heppell, John	McWilliam, John
Hill, Keith (Streatham)	Madden, Max
Hinchliffe, David	Mahon, Alice
Hoey, Kate	Marek, Dr John
Hogg, Norman (Cumbernauld)	Marshall, David (Shettleston)
Home Robertson, John	Marshall, Jim (Leicester, S)
Hood, Jimmy	Martin, Michael J. (Springburn)
Hoon, Geoffrey	Martlew, Eric
Howarth, George (Knowsley N)	Maxton, John
Howells, Dr. Kim (Pontypridd)	Meacher, Michael
Hoyle, Doug	Michael, Alun
Hughes, Kevin (Doncaster N)	Michie, Bill (Sheffield Heeley)
Hughes, Robert (Aberdeen N)	Milburn, Alan
Hughes, Roy (Newport E)	Miller, Andrew
Hughes, Simon (Southwark)	Mitchell, Austin (Gt Grimsby)
Hutton, John	Moonie, Dr Lewis
Illsley, Eric	Morgan, Rhodri
Ingram, Adam	Morley, Elliot
Jackson, Glenda (H'stead)	Morris, Rt Hon A. (Wy'nshawe)
Jackson, Helen (Shef'ld, H)	Morris, Estelle (B'ham Yardley)
Jamieson, David	Morris, Rt Hon J. (Aberavon)
Janner, Greville	Mowlam, Marjorie
Johnston, Sir Russell	Mudie, George
Jones, Barry (Alyn and D'side)	Mullin, Chris
Jones, Lynne (B'ham S O)	Murphy, Paul

Oakes, Rt Hon Gordon	Smith, Andrew (Oxford E)
O'Brien, Michael (N W'kshire)	Smith, C. (Isl'ton S & F'sbury)
O'Brien, William (Normanton)	Smith, Rt Hon John (M'kl'ds E)
O'Hara, Edward	Smith, Llew (Blaenau Gwent)
Olner, William	Snape, Peter
O'Neill, Martin	Soley, Clive
Orme, Rt Hon Stanley	Spearing, Nigel
Parry, Robert	Spellar, John
Pendry, Tom	Steel, Rt Hon Sir David
Pickthall, Colin	Steinberg, Gerry
Pike, Peter L.	Stevenson, George
Pope, Greg	Stott, Roger
Powell, Ray (Ogmore)	Strang, Dr. Gavin
Prentice, Ms Bridget (Lew'm E)	Taylor, Mrs Ann (Dewsbury)
Prentice, Gordon (Pendle)	Taylor, Rt Hon John D. (Strgfd)
Prescott, John	Taylor, Matthew (Truro)
Primarolo, Dawn	Thompson, Jack (Wansbeck)
Purchase, Ken	Tipping, Paddy
Quin, Ms Joyce	Turner, Dennis
Radice, Giles	Tyler, Paul
Randall, Stuart	Vaz, Keith
Rathbone, Tim	Walker, Rt Hon Sir Harold
Raynsford, Nick	Walley, Joan
Redmond, Martin	Warden, Gareth (Gower)
Reid, Dr John	Wareing, Robert N
Robertson, George (Hamilton)	Watson, Mike
Robinson, Geoffrey (Co'try NW)	Welsh, Andrew
Roche, Mrs. Barbara	Wicks, Malcolm
Rogers, Allan	Wigley, Dafydd
Rooker, Jeff	Williams, Rt Hon Alan (Sw'n W)
Rooney, Terry	Williams, Alan W (Carmarthen)
Ross, Ernie (Dundee W)	Winnick, David
Rowlands, Ted	Worthington, Tony
Ruddock, Joan	Wray, Jimmy
Salmond, Alex	Wright, Dr Tony
Sedgemore, Brian	Young, David (Bolton SE)
Sheerman, Barry
Sheldon, Rt Hon Robert	Tellers for the Noes:
Short, Clare	Mr. Jon Owen Jones and Mr. Alan Meale.
Simpson, Alan
Skinner, Dennis

Question accordingly agreed to.

Bill read a Second time.

Ordered,

That Clauses 42, 48, 52, 67, 115 and 183 be committed to a Committee of the whole House;

That the remainder of the Bill be committed to a Standing Committee;

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