HC Deb 12 May 1993 vol 224 cc813-57 4.11 pm
Mr. Nicholas Brown (Newcastle upon Tyne, East)

I beg to move amendment No. 48, in clause 52, page 30, line 34, leave out 'sections 257 and' and insert 'Section'.

The Chairman of Ways and Means (Mr. Michael Morris)

With this, it will be convenient also to discuss the following amendments:

No. 49, in page 30, line 34, leave out 'personal and'.

No. 50, in page 30, line 35, leave out 'allowances' and insert 'allowance'.

No. 51, in page 30, line 35, leave out 'amounts' and insert 'amount'.

No. 12, in page 30, line 37, after '1993–94', insert 'in respect of the married couple's allowance only'.

No. 52, in page 30, line 38, after '1993–94', insert 'so far as relates to section 257A of that Act.'.

No. 13, in page 30, line 38, at end add 'in respect of the married couple's allowance only'.

Mr. Brown

The amendments tabled by the Labour party would have the same effect as those tabled by the Liberal Democrats—although I see that no Liberal Democrat is here to speak to those, so it would probably be for the convenience of the Committee if I spoke to their amendments as well as ours. Fortunately, the amendments have been grouped together.

Mr. Tim Smith (Beaconsfield)

Where are they?

Mr. Brown

The hon. Member for Beaconsfield (Mr. Smith), who I understand will not be with us in the Standing Committee—that is a source of enormous regret to the Opposition—asks me to explain where the representative of the Liberal Democrats is. As the right hon. Member for Berwick-upon-Tweed (Mr. Beith) has just entered the Chamber, I can say, "There he is," or, "He is there, he is there," as the Prime Minister would point out in that inimitable style that he has made his own.

The other inimitable element of style that the Prime Minister has made his own is, of course, concealed tax increases, which we are discussing today. In case anybody has overlooked it—I am sure that no one in the Chamber has—I must explain that what is before the House is a massive increase, but a back-door increase, in direct taxation. [Interruption.] The Financial Secretary to the Treasury giggles at that idea. I do not know whether he giggles nervously or out of sheer physical exhaustion; after all, he has had to deal with the Maastricht legislation as well as with the Finance (No. 2) Bill.

I should be a great deal more sympathetic to the Government's concealed tax increases if some of them were being spent on procuring the landing platform helicopter vessel from Swan Hunter. I understand that the Treasury is taking the credit for the fact that the order has gone to Barrow-in-Furness rather than to Swan Hunter. If that is an opening shot in the negotiations, it is not a worthy one.

The tax increases before us are of substantial significance. The changes that the Budget invites us to make in personal allowances are designed, as the hon. Member for Dover (Mr. Shaw) will be well aware, to bring in an extra £2.5 billion for the Exchequer in 1994–95 and an extra £2.7 billion in the following year. Those are substantial sums.

That Tory trick has been tried before. In 1981, the then Chancellor froze all the allowances and gained an extra £2 billion. What I think will anger the electorate—last week's election results show the extent of public anger with the Conservative party—is not just the breaking of pre-election pledges about tax increases but also the sneaky way in which the Chancellor has gone about the increases. It is clear that Treasury files have been scoured for tried and tested ways of raising taxes that at least the Chancellor hopes the taxpayers will not notice. Clearly, however, they have noticed.

Let us take the obvious example. Although an increase of a penny in the pound in income tax would have been more progressive than a I per cent. increase in employees' national insurance contributions, the Chancellor chose the latter. This is not because such a move provides more help for the poor—obviously it does not—but because the Chancellor clearly believes that it does not look so much like a tax increase.

Mr. Tim Smith

Will the hon. Gentleman give way?

Mr. Brown

When I finish this point, I shall of course give way to the hon. Gentleman, who is a firm favourite of mine and of other Labour Front-Bench Treasury spokespersons.

Exactly the same sort of thinking as that to which I have just referred applies to the extension of valued added tax to domestic fuel and charities. It is pretty clear that the electorate have seen through these devices and are even more angered at the attempted deceit than at the tax increases themselves. What the Treasury team has given us are the methods of Arthur Daley, used by those who clearly regard Alan B'Stard as a role model.

I give way to the hon. Member for Beaconsfield (Mr. Smith), without the obvious implication.

Mr. Smith

I am sure the hon. Gentleman knows that the principal reason for increasing national insurance contributions is that the national insurance fund is now in substantial deficit. Indeed, it will still be in substantial deficit after the increase. I imagine that the hon. Gentleman supports the contributory principle on which it is based. Contributions must be increased when outward payments are rising.

Mr. Brown

It would have been more helpful if the hon. Gentleman had reminded us which party had scrapped the Treasury's contribution to the national insurance fund. If his case is based on hypothecation, why, a few years ago, did not the Government think that that was a very strong argument? The Standing Committee will miss the hon. Gentleman, as he brings to the arguments a quality that one does not necessarily find in all his hon. Colleagues. In making that comment, I do not intend to cast aspersions.

I should like to move on to the real topic of this debate— not just tax rises, but sneaky tax rises. Taken together, the Government's changes in allowances and the change to the lower rate band, which, in fairness, has also to be considered, will result in a net gain to the Exchequer of £2.7 billion by 1995–96. Of course this is significant. We should discuss the lower rate band as a reform, as a means of giving back to taxpayers more of their own money, alongside the freezing of the personal allowances, which is a means of taking from taxpayers more of their own money.

Let me state the brutal arithmetic. In 1995–96, the Chancellor will gain about £96 million from freezing all the personal tax thresholds, and another £1,170 million through further restriction of the married couple's allowance. On the last point, hon. Members will recall how thoroughly the Labour party was denounced during the 1987 general election campaign for proposing to do something similar. The present Prime Minister denounced our proposals, and then adopted them. To offset the substantial inflows to the Exchequer that I have just described, it is right to consider the cost of about £850 million to which it is said the lower rate band will give rise in the same financial year. That money goes back to the taxpayer.

However, the changes to mortgage tax relief gain an extra £870 million for the Exchequer. Here again, the Chancellor probably hopes that people will not notice or will not mind so much, as mortgage interest rates have come down following his spectacular policy of leaving the ERM and reducing interest rates. However, long-term interest rates are rising, and are certainly higher than short-term rates. We all know what that probably means for the future, although I am not sure that I agree with the Chancellor that letters to him urging rises in interest rates are a lead indicator.

Mr. David Shaw (Dover)

As one of the more sensible members of his party, does not the hon. Gentleman think that it is sensible for the Government to raise revenue to reduce a deficit which has been caused by a recession, not just in the United Kingdom, but worldwide? As he has raised the issue of the long-term rate of interest, surely he recognises that, by reducing the deficit, we will secure a better future, with a reduced long-term rate of interest. Does he not feel, in the national interest, that raising additional revenue in that way is good?

Mr. Brown

The hon. Gentleman certainly knows how to launch a wounding attack. Being described as one of the more sensible members of the Opposition Front Bench by the hon. Gentleman is designed to do me enormous damage on Tyneside, or at least among those who follow the debates in Committee on the Finance Bill.

The hon. Gentleman has obviously been following my speeches, including my reply to the Second Reading debate and my earlier speech on economic affairs, when I drew attention to the deficit and to the dangers inherent in it. The deficit is a problem. It would be a problem for us in government, as it is for the Government, but let us not forget how it came about. It was the Government who said before the general election that it was safe to reduce taxes and who say that recovery is happening, but yet have had to reduce, rather than increase, their growth forecasts.

Above all, it was the Government who in 1988 said that it was right to cut the top rate of income tax. The Labour party voted against that, after a huge fight about it during the passage of the legislation that year. I think that the hon. Gentleman served on the Standing Committee, so he will recall the events with some affection. It would be better if he showed sorrow and repentance, although those emotions and characteristics are not normally associated with him.

Moving to the Chancellor's tax hike, obviously he thinks that he can slip through this substantial tax increase —clearly that is what it is—without people noticing or objecting. He has allied to the changes on mortgage tax relief changes to car tax allowances, which will bring in an extra £370 million in 1995–96, and changes to the tax treatment of relocation expenses, which we will examine in detail in Committee, which will bring in an extra £206 million, not an insignificant amount.

When we add the gains from freezing all the tax thresholds and eroding personal allowances, and deduct the much smaller cost of the lower rate band, we arrive at a net gain to the Exchequer for the financial year 1995–96 of £2.7 billion. Expressed as a proportion of all revenues for the Government, that is an increase of 4 per cent. It is significant because of the way it is constructed. Particularly seriously for the Opposition, it is significant because it is also regressive.

The very poorest are not affected. One fifth of all adults do not pay income tax, even at the 20 per cent. rate, because they are too poor. They way to target help on the poorest is not through the tax system but through the social security system. However, I suspect that the Chancellor and the Chief Secretary were even less receptive to that point than usual when they came to construct this year's Budget. Of course, on past form it is not a point that one would expect the Secretary of State for Social Security to have raised or pressed with them.

The Institute for Fiscal Studies, in its green budget for this year, draws attention to the gains and losses from restricting allowances and from expanding the reduced rate band. For its calculation, it used a figure of £1,000 rather than the Chancellor's £500—the broad flow gives a similar distributional effect. The institute's work shows that the very poorest are not affected, because they are too poor to be affected by any change in the construction of the tax allowance system. The next poorest—those in the third, fourth and fifth deciles, who have below ordinary or medium means—are adversely affected by the change. People in the sixth, seventh, eighth and ninth gain slightly from the change, and the wealthiest 10 per cent. are also slightly adversely affected because they come into a higher rate band.

We are concerned, of course, about the regressive effect of the change—particularly the way in which it will impact upon those who are not the poorest in our society, but next to them. They are typically persons in work but earning £100 a week or less. The freezing of allowances and the expanding of the lower rate must cumulatively have a regressive effect.

Single people with incomes of £3,535 up to a level of £5,535 are £18 worse off because of the changes, but everyone with an income of less than £5,895 must be worse off with the lower rate band than they would have been with the indexation of personal allowances.

Because of this, the parliamentary Labour party has tabled an amendment whose intention is to restore allowances. By this means, we wish to help those in our society who are on poor wages. We object very strongly to the dishonesty of the construction of the Government's tax policies. We also object very strongly to the use of the lower rate band and the freezing of allowances to make changes which are demonstrably regressive.

Mr. Tim Smith

It is a matter of considerable regret to me that I shall not be serving on the Finance Bill Standing Committee and shall not have the opportunity of hearing the entertaining words of the hon. Member for Newcastle upon Tyne, East (Mr. Brown).

It is worth recalling the background to any debate on the indexation of personal allowances, especially as the hon. Member for Birmingham, Perry Barr (Mr. Rooker) is present in the Chamber. Hon. Members will recall that in the 1970s there was no obligation on the Government of the day to index personal allowances. When inflation reached 25 per cent., in 1975, there was pressure, not only from the Opposition of the day but also from the hon. Member for Perry Barr and his colleague who is now the hon. Member for Preston (Mrs. Wise), to change the law.

This was successful, and that change has been one of the most important and radical changes to tax law in the last 20 years. It is now incumbent on the House, if it does not want to index, to make a positive decision in that sense. The change was more important in those days, the late 1970s, when inflation was running at an average of about 15 per cent. per annum, than it is today. None the less, it is important even today.

A decision not to index these allowances should not be taken lightly. I would be the first to recognise that, if one does not index allowances, one is increasing the tax burden on those people on the lowest incomes. That was precisely the concern of the hon. Member for Perry Barr when he pursued this issue so assiduously, and ultimately so successfully, in the late 1970s. I am very glad that at that time the Conservative Opposition supported him in that endeavour, because it was a very important change.

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

I agree with what my hon. Friend is saying, and he is making an important point. I wonder whether he is aware of the statistical background against which this argument is taking place. Over the five years between 1974 and 1979, the Labour party cut the real value of the single person's allowance by 21 per cent. In the period since we have been in office, including this year's proposals, the single person's allowance has risen by 25 per cent. in real terms.

Mr. Smith

I am grateful to my hon. Friend for reminding the Committee of the background to the decision, but I was not surprised at what he had to say.

The concern of hon. Members at that time was not only that there had been substantial increases in tax rates in the Budget of March 1974—when Denis Healey had increased the standard rate of income tax from 30 per cent. to 33 per cent.—and in the following year's Budget of March 1975, when the standard rate was increased again from 33 per cent. to 35 per cent. In addition, we had 25 per cent. inflation and no indexation of tax allowances. As a result, not only was there a massive increase in the tax burden for every income tax payer, but his bore down particularly heavily on people on low incomes. That was the concern of the hon. Member for Perry Barr. By that time, much of the damage had been done, because changes were not made until the Finance Act 1977.

Mr. Jeff Rooker (Birmingham, Perry Barr)

It was 14 June 1977.

4.30 pm
Mr. Smith

It was 14 June, 1977. The hon. Gentleman has that date etched on his memory—rather as I do 28 April 1977 when, partly as a consequence of the huge changes in taxation, I was elected to the House for the first time. I remember the miners of Ashfield showing me their pay slips and telling me of the massive increase in the tax burden they had suffered under Denis Healey, the most unpopular Chancellor ever in Britain. We will never again have such an unpopular Chancellor because of such a massive increase in the tax burden.

Mr. Rooker

Will the hon. Gentleman give us a forecast of when he thinks the tax burden will once again be reduced to the level that it was left by Denis Healey?

Mr. Smith

At that time, people were concerned about direct taxation. Funnily enough, and it is a rather strange thing, most people have a good idea how much tax they pay—for example, in local taxation. My post suggests that people have a pretty good idea of how much council tax they pay. It is a tax with a high profile, as it should be. So is income tax. People get a pay slip every week and they can see how much income tax and national insurance is being deducted. However, if the average person in a pub was asked how much tax he had just paid on a round of drinks, fortunately, he would probably have no idea.

Mr. Alan Milburn (Darlington)


Mr. Smith

It is extremely fortunate, and it is true for all Governments.

There is no doubt that some ways of raising tax are less painful than others, simply because they have a lower profile. Some taxes have the advantage of being buoyant, some do not. There are many different considerations when one is deciding on the most sensible tax structure, but all those factors need to be taken into account.

At that time, people were concerned about direct taxation, and they are still concerned. They are concerned principally, but not exclusively, about tax rates, but they are also concerned about tax allowances and the point at which their income starts to be taxed. The minimum amount that one can earn before one has to pay tax is an important question, and we are considering it this afternoon. It is not a decision to be taken lightly to decline to increase the tax thresholds. One needs to give that serious consideration, and it is precisely what we are doing in the debate.

The hon. Member for Newcastle upon Tyne, East referred to the 1981 Budget. I am probably right in saying that it was the last occasion on which such a decision was taken. That may not be so, but it certainly involved a large increase in taxation. He referred to a figure of £2 billion, and I believe that was the figure by which taxes were increased in 1981.

Although the circumstances were not the same in 1981, they were similar in some ways. There is no doubt that the Budget in 1981 was extremely unpopular—of course it was; no one likes having their taxes increased, it is as simple as that—but it was also a very courageous Budget, which established the foundations for economic recovery throughout the 1980s, because it tackled the problem of the public sector borrowing requirement. The Chancellor, Lord Howe—Sir Geoffrey Howe, as he then was—made a clear commitment to sound finances on the part of the Conservative Government.

We had to deal with the difficult problem of the PSBR, and my right hon. Friend the Chancellor has done the same this year. This, too, is not a popular Budget, and we do not have to look far to see why. If we look at page 6 of the Red Book, we find that taxes are to rise by nearly £500 million in the current financial year, by more than £6.5 billion next year and by more than £10 billion the year after. Of course such measures are never likely to be popular.

Mr. Nicholas Brown

It would help my understanding of these matters if the hon. Gentleman could explain why —if the Government were as committed as he said to sound finances in 1981—the situation has since deteriorated to such an extent that it is necessary to have tax rises to reaffirm the same commitment that was given then? What has happened over the last 10, 11 or 12 years? Why have matters deteriorated in such a way that we need to hear the same speech?

Mr. Smith

I do not want to leap about like a grasshopper in what is a carefully prepared and thought out discourse. I will come to why we now face such a large PSBR, to which the hon. Gentleman referred in his speech.

The decision not to index personal allowances must be seen in the broader context of the important need to raise revenue to tackle the PSBR. The point that I was making is that Sir Geoffrey Howe in his 1981 budget did exactly that. It was extremely unpopular at the time, but it established a basis for economic recovery throughout the 1980s. It will not be long before we think the same about the 1993 Budget.

Mr. David Shaw

My hon. Friend says that this is not a popular Budget. Will he consider that very carefully? It has been popular with overseas holders of sterling, who have seen that the pound is worth supporting and that the Government have been running the finances well; it has been popular with overseas purchasers of gilts; the Government's borrowing requirement has been well met by support from overseas purchasers; it has been popular with business men, who feel that it is the basis on which recovery can be built; it is clearly popular with overseas investors, who still intend, as far as one can see, to locate their businesses here; it is clearly popular with the people who can help us create jobs in this country. Perhaps my hon. Friend will consider that it is a popular Budget with all the people who count, but what we must do is explain it to the people better—

The Chairman

Order. The hon. Gentleman is not being popular with the Chair. We are supposed to be discussing personal and married couples' allowances.

Mr. Shaw

I understand your point, Mr. Morris, but if I can make the key point—

The Chairman

Order. No.

Mr. Smith

I have to say that I was taking a rather narrow view of popularity: I was referring to the voters in my constituency. I accept what my hon. Friend says—he makes an important point—because, in the long run the Budget did appeal to the people he is talking about. They too recognise that the decision not to increase the personal allowances was not an easy decision to take. It was a difficult decision, but the right decision in the circumstances. In the long run, it will have very great benefits. There are two different contexts.

Mr. Clive Betts (Sheffield, Attercliffe)

The hon. Member is comparing the 1993 and 1981 Budgets, and he is saying that the latter laid the foundations for what he seems to think was a recovery in the 1980s, and that the former will do the same for the 1990s. But surely in 1981 it was unnecessary for the Government to freeze the uprating of personal allowances in line with inflation. Why then is it necessary in 1993, given that he has drawn the comparison between the two Budgets?

Mr. Smith

I think that I am right in saying that the Government did exactly that in 1981. The hon. Member for Newcastle upon Tyne, East (Mr. Brown) also confirmed that that was the case. That is why I was drawing a parallel with 1981. I was saying that on both occasions difficult decisions had to be made in order to provide a sound basis for economic recovery.

I want briefly to deal with a point raised by the hon. Member for Newcastle upon Tyne, East. He asked why the Government did not increase the standard rate of income tax, rather than, for example, increasing national insurance contributions. It is an important point that needs to be addressed. I suggested to him that it was because the national insurance fund is a separate fund. Some people tend to trivialise the matter and say that it is of no consequence, but I attach importance to this and to the contributory principle, for many reasons that it would be wrong to go into in the present debate. I accept what the hon. Member says about the Treasury supplement. I would like to see us get back to a national insurance fund which is properly funded.

What I wanted to say about the decision not to index the tax allowances was that it needed to be looked at in two contexts. The first is that of increasing taxes overall. That is what will happen. I have already quoted the figures to the Committee. It is one of a number of different measures, some of which could be described as more progressive than others. We could have some debate about which taxpayers will be hit hardest by this. I think that the figures that the hon. Member for Newcastle upon Tyne, East quoted earlier, from the Institute for Fiscal Studies, were prepared before the Budget. At least, it sounded like it to me, because he referred to an increase in the 20 per cent. band of £1,000 whereas, as I understand it, the 20 per cent. band will be increased by only £500.

Mr. Nicholas Brown

That is what I said.

Mr. Smith

Yes, the hon. Gentleman made that point, but I was suggesting that, as the figures from which he was quoting referred to £1,000, they must have been prepared before the Budget, or, if they were prepared after the Budget, they must have been prepared by someone who had not read the Budget properly.

Mr. Brown


Mr. Smith

Whichever it was, they were not very helpful figures, because they did not refer to what had actually happened.

Mr. Brown

The hon. Gentleman knows perfectly well that I said that I was quoting from the IFS's green budget, which was prepared in advance of the Budget. It is a document with which he is perfectly familiar. The graph on the distributional effect was prepared on the basis of £1,000, and I acknowledged that the band had been expanded by only £500. But it does not affect the broad distributional effect, the fact that the poorest neither gain nor lose because they do not pay tax, the next poorest lose and the people who are slightly better off may gain a little, but not a lot.

Mr. Smith


Mr. Dorrell

My hon. Friend might like also to ruminate on the fact that, although the hon. Member for Newcastle upon Tyne, East quoted from an IFS report on what might happen on the basis of its green budget, he very noticeably did not quote from the IFS analysis of what will happen as a consequence of the Government's actual Budget. It has analysed the distributional effect of the Budget, and the evidence that it has produced shows almost precisely the same tax take all the way up the income scale. Decile by decile, the effect of the Budget is the same, according to the IFS.

Mr. Smith

I am very grateful to my hon. Friend for confirming what I was about to say, which was that the hon. Member for Newcastle upon Tyne, East had, first of all, quoted from a document prepared before the Budget and, secondly, had looked at two measures in isolation rather than looking at all the Budget measures together.

Let me take one example, the taxation of company cars. We all know that the amount of benefit in kind which is subject to taxation if one has a company car has been increased year by year for the past five years or so, and has now reached the point—I fully support this, I may say —at which taxpayers are now required to pay tax on the full economic benefit of having a car. We also know that most people who drive company cars are on higher salaries, and we must take account of that in assessing the overall distributional effects of the Budget.

I am therefore most grateful to my hon. Friend the Financial Secretary for confirming what I believe—that it is important to look at all these cases together, although we are just debating the one change at the moment, the decision not to index tax thresholds. If we do that, we find that the effect is reasonably fair for everyone. We must all bear a bit of pain, and all income tax payers must pay a bit more.

One of the more important of the difficult decisions made by the Government to raise more revenue was not to increase the tax rate. Some people have said that it would have been more straightforward to do so, and they have asked why the standard rate or the higher rate of income tax was not increased. I believe that it would have been a mistake to do so.

4.45 pm

To increase either of the tax rates would have been a major disincentive for people, a step backwards. What my hon. Friends at the Treasury have done is to take another major step forward to a tax rate of 20p in the pound. That is very good news indeed. It is our ultimate objective, and we have taken another small but important step towards it in this Budget. In the long run, it will be a very popular decision. At the time of last year's Budget, the decision was derided by some. They said that the Chancellor had got it wrong, but only a few weeks later, the electorate decided that the Chancellor had got it right. It was the right decision to introduce a 20p tax band. It was a decision that I supported, and I very much welcome the present decision to increase the tax band.

I want to have a look not just at the need to fund the public sector borrowing requirement, although I feel that it is incumbent on Opposition Members, if they object to every tax increase, to say where they would get the money from. It was noticable in Monday's debate that the hon. Member for Peckham (Ms Harman) consistently refused to say how a Labour Government would increase taxes. That is not a responsible action. With a large PSBR, some decisions to increase taxes are necessary, and we should be told what the Labour party's alternatives are. But I do not suppose that we will hear anything about that in this debate. [Interruption.] Does the hon. Gentleman wish to say something? If so, it is normal practice here to stand up.

Mr. George Howarth: (Knowsley, North)

If the hon. Gentleman is trying to tempt my hon. Friend the Member for Peckham into responding, perhaps he could say how he thinks the Chancellor should fund the PSBR next year. If he cannot do so—and I suspect that the Chancellor cannot —how can he expect my hon. Friend to say how she would do it in two or three years' time?

Mr. Smith

There are published proposals that take us through to March, 1996, three years away. They are projections, but what else could they possibly he? They cannot be statements of faith.

I will tell the hon. Gentleman something. The Treasury has been widely criticised for failing to forecast what the PSBR is likely to be, but I refer the hon. Gentleman to a table in the Red Book—which I will probably be unable to find now because of the size of the Red Book and the fact that I need to keep on talking while I look for it. Because we now have a panel of independent advisers, somewhere in the Red Book—my hon. Friend the Financial Secretary may be able to find it for me—is a very interesting table which shows that each of the independent forecasters has made a separate forecast for the PSBR, and that in 1995–96 the discrepancy, if I remember rightly, is between £20 billion and £50 billion.

That demonstrates the difficulty of forecasting a figure which is itself the difference between two very large figures. It is like trying to forecast the balance of payments. So what the hon. Member for Knowsley, North (Mr. Howarth), who keeps intervening from a sedentary position, should appreciate is that forecasting is an extremely inexact science.

While the Treasury has got it wrong, so has every other economic forecaster. The table, which I now learn from my hon. Friend the Financial Secretary is on page 54 of the Red Book, shows that Mr. Wynne Godley has the highest forecast of PSBR, at £60 billion, in 1994–95. It is only next year that we are talking about, less than a year away. Mr. Godley is forecasting £60 billion, whereas Mr. Congdon is forecasting £38 billion, a difference of £22 billion in the forecast of the PSBR for next year. That illustrates the difficulty in forecasting the PSBR.

Mr. Robert Ainsworth (Coventry, North-East)

Would the hon. Gentleman care to make a few comments on the forecast immediately before the last election of tax decreases year on year, made by the Chancellor—and the Prime Minister, I think?

Ms Harriet Harman (Peckham)

That was not a forecast; it was a promise.

Mr. Smith

Unfortunately, I do not have last year's Red Book with me, so I cannot say what tax decreases were forecast. But, of course, the main tax decrease that was proposed in last year's Budget was the introduction of the innovative 20p tax band to which I have already referred, which was opposed by Opposition Members but was widely supported by the electorate only a month later in a general election.

Mr. Jim Cunningham (Coventry, South-East)

I accept what the hon. Gentleman said about the 20p or 20 per cent. tax band, but does he not agree that that was offset last year and this year—last year by the increases in VAT and this year by the proposed increases in VAT?

Mr. Smith

I have already said that increases in taxes are unpopular, but Governments have to make unpopular decisions sometimes, in the national interest. That was an unpopular decision that will form the basis for sound economic recovery.

Mr. David Shaw

My hon. Friend is talking to an amendment on revenue raising and the issue whether we should be raising additional revenue. He drew attention to the fact that the Opposition spokesman, the hon. Member for Peckham (Ms Harman), refused to detail how alternatively she would raise additional revenue. Does he conclude that, if she proposes to keep the PSBR the same, she now really wants to reduce public expenditure? Is that not a major change for the hon. Lady and the Labour party? Does the Labour party now want to cut public expenditure significantly, if it will not raise additional revenue?

Mr. Smith

I am very sorry to disillusion my hon. Friend, but I recall that, in her speech on Monday, the hon. Lady's solution to the PSBR was to cut taxes and increase spending. She said "Let's have more spending on education and training, and let's have more investment allowances for companies." That means lower business taxes and higher public spending. I am only a simple accountant, but if one cuts taxes and increases spending, I think I am right in saying that one adds to the PSBR. So I do not think that the hon. Lady's solution is the right one.

My hon. Friend the Member for Dover (Mr. Shaw) is entirely right. There are only two possibilities: one has either to increase taxes or to cut public spending. Those are both difficult and unpopular decisions that Governments have to take.

The second yardstick by which this matter should be considered is the decision in the Budget to devote what help was available to business ensuring that the tax cuts that could be made went to business. That was the right balance, I think, at the present point in the economic cycle.

As my hon. Friend the Member for Dover said, as a result of that, this Budget was widely welcomed by business. If we look at the table on page 6 of the Red Book, we can see why. The decision not to increase business rates by more than indexation will cost the Exchequer £370 million this year, but that decision has been widely welcomed by business, as has the decision debated last night to improve VAT relief on bad debts. That will cost £150 million in the current year, but it will bring immediate relief to many companies that have cash flow difficulties.

There is an important balance here between business taxes and personal taxes. I believe that the Government have that balance right, too, so it was right in the Budget to make some increases in personal taxation, and that is why I support the clause.

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

The trouble with the small, but important, steps towards the 20p band to which the hon. Member for Beaconsfield (Mr. Smith) referred is that individually they often have the effect of not helping the poorest and lowest earners. That is a point to which I shall return in a moment. To be in favour of a general objective is not necessarily the same as supporting proceeding to it by steps which do not in themselves help the people it is supposed to help.

We have on the Order Paper two amendments with the same objective as the amendments that the Labour party has put forward today. They would stop the Government from failing to increase the personal tax allowance, but continue the freezing of the married couple's allowance. By a neat bit of gazumping, the Labour party in the course of the past three days put down more amendments, thus widening involvement in this debate.

The freezing of the personal income tax allowance brings more people into tax. I remember speech after speech by Chancellor after Chancellor and Financial Secretary after Financial Secretary saying how many people the Government were taking out of tax. If one freezes personal income tax allowances, one brings more people into tax, and they are by definition people at the lowest levels of income.

The married couple's allowance is not in the same category. Some people regard it as an anomaly because it is not related to whether there are children in the family. Freezing it seems to have become quite a common practice and to enjoy reasonably widespread support, but we would support that only so long as child benefit continues to be uprated annually, at least by the rate of inflation.

The Government are selling their 20p tax rate as if it is helping those on low incomes and is in some way a better measure than indexing the tax allowance. That is patent nonsense. The small steps taken towards the 20p tax rate, such as the one taken in this Budget, are not a significant way of helping those on the lowest incomes. It is, indeed, a kind of deception of the British people.

If steps to the 20p rate are paid for by not indexing the basic rate, one hurts the people the policy is supposed to assist. Every person with income above £3,445 will lose £18 a year, because the personal allowance should have been uprated by 2.6 per cent.—using the December 1992 RPI—to £3,535, which is £90 higher, and since they would have paid tax at 20p on that £90, the loss is £18.

Instead of uprating the allowance, the Chancellor has widened the 20p band, but this applies only to people with incomes above £5,445, so the income tax deduction from the new wider 20p band begins to offset the tax increase from not indexing only for people who have annual incomes above £5,445. It is only at incomes above £5,805 that the income tax cut from the wider band offsets the increase from not indexing the allowance, so from the point of view of those on the lowest incomes it is a poor bargain; they would have been much better off if the tax allowance had been indexed. The Chancellor continues to boast that the extension of the 20p rate is assisting the poorest in society, but in fact it does not have that effect.

The Budget shows the real reason why the 20p band method appeals: it can bring in more revenue by sleight of hand than it costs. The cost of extending the 20p rate by £1,000 will be £710 million in 1994–95 while the revenue raised from restricting mortgage tax relief to 20p in 1994–95 will be £820 million. The revenue raised from restricting the married couple's allowance to 20p in 1994–95 will be £910 million while the revenue raised from restricting the taxation of dividends to 20p will eventually be nearly £1 billion in a full year. So the gain to the Exchequer is larger than the cost. One begins to smell a rat when one sees that happening; one discovers that it is not a measure to help the lowest paid and it is also a revenue-raising measure.

The Chancellor, nearer the next election, will announce that he is widening the 20p band yet again. I use the word "Chancellor" in the way in which the Prime Minister now uses it, to denote whoever happens to hold that office. I say that advisedly because I have been passed a note saying that the Chancellor, speaking elsewhere, is announcing at this very moment that he does, after all, have some regrets. I have no information about which matters he regrets—we shall discover that on another occasion.

When his successor, whoever that may be, announces that he is widening the 20p band again to give millions of people a tax cut, will he point out that that 20p band has cost people money? The numbers will work out in favour of what the Chancellor claims to be his policy only if he fully replaces the 25p rate by the 20p rate. Given the PSBR forecast, there cannot be any serious possibility of that happening.

5 pm

The hon. Member for Beaconsfield (Mr. Smith) referred to the basic decision in the Budget not to increase the standard rate, but instead to use the national insurance contribution as the means of raising the equivalent of a penny, or somewhat less than a penny, on the standard rate of income tax. The hon. Gentleman justified that by reference to the national insurance fund and to the fact that the insurance fund will be in deficit if that is not done. But it will still be in deficit even if that is done. This action is not a balancing act or an actuarial balancing of a contributory national insurance fund, but the Government raising a penny on income tax without breaching the doctrinal objection to raising a penny on income tax which their election commitments represent.

As the Government have broken so many of their other election commitments in the tax area, I think that we, as Opposition parties, could now absolve them from any further commitment or responsibility at all. Nobody believes that the Government are bound by any of those promises any more, so they are entitled to start assessing what might be good for the country as opposed to which of their promises they are prepared to break and which they are not prepared to break.

If the Government are to raise the equivalent of a penny on the standard rate, they should do it by the standard rate system and not by a system which fails to tax higher levels of income, fails to tax benefits and perks and fails to tax investment income. That is not a sensible route to take.

Mr. Tim Smith

Will the right hon. Gentleman confirm that it is Liberal Democrat policy to increase the standard rate of income tax?

Mr. Beith

We are in a rather different position from that of the hon. Gentleman's party. At the general election, we told people that in some circumstances we would raise the standard rate of income tax, and we defined those circumstances. The hon. Gentleman, who said that he would never raise the standard rate, can hardly criticise me when he now represents and appears to support the actions of a Government who have done so, and who have done it through the national insurance route and have used a quite spurious argument for doing so.

Mr. Dorrell

Would the right hon. Gentleman make it clear that he is distinguishing his position from that of the Labour party by saying that he is still bound by the commitments that he gave to the electorate at the general election?

Mr. Beith

That is an odd question from a member of the Government: I cannot fathom its intricacies, particularly in reference to the Labour party. I shall seek to uphold the policies and ideas that we put forward at the election. I hope that the Conservatives, like most political parties, will have the sense to notice if they are occasionally wrong. The Chancellor has announced that he now has some regrets, but so far I see no reason to change any of the policies that we advanced at the election.

Mr. Thomas Graham (Renfrew, West and Inverclyde)

The right hon. Gentleman will remember that, just weeks before the general election, the Conservatives were accusing the Labour party of proposing a £36 billion PSBR. Yet the Conservatives are now introducing proposals similar to those advanced by the right hon. Gentleman. After one year of this Conservative Government, the country is in an economic mess. I am sure that if we had a good look at the books any one of us could do a better job than the Government are doing.

Mr. Beith

It is nice to have such robust help in Committee. The hon. Gentleman makes a fair point.

I wanted to argue the merits of being straight about using the standard rate rather than disguising standard rate increases through national insurance increases which do not bear fairly on people and do not raise so much revenue. The reason for that is that they do not apply to levels of income above £420 per week, they do not apply to benefits and perks, and they do not apply to investment incomes. We have proposed ways in which we could move from the present system to the wholesale amalgamation of national insurance with the income tax system. If the Government propose to add to the tax take, they should at least do so by using the standard rate income tax system.

There are huge costs to the Government and even greater costs to business from our persistence in running the two systems side by side. I do not share the belief of the hon. Member for Beaconsfield that we can somehow resurrect the contributory system which, in effect, has been destroyed. There is no actuarial balance in the fund; it is all a myth. The hon. Gentleman knows that perfectly well; otherwise, he would tell me that there was not a £2 billion deficit in the national insurance fund and that it was all covered. He knows perfectly well that it is not covered and that the fund is not in balance.

Mr. Tim Smith

Entitlements to benefits depend on contributions. That is a good thing. Is the right hon. Gentleman saying that he would sweep all that away as well?

Mr. Beith

The hon. Gentleman must also know that most of what is paid out in the form of benefits is not based on contribution entitlements. The contribution side now plays a small part. The hon. Gentleman should reflect sometimes on the extraordinary position in which people such as his constituents find themselves. As Members of Parliament, we have to give them a letter which explains that their failure to make two contributions in 1956, of which they were unaware at the time, has left them unable to claim a benefit now. The whole system is creaking and groaning, and it is time for it to be replaced by one which streamlines the two measures. However, that takes us wide of the clause.

I am arguing that the Government are trying to use a variety of other devices to avoid doing what they would otherwise be doing in the circumstances. They would be saying, "We got it wrong; the economy was in far worse off a mess than we said; the PSBR is appalling and will continue to be appalling; we must raise more tax and we shall therefore raise the standard rate." That is what the Conservative Governments might have done in previous years, but they do not do it now because they have made a fetish of never raising the standard rate of income tax.

When we think about the allowances, we are bound to reflect on the strange perks and loopholes which still exist in the system. At the moment when the Government are exacting from people the extra costs of not indexing the allowance, Ministers appear still to enjoy the perk of having cars to drive them from their homes to their Departments. They still appear—I say "appear" because I get very evasive answers from Ministers—not to be paying tax on a benefit which is taxable for anyone in an equivalent position.

All sorts of mysterious perks and hidden benefits are still tucked away in the tax system. Such perks never work to the benefit of people at the lowest levels of income. Those people are hit by the full force of the pay-as-you-earn system, and if they are at the bottom of the scale they are hit far more forcefully than those at higher levels of income who do not have to bear the higher cost of national insurance contributions.

Mr. Milburn

The right hon. Gentleman says that he receives evasive replies from Ministers. I do not know whether he had an opportunity to read The Guardian this morning. The Financial Secretary is quoted there and I thought that his reply was far from evasive. He made it clear that, if he had to pay the full tax that was due on the perk, he would get up and walk.

Mr. Beith

Not only did I read the article, but there is a quotation from me in it, as the hon. Gentleman may recall. I do not remember those words being attributed directly to the Financial Secretary. A number of other interesting comments were attributed to other Ministers, or were said to have been made by unnamed Ministers.

In the course of the day, it has been drawn to my attention that, when the basis on which the concession appears to exist was introduced—it was part of a change made by Denis Healey when he was Chancellor which was intended to bring all journeys to work within the tax system—Ministers were told that it would not affect them and that it might be a good idea if they occasionally gave their civil servants a lift because that would help to emphasise the fact that the car was for business use and not a perk.

Mr. Tim Smith

Did Denis Healey say that?

Mr. Beith

I do not know who gave the advice, but I believe that such advice was given.

The clause and the amendments relate to those at the bottom of the tax scale who get none of the little let-outs and loopholes. They bear the full brunt of tax, and in a number of respects they will be disadvantaged by the small steps towards a 20p band if those small steps are financed by tax allowances not being indexed.

The work done by the hon. Members for Preston (Mrs. Wise) and for Birmingham, Perry Barr (Mr. Rooker) in the famous amendment was an important part of tackling poverty. It was a measure to ensure that the Government did not continue without statutory or parliamentary authority to scoop tax from those least able to bear additional tax burdens. In any year in which the Government fail to abide by the Rooker-Wise principles, they deserve to be challenged and tested, because the case that they have advanced for gaining extra tax income to deal with the PSBR is not improved when elements of that tax income seem to be earned unfairly from those least able to bear it.

The case is undermined by the fact that the failure to spend money on various investments has prolonged the recession and, therefore, increased the PSBR. If the Government want to come to the House and say, "Yes —we made a mess, we have a problem and we have a huge public sector borrowing requirement; as the Red Book shows, we shall have a huge public sector borrowing requirement even if we get growth; yes, we need to raise tax revenue to get that growth," why do they not use known, fair and trusted parts of the tax system to raise that revenue instead of raising it by the back door?

Mr. Milburn

My hon. Friend the Member for Newcastle upon Tyne, East (Mr. Brown) described the freezing of personal allowances as a sneaky measure. He is absolutely right, because the freezing of personal allowances is a tax rise in all but name. The measure will hit both ends of the income scale. It will bring more people on middle incomes into paying tax at the higher rate. It will have a serious impact on poorer families in my region—hon. Members will know that my region has the greatest concentration of low-paid people in the country. It will ensure that they pay a hefty price for the Government's economic mismanagement.

I was taken by the speech of the hon. Member for Beaconsfield (Mr. Smith), who managed to dig himself into a substantial hole by arguing that, in 1981, it was necessary to do exactly what is being done now, in the hope that it would never be done again. However, 12 years later we have more unemployed people, a bigger public sector borrowing requirement and graver economic circumstances than ever before. Who was in charge during that period? It was certainly not the Labour party. The Minister and his hon. and right hon. Friends got us into the current mess. Frankly, the poorest people in the country are now paying the price for that mess.

The measure before us today is not only a tax on the poor—it is a tax on my region in the north. Across the country, 300,000 people who do not pay tax at present will be brought into the tax net for the first time. The 4.5 million people who are low-paid and who pay tax at the 20p rate at present will also lose. They will not gain a penny from the extension of the 20p band, but will lose from the freezing of allowances. They will be asked to contribute to the £700 million tax bill that the freeze on allowances will cost taxpayers.

As usual, the Red Book is fairly categorical. We are talking about enormous sums of revenue that will be raised by this back-door tax rise. Inevitably, the measure will penalise those who are least able to pay. That is in keeping with the Government's record of switching the tax burden from the rich to the poor in the 1980s. The poor were certainly not invited to the tax-cutting party of the 1980s, but they are now being asked to clear up the mess. The hon. Member for Beaconsfield and his hon. Friends are to blame for that situation.

Mr. Tim Smith

Did the hon. Gentleman not hear the figures that my hon. Friend the Financial Secretary gave to the House? Under this Government, the personal tax allowance has risen substantially in real terms, whereas it fell under a Labour Government. If the Labour party is so committed to the eradication of poverty, why did a Labour Government so furiously resist the Rooker-Wise amendment?

Mr. Milburn

If the hon. Gentleman has read this Red Book and previous ones, he will know that the tax system has changed over the past 14 years, from one in which the rich paid more tax than the poor to one in which the poor paid more tax than the rich. It is a Robin Hood in reverse —and the figures are categorical. As the Financial Secretary knows, between 1978–79 and 1992–93, a typical family on average earnings has seen its tax burden rise from 35.2 per cent. to 36.7 per cent. of its income. Between 1979 and 1990, the poorest 20 per cent. of households saw their tax bill rise from 30.7 per cent. to 39.7 per cent. of their income, while the top 20 per cent. saw their tax take a fall from 37.3 per cent. to 33.5 per cent.

Mr. John Butcher (Coventry, South-West)

I refer the hon. Gentleman to some questions tabled by the then Labour Front-Bench spokesman, the Member for Blackburn (Mr. Straw), about the effect on the tax take of reducing the top income tax rate from 60p to 40p. What he discovered in hostile questions was that not only the cash amount from the richest section of the community increased but the proportion which the richest section of the community contributed to the total tax take increased as well. The supply side effect was real.

5.15 pm
Mr. Milburn

The hon. Gentleman must have read my speech, because I am coming precisely to the effect of the top rate tax cuts and the contrast between the 1988 giveaway Budget under Chancellor Lawson and the current Budget.

The shift in the tax burden from the rich to the poor has been achieved by deliberate Government policy instruments. For the poor, it has been achieved by shifting the burden of taxation from direct to indirect taxes.

At the same time, a growing number of people on low incomes have been drawn into paying tax through fiscal drag, as their tax-free income has shrunk in relation to average earnings. For the rich, the shift has been achieved by huge cuts in the top tax rate. I shall refer to that point in a moment.

Mr. Robert Ainsworth

We repeatedly hear the point made by the hon. Member for Coventry, South-West (Mr. Butcher). The issue is that, by putting the tax burden on the rich, we are getting more tax from them. Is it not the case that that is a deception, and that the real reason why we are getting extra taxation is that many more people pay it because the indexes have not been raised in line with inflation in the way that they should be? Is that not something that the Government repeatedly try to get away with?

Mr. Milburn

As always, my hon. Friend is absolutely right. It is yet another case of the Government trying to perpetrate a con on the British people. The information that I have from the Financial Secretary is clear—vast sums of money were given away in the top rate tax cuts. According to his parliamentary answers, £9.5 billion has been given away to the richest people since 1988.

Mr. Dorrell

So that we are proceeding on the basis of facts rather than assertions, I must point out that the top 5 per cent. of taxpayers in 1978–79 contributed 24 per cent. of the total yield of income tax. In 1993–94, that same top 5 per cent. is expected to contribute 32 per cent. of the yield of income tax. That is the top 5 per cent. of income tax payers.

Mr. Milburn

The Financial Secretary obviously wants to bandy statistics—I am happy to do that. Perhaps he would like to tell us how many people are in the top 5 per cent. and what the spread is in the benefits of top rate tax cuts. According to his parliamentary answers, almost 60 per cent., or £5.5 billion, of the £9.5 billion handout and giveaway went to top rate taxpayers in one region of the country—the south-east.

It is no wonder that there was a huge fiscal stimulus to the economy in the south-east but, of course, we are now suffering the consequences of overheating, shortage of skilled labour, pressure on the green belt and a huge explosion in house prices. The brakes had to be slammed on, as they were two or three years ago, and we are now paying the price. We are shivering as a consequence of a countrywide recession, which is the result of the sort of measures that were implemented in 1988 by the Minister and his predecessors.

Mr. Jim Cunningham

My hon. Friend referred to what the top 5 per cent. paid in taxation. Does he agree that their income also rose in that period?

Mr. Milburn

We have seen an explosion in the incomes of the very richest people. I described earlier how the top 20 per cent. have done so well, while the bottom 20 per cent. have done so poorly. There is no doubt that families on average earnings are, as a consequence of the Government's fiscal policy during the past 14 years, paying more of their income in tax than ever before. Those are the stark facts: the Financial Secretary cannot argue with them.

I give one example. A top rate taxpayer in the south-east of England is on average at least £10,000 better off as a consequence of top-rate tax cuts. The south-east has not been the biggest regional gainer. The south-west takes the lead in the top-rate tax cut league. It is interesting to examine which parts of the United Kingdom do least well out of top-rate tax cuts. Not surprisingly, Northern Ireland and my region, the north, received the smallest benefits as a consequence of the cuts in top-rate income tax.

What a contrast between 1988 and the Finance Bill that we are debating today. In 1988, there was an enormous handout and a tax bonanza for the rich. As a consequence of the measures presented by the present Chancellor in his Budget this year, there will be tax increases of £6.5 billion in 1994–95 and £10.5 billion in 1995–96.

The cost of imposing VAT on heating alone will mean £950 million in higher bills next year and £2.3 billion in the following years. The whole country is paying the price for the Conservatives' tax bonanza for the wealthy in 1988. What they gave away with one hand to the very rich, they are taking back with the other from pensioners, families, the low-paid and those on middle incomes. It is an odd reversal of the Robin Hood story when the poorest end up subsidising the richest in our community.

Mr. Graham

The other day I spoke to a woman in my constituency who told me that she had looked at her diary for 1979. It was faded, but she noticed that her husband was working, her two sons were working and she was going on holiday to Benidorm. Now she is not going on holiday to Benidorm, her son is not working, her other son is on low pay and her man is almost crippled with illness.

In 1979, at least they were all working and they could afford to pay tax. Now 4 million people are desperate and 3 million people are unemployed. The other night we passed a measure which will mean that 9 million pensioners will have to pay through the nose to heat their homes. The Government are proud of that record. The crisis is one of their own making. My hon. Friend has elaborated on that well tonight.

Mr. Milburn

My hon. Friend is right. He graphically describes the problems that the Government have imposed on millions of people in Britain. It is not merely a question of complacency. It is a question of the Government's inability to apologise to the British people. We saw that most graphically in the private notice question just before this debate. I will not go into that, Mr. Morris, because I can see that you wish me to move on. I will take that hint seriously.

So we are now all paying for that tax bonanza. By freezing personal allowances, the Government will force the tax burden of low and middle-income families through the roof. Rightly, people will feel betrayed by a party which in its general election manifesto just one year ago loudly declared: we are the only party that understands the need for low taxation. The Conservatives' tax-cutting credentials have been shot through by this measure and other measures in the Finance Bill. In just one month next year—April—the British people will feel the effect of the cuts in mortgage interest relief at source and the married couple's allowance, the increase in national insurance and the introduction of the fuel tax. Ministers might not be so complacent then. Certainly the crisis of confidence which the Government face will not go away, because too many people are paying through the nose for the mistakes that have been made.

Mr. David Shaw

The Government have had a difficult Budget to prepare when we are, as we have now discovered, at the end of a recession. As we reach the end of the recession, sadly, unemployment—the lagging indicator—increases and the deficit continues to rise for some time after one has hit the bottom. There is no doubt that we are having to raise additional finance because we have an excessive budget deficit.

There are not many ways in which one can deal with an excessive budget deficit. Indeed, my accountancy career has taught me that there are only three: we can borrow, if someone will lend to us, but if the deficit is excessive, people do not want to lend to us; or we can raise additional revenue; or we can cut expenditure.

It is clear that no one in the Conservative party wanted major areas of expenditure to be cut. They did not want pensioners, invalids, or those on disability benefits to suffer and they did not want cuts in health service or education expenditure. Consequently, the Government have chosen the course of raising some additional revenue and they should be applauded for taking that courageous decision.

Mr. Robert Ainsworth

If the Government decided that the right course of action was to raise revenue, why did not they seek to raise it from the very people who gained from the tax cuts that they introduced a few years ago? Why are the Government seeking revenue increases from the bottom part of the earnings structure when they gave those tax breaks to the top?

Mr. Shaw

As my hon. Friend the Financial Secretary said, the hon. Gentleman and his colleagues are living in a mythological world. In many instances, the top 5 per cent. who received the reduction in the rate of taxation have increased their earnings and the wealth that they have brought into the country. As a result, they have paid an increased proportion of the income tax bill. That is a major achievement and we must encourage that expansion.

I want the top rate of tax to come down lower. It is sad that we wish to cut only the basic rate from 25 to 20 per cent. We should consider how to reduce the top rate from 40 per cent. We are now competing in the world to bring the wealth creators to Britain. If we could encourage more of them to come here, more revenue would be raised from income tax at lower rates. That is the great achievement of the Government.

I return to my key point. We must either raise revenue or cut expenditure. The Opposition argue that we might be in a different world if they were in office. They say that the deficit would be considerably less. They are trying to con the electorate into believing that if they were in office, we would be in a make-believe world. That is the only world that would be different. One cannot say that if Labour was in office there would be no German recession, no French recession and no American recession. We live in this world. We do not live in the make-believe world that the Labour party would like to exist if it was in office.

So revenue had to be raised in the Budget. Clause 52, with which the amendment deals, is the right clause and the right measure to raise additional revenue.

Public finances have to be prudently managed. Reference has been made to the Labour manifesto's proposals which we costed at some £37 billion. I commend the hon. Member for Renfrew, West and Inverclyde (Mr. Graham) for remembering that figure. That £37 billion was not what the deficit might have been; it was additional to any deficit that we now have. If Labour had been in office and the recession had continued—I am talking about the recession in America, Germany and France, which are key export markets—we would be looking at a deficit not of £50 billion but of £50 billion plus £37 billion; a deficit of at least £87 billion, approaching £100 billion.

Mr. Jim Cunningham

Will the hon. Gentleman give way?

Mr. Shaw

I shall give way to the hon. Gentleman, who no doubt wants to explain how a Labour Government would have financed such a deficit.

5.30 pm
Mr. Cunningham

I shall not explain that aspect. I should have liked the hon. Gentleman to have gone on to say that the difference between the Labour party and the Government at the time of the general election was that Labour borrowing would have been used for investment, whereas the money that you have borrowed is to pay your debts. That is the fundamental difference between you and us.

The Second Deputy Chairman of Ways and Means (Dame Janet Fookes)

Order. I remind the hon. Gentleman that he is addressing me when he says "you", and I am not responsible.

Mr. Cunningham

I apologise, Dame Janet.

Mr. Shaw

I disagree with the hon. Gentleman because I, like many people, studied the Labour party manifesto carefully. More significantly, I made a number of interventions in the speeches of Labour Front-Bench spokesmen in the year or two before the general election asking if the commitments that they were annoucing at the Dispatch Box were firm commitments. I started to add them up on the back of an envelope and on my calculator. They were not capital commitments to invest in Britain's future. Many of them were revenue commitments to invest in more pay, more salaries and more bureaucracy. They were the sort of commitments that would have to be funded with increased borrowing. As an accountant, I know that to fund wages and salaries with borrowing is the worst sort of deficit financing.

Mr. Graham

I take the point that the hon. Gentleman did his sums on the back on an envelope. I am pretty sure that everyone in the Committee and in the country will agree that the Government, too, have done their sums on the back on an envelope. The hon. Gentleman has a fond interest in Scottish affairs. In Strathclyde we have lost more than 50 per cent. of our manufacturing jobs since 1979–166,000 jobs. The Labour party planned an investment and training programme. That was what part of the sum was intended for. That was welcomed by the people of Scotland and, I am sure, by the people of Britain who wanted Scotland once again to be the engine of recovery. The £36 billion of public sector borrowing would clearly have been welcomed. It would have provided a basis from which to build on in the future and we might not have had this recession, which has clearly been created by the Government.

The Second Deputy Chairman

Order. The hon. Gentleman's intervention is becoming a speech.

Mr. Shaw

I recognise the hon. Gentleman's contribution. As he rightly says, I have a great interest in Scotland and some Scottish affairs. I am sure that he will recall that under Labour, between 1974 and 1979, not just in Scotland but in the country as a whole, manufacturing output fell and we had a record number of industrial disputes and a major problem in getting enough investment in British manufacturing.

Yesterday, the Select Committee on Social Security heard from managers of the British Coal pension fund about its problems. It was notable that the deficits from the fund's investments occurred under a Labour Government who made generous contributions to compensate. The surpluses that have improved pensioners' benefits have come since the Conservative Government have been in office. Those surpluses have been earned from the success of British business and British industry, so there has been a major transformation.

We might well ask why some areas of Scotland, for which the hon. Gentleman and I share an interest and concern, have not benefited. I am concerned, even as the Member of Parliament for Dover, that some of the benefits in our economy are not filtering through into the Scottish economy. The only possible explanation is that too much of the Scottish economy is managed by Labour-controlled local authorities.

If we could shift the resource base from the Labour-controlled local authorities in Scotland into the private sector, my constituents in Dover would benefit from a better managed economy. The Government might not even have had to introduce clause 52. Public finances overall would be better managed because we would be spending less money in the public sector and getting more profitable investment and more profitable resource development in the private sector.

Mr. Graham

The hon. Gentleman mentioned Scotland, but he must realise that the Scottish public have rejected the Government for decades. I wish that the Scottish people could have a wee turn at giving the Prime Minister a bloody nose like the English and Welsh voters. I am sure that they would give him a real belt in the belly if they had the chance of a referendum.

Mr. Shaw

I do not want to stray too far from the subject, but the hon. Gentleman must accept that the problems that are developing in Monklands, East and a number of other key Labour areas show that a unique opportunity is developing for the Conservative party in the 1990s in Scotland. There is no question but that, when the people of Scotland see how much employment in the public sector is taking job opportunities from the private sector in Scotland, there will be a transformation in the Government's political fortunes in Scotland. That is already occurring, as can be seen from the improved results in Scotland at the general election.

But to return to my main point, if Labour had been in office we would not be sitting here today talking about whether we can afford to index personal allowances or other allowances. We would be talking about how to deal with a major deficit of enormous proportions—potentially £100 billion.

Dr. Roger Berry (Kingswood)

Does the hon. Gentleman recognise that the rate of growth under this Government has been the worst of any post-war British Government and far worse than that of the previous Labour Government, that as a result unemployment is far higher and that that is the major reason for the high level of public sector borrowing?

Mr. Shaw

I just happen to have a graph here which I have produced on my computer. However, graphs cannot be recorded in Hansard, so I shall have to talk about it. I assure the hon. Gentleman that the real prosperity clearly existed in the 1980s. The only significant cuts in public expenditure where the line on the graph falls below zero took place under a Labour Government in 1975, 1976 and 1977. Since then, public expenditure and the nation's prosperity have continued to improve. Therefore, I cannot accept what the hon. Gentleman says.

The Second Deputy Chairman

Order. Before the hon. Gentleman continues, I should point out that he is going wide of the amendment. I have given one or two warnings already and if the hon. Gentleman or any other hon. Member persists, they will have to resume their seat.

Mr. Shaw

Thank you, Dame Janet. I desperately wanted to get back to the main point, but I was diverted into Scotland and some of the wider issues of the economy. I appreciate that you are being your usual firm self, but I realise, as I am sure do many, that a better balance in many areas of the economy, of which Scotland is one, between the public and private sectors, would mean that the private sector would create more jobs and there would be less deficit and consequently less need to restrain the increase in personal allowances in the way in which the clause does. That is the key point. The real issue raised by the Opposition in this debate is whether we should curtail allowances or raise the rates of income tax. The Opposition have not lost their old clothes. They have dusted them down again, having found them in the closet. They want to raise the rates of income tax. I cannot support that view.

Mr. Nicholas Brown

That is not so.

Mr. Shaw

The hon. Gentleman says that that is not so. If he does not want to increase revenue by raising the rates of income tax, either he must want to cut expenditure or he must want to borrow more. If not, I do not see how he will be able to meet the deficit which, as I said earlier, occurs not just in the United Kingdom but worldwide.

Mr. Brown

I made this point to the hon. Member for Beaconsfield (Mr. Smith), but perhaps the hon. Gentleman was not paying his usual attention. In 1988, the Labour party voted against the Government's top rate tax cuts. That is still our position. We should not have a deficit if the top rate of tax had not been cut, for it amounts to a substantial sum of money.[Interruption.] The Financial Secretary laughs, but cumulatively that extra sum of money would have been available to the Government since 1988. The purpose of our amendment is not to increase income tax. Its purpose is to restore the allowances that the Financial Secretary and the Chancellor of the Exchequer are trying to freeze.

Mr. Shaw

I know that the hon. Gentleman uses a wide base when he studies these issues. He has heard of the Laffer curve. If the rate of taxation is too high, the amount of revenue raised goes down. The Financial Secretary has produced the figures and has shown that, by reducing the top rate of income tax, we have increased the revenue take from the top earners. That, surely, is the key point.

Mr. Brown

But the hon. Gentleman must acknowledge that now there are 1 million more of them.

Mr. Shaw

The point that I acknowledge is that the top 5 per cent. are paying more as a proportion of the total income tax take.

Mr. Dorrell


Mr. Shaw

Does my hon. Friend wish to confirm that point?

Mr. Dorrell

Yes. The hon. Member for Newcastle upon Tyne, East (Mr. Brown) is completely wrong. The group of people about whom I was talking numbered 1.3 million in 1978–79. In 1993–94, it numbers 1.2 million, so, for what it is worth, there has been a fractional reduction, not a big increase in the number of individuals concerned. What has increased is the share of the income tax burden that those 1.3 million or 1.2 million people contribute. That share has increased sharply, from 24 per cent. to 32 per cent. of the total yield of income tax.

Mr. Shaw

What my hon. Friend has said shows that it is a truism that, if we reduce the rate of income tax, we increase revenue. That must be a very important lesson. I know that the hon. Member for Newcastle upon Tyne, East wants to rise and confirm that those who sit on the Opposition Front Bench have now learnt that lesson.

Mr. Brown

We are talking, I think, about different groups of people. If I heard him aright, the Financial Secretary is talking about the top 5 per cent. of high earners, to whom he referred earlier, whereas I am referring to all those who pay tax at the top rate. The hon. Gentleman's argument is absurd. If one received more revenue by reducing the tax rate, the logical assumption is that even more revenue would accrue to the Government if one reduced the tax rate yet further, but that obviously is not the case.

Mr. Shaw

The hon. Gentleman knows how the graph works. He also knows how the calculation works: that at a tax rate of 100 per cent. there is zero revenue, because there is no point in going out to work. The hon. Gentleman must also know that if one reduces tax rates to too low a level, the Government will not raise the maximum amount of revenue. The key point of the Laffer curve as it is computed is that the optimum tax rate is of the order of 15, 20 or 25 per cent., depending upon which country one is in and depending also upon the financial base that one uses. It is clear that, even at 40 per cent. tax rates, there may be the opportunity to lower still further the top tax rate and increase revenue.[Interruption.] The hon. Member for Newcastle upon Tyne, East told me off for not paying attention, so he should not converse with the hon. Member for Birmingham, Perry Barr (Mr. Rooker), but perhaps he suffers from my weakness from time to time.

The key point is that the Government have made the decision not to change allowances, thereby increasing revenue, instead of attempting to raise additional revenue by increasing the rate of income tax. That would have been a disincentive. It would not have been the right thing to do as we come out of the recession. It would have put on the motor car's brakes; it would have stopped the engine; it would have taken away the fuel that can help us to get out of the recession. The Government have done the right thing and it was a sensible decision to make.

Mr. Tim Smith

Is not it clear from these exchanges that the Opposition have learnt nothing from the experience of the past 14 years? Some people may think it incredible that my hon. Friend should suggest a tax rate of 100 per cent., but there was a tax rate of 98 per cent. in 1979. That was the rate that we inherited.

5.45 pm
Mr. Shaw

I agree with my hon. Friend. If ever there were a case for a "quickie" general election, it would be on the basis of what we have heard from those who sit on the Opposition Front Bench today. The Opposition have no new taxation policy to present to the British electorate. All they want to do is to tax the British electorate more and more and to employ more and more civil servants and bureaucrats. The Opposition still have the wrong policies for tackling the economic issues that face us as we come out of the recession. The fact of the matter is—

The Second Deputy Chairman

Order. How does this relate to the amendment under consideration?

Mr. Shaw

You are right, Dame Janet. Again I have been taken slightly away from the point. I was carried away by my enthusiasm for increasing our majority and having another term in government.

The key point is that we are still wedded to reducing the rate of income tax over a period of time. That was featured consistently in our successful, election-winning manifestos. The Opposition want to tackle the tax issue differently. They want to raise tax rates and change the way in which taxes are raised. Our policies contain the right balance. The Budget was skilfully constructed in the middle of a worldwide recession that is causing great difficulties. The Budget deficit continues to increase and the lagging indicator—unemployment—is inevitably at a higher level than one would like.

Clause 52 reflects the fact that both the foreign and the domestic financial markets have given the Government a considerable vote of confidence. The British electorate should recognise the fact and consider giving a further vote of confidence to the Government in any future by-elections. That vote of confidence should be based on the difficult decision that is reflected in the clause we are debating.

Mr. Rooker

What we are debating today, if we cut through the bull and the smears on Opposition policies by Conservative Members today, is a tax increase on the low-paid. At least 300,000 people, who would not otherwise have to do so, will now have to pay income tax. Furthermore, those at the bottom end of the tax threshold —4.5 million people—will not enjoy the benefits that they ought to receive. We shall no doubt hear the Financial Secretary refer to what happened between 1974 and 1979. That point has already been made clear in interventions.

My conscience is clear. My record is okay. The same cannot be said of the Government's record. In 1993, the tax burden on the British economy is greater than it was in 1978–79. Compared with this Government's record, the last Labour Government have nothing to apologise for when it comes to the tax burden on the British economy. I freely admit that the burden is shared differently—hence the steps that I took as an individual hon. Member in 1977. Earlier, I interrupted from a sedentary position to remind the hon. Member for Beaconsfield (Mr. Smith) of the date —14 June.

If the Finance Bill had not been amended in 1977, we would not be able to hold this debate today. We can debate this proposed tax increase on the low-paid because of what happened in Committee on 14 June 1977, when I and my hon. Friend the Member for Preston (Mrs. Wise), then the Member for Coventry, South-West, moved amendments on indexation. It is not the fault of the right hon. Member for Berwick-upon-Tweed (Mr. Beith), but that night we did not enjoy the support of the Liberal party. John Pardoe was upset because, as part of the Lib-Lab pact, he was obliged to vote with the Government. He was very distressed because indexation was Liberal policy.

I want to consider the obnoxious tax increase on low-paid people, and in doing so I shall give a couple of statistics on the tax burden. Between 1978–79 and 1992–93, as a share of income, the tax burden—income tax and national insurance—declined for single people, married couples and people on average earnings or above who had children. In the same period, the tax burden for people on less than average earnings also fell, with the glaring exception that the share of income that family units—couples with children—on less than average earnings pay in tax and national insurance, taking into account child benefit, is greater now than in the last year of the Labour Government. The share paid by the poorest families—those on three quarters or half average earnings—is higher than under the previous Labour Government. They are a unique group.

It is tedious to keep repeating statistics, but I will give the figures for a family with two children and 50 per cent. of average earnings. Hon. Members might regard 50 per cent. of average earnings as irrelevant or unrealistic, but average earnings are alleged to be £340 a week. When I say that, most of my constituents say "Don't talk silly—our wages are nothing like that," and that is true of the majority of people because the average is not the majority.

The share of income that a couple on 50 per cent. of average earnings with two children paid in income tax and national insurance, minus child benefit, in 1978–79 was 2.4 per cent. whereas in 1992–93 it was 6.3 per cent.

Mr. David Shaw

Will the hon. Gentleman give way?

Mr. Rooker


The share of income paid by a couple on 75 per cent. of average earnings has increased from 14.6 per cent. to 15.5 per cent. In other words, whatever changes have occurred in that period, couples on less than average earnings with children have suffered uniquely and their position will be made worse by the freezing of tax allowances, which is why the clause is so objectionable.

Mr. Dorrell

I have made a calculation for a married man with two children—a single earner in the household —on half average earnings. Will the hon. Gentleman confirm that, since 1979 and at today's values, the real take-home pay of that person has risen by £67.30p a week?

Mr. Rooker

Absolutely—I am coming to that. I am talking about the income share that such a family pays in tax and national insurance. The share that they pay from their household earnings has gone up, whereas it has gone down for everybody on more than average earnings. It has gone down for single people, married couples and families on more than average earnings. It has gone down for single people on less than average earnings. It has gone down for married couples on less than average earnings without children. It has, uniquely, gone up for couples on less than average earnings with children. What a record—low-earning families with children are the poorest-paid and the hardest stressed group in the country.

The important point is the share. We are talking about the community kitty for the country. That is the purpose of taxation—for people according to their means to pay into the community kitty. Why are the lowest-paid families on less than average earnings with children paying a larger share of their income than in the last year of the Labour Government? Why should their share of the community kitty have gone up when everyone else's has gone down?

Mr. Dorrell

Does the hon. Gentleman believe that the changes in the totality of the tax system which have been made since 1979 may have led to the enhanced rate of improvement in the take-home pay of every group in the community, including the group that he is talking about?

Mr. Rooker

Exactly, but relative to everybody else the share of the burden that they are asked to bear has gone up. The Minister cannot deny that. No one denies that their absolute earnings have gone up. Earnings kept ahead of inflation in the 1980s, which caused some of our present difficulties, but why has their share of the community kitty increased when everybody else's has gone down? Why has the share of income that the hon. Member for Dover (Mr. Shaw), as a Member of Parliament, perhaps with outside earnings, has to pay gone down? Why should the poorest paid families on less than average earnings with children, uniquely, be asked to pay more? The Minister argues that their earnings have gone up, but the share of earnings that they are asked to pay has gone up while everyone else's has gone down.

That is the reality of the debate and not what the hon. Member for Dover was saying. An increase in taxation is being proposed for the poorest people in the country. They are being asked to pay a bigger share of their income in tax than anybody else. I was opposed to that in 1977 when I proposed amendments in Committee and I am opposed to it now.

I do not deny that the spending power of all families and sectors has increased, but those on less than average earnings have done substantially less well than the better off. That is my argument. My argument is one of fairness between groups in society—those on low incomes and those on high incomes. I believe that people who have high incomes should pay a bigger share, and indeed they will pay a bigger share this year, but during this Government's term of office their share has gone down while the share taken from the poorest paid families has gone up. That needs to be emphasised and constantly repeated. That is why we oppose the clause, which stops indexation.

Mr. David Shaw

I believe that at one stage, the hon. Gentleman referred to household income rather than individual income. The average household income increasingly includes the incomes of two people—husband and wife—because more women work today under this Government than when Labour was in office. As a result, a higher rate of income tax may often be paid in a two-income household, because when the two incomes are added together more taxation is paid at the higher rate. That can often account for the phenomenon that the hon. Gentleman has identified.

6 pm

Mr. Rooker

I used the term "household income" as a figure of speech, but I was talking about earnings, and the figures that I cited related to earnings. Generally speaking, when figures are produced for a married couple with two children, it is assumed that there will be one earner and one non-earner. the wages earned by some of the women in the families affected are so low that they would not make any difference to the tables, which are produced by the research staff in the Library on the basis of parliamentary answers.

I have been talking about low pay, so by definition I have been talking about earnings, and about people who have jobs. We must not forget that the unemployed are also subject to taxation at certain periods. During the year in which they cease to be employed and during the year in which they obtain another job, unemployment benefit is part of their annual taxable income. The impost does not fall only on people with a low-paid full-time or part-time job; the unemployed are also caught in the tax net now. Some of them are also subject, at the margins, to the effects of the clause and the freezing of personal allowances.

The Minister may say, "What is all the fuss about? It is only £18 a year."

Mr. Dorrell

At the maximum.

Mr. Rooker

Yes, that is the maximum—or rather, it is £22 a year for the average family but £18 for a single person. People will say, "Eighteen pounds? That is chicken feed." Hon. Members may pay that much for their lunch or their supper, or even leave that much as a tip after their supper. But I have met constituents—my hon. Friends have met such people, and I know that Conservative Members have met them, too—who could not raise that sum at any stage in their yearly existence.

I thought of a couple of examples today involving unemployed constituents seeking to get back into work, who had used the opportunity of unemployment to further their education. But they could not pay the exam fees. One person could not pay the £10 assessment fee for nursing training. When people are that low down the income scale they do not have the money. That is why it is wholly unfair to ask those people to pay an increased share of taxation. It is immoral—there is no other word for it.

I do not accept the argument that the sum is small, because I consider that sum not in isolation but in the context of the generality of what other taxpayers are asked to pay. There should be fair shares. The well-off should pay their fair share, but the clause freezes allowances in such a way that they will not pay as fair a share as they would otherwise have done.

One of the long-running advantages of the 1977 indexation measures—although they have subsequently been amended, the kernel of them remains—is that these days at Budget time the Treasury publishes tables which make a good comparison with what the figures would have been like if there had been indexation. Indeed, I was amazed at the brass face of the Budget press release dated 16 March, with its illustrative tables on income tax rates and allowances. Every hon. Member has an average of 500 constituents who will now pay tax at 20p in the pound although they did not pay tax before the Budget. The average number is 500, so some hon. Members will have many more constituents in that position.

The Treasury tables showing the annual effects of the income tax changes in the Budget, compared with what indexation would have provided, has to assume an increase in incomes. When comparing one year with another one must not assume that incomes will stay the same; one must assume an increase in earnings. I thought that the Treasury would assume an increase of 1.5 per cent., but not on your life—the Treasury assumed an increase of 4 per cent.

Why did the Treasury assume that incomes would increase by 4 per cent. between 1992–93 and 1993–94 when there is a 1.5 per cent. pay freeze in the public sector which also runs through the low-paid part of the private sector? What brass face the Treasury and Ministers must have to approve the use of 4 per cent. as an illustrative figure when they have introduced a pay freeze of 1.5 per cent. That is outrageous. When the Financial Secretary winds up the debate, I should like him to tell us why the figure of 4 per cent. was approved. That figure does not represent reality for most people.

I shall finish soon, because the point has been well made that the effect of the clause is a massive tax increase for the low-paid. The burden is greater for the low-paid—especially if they have children—than for the rest of the country, and to that extent it is extremely unfair.

Because of the increased burden of taxation on the low-paid, we are creating in this country an underclass of citizens who are bewildered by the system and who struggle to make ends meet from one week to the next. Hon. Members all know this from what they hear in their constituency surgeries, and from the letters and telephone calls that even Conservative Members mention. In a debate not long ago, a Conservative Back Bencher referred to the people who shuffled into his surgery with a haunted look in their eyes, the down-beaten and downtrodden who could not cope because of the increased tax burden and the cuts in benefits that his own Government had brought about. I shall not cause that Conservative Member any more trouble than he is already in by reminding the Committee of his name.

According to the average figure, 500 constituents of mine will pay tax at 20p in the pound rather than paying nothing as, because they are so low-paid, they would otherwise have done. I am speaking for those people tonight, as my hon. Friends have spoken for their constituents. No Conservative Member has said, "Well, that is it. I have some low-paid constituents, and it is tough, but they will just have to pay more tax." Conservative Members will not have the courage to say that.

Instead they will say that the budget has to be balanced and extra revenue is needed. Nobody denies that, but why take from people on lower than average earnings a greater share of their income than is taken from people on higher than average earnings? That is wholly unfair, and we shall certainly pin it on the Government.

What will the money pay for? The Government were open about that. The brief published on Budget day gave a little summary of the measures for 1993–94: The Chancellor proposes that there should be little net change in …1993–94. Certain taxes are reduced: there is help for business and the housing market". There certainly is help for business. Some of the extra taxation brought in by the clause—brought in off the backs of people so low paid that they were not paying tax at all—will help to fund businesses such as the Heron corporation so that money can be forked out for the Ronsons of this world.

The idea is outrageous. It is beyond belief that that is the sort of business that the Government are supporting. They will raise taxes on the low-paid and say, "Yes, we want to get business going," but they give no directions and no special incentives to ensure that that money is put into real investment to create real jobs, now factories and new businesses. No—businesses will be able to do exactly what they like.

Mr. Tim Smith

I understand what the hon. Gentleman is saying, but the Red Book shows that the main factor was the decision not to increase business rates by more than the rate of inflation. Had that decision not been made, many businesses might have been pushed over the brink and jobs would have been lost. There is a balance between jobs and income tax. Which would people prefer to have—a job, with earnings on which they had to pay income tax, or no job?

Mr. Rooker

For my sins, I was the Opposition local government spokesman in 1987–88 when the Bill introducing the poll tax was in Committee. It took 200 hours. We were dealing with the business rate, the poll tax for business, and we shot the Government's arguments to pieces. The rates that business pays as an overall proportion are minuscule. I do not accept the argument that to help businesses we have to impose more taxes on the low-paid. That is what I cannot justify. We cannot consider one small provision of the Bill in isolation.

This provision will raise money on the backs of the low paid. What will it be used for? It will be used to reduce the tax burden on businesses. It is unfair to expect people whose earnings are 50 per cent. of the average to pay a bigger share than the average Member of Parliament or the Gerald Ronsons of this world for the purpose of reducing the taxes paid by businesses. Nobody is on lower pay than those who until now were below the tax threshold.

There must be no taxation by stealth. In this regard, the hon. Member for Beaconsfield was quite honest and open. As I look at the Strangers Gallery, to which I am not supposed to refer, I expect that very few people realise that what we are debating here is a big increase in taxation. What is being done is not being done by stealth, as in the past. The Committee has an opportunity to debate and to vote. When I found out in 1977 how the system worked I objected strongly. The roof came in on my hon. Friend the Member for Preston and myself for what we were doing. We were criticised by the press and by the leadership of our own party. But then the penny dropped as messages came in from pensioners' groups and trade union branches. It is much fairer to have things done in the open.

The tax burden on the poor is too great, and the Government are reverting to the previous process. Next year they will say that the rate of inflation this year was only 2.6 per cent. and that the forecast figure for the following year is 3.6 per cent.—nowhere near the level of the late 1970s. They think that if they get away with freezing allowances in one year, they will get away with it again. We are returning, step by step, to the old system of taxation by stealth.

This process must be opposed at every turn. In 1981 I came to the Chamber and opposed what was being done. I will act similarly today, and I will continue to do so. I do not take any pleasure in this. It takes time, and it is not easy to explain to people outside. What members of the public do know, however, is that under the Budget taxes on the low-paid have increased.

I should like to make again a point that I made at the end of the Second Reading debate, when between the end of the Financial Secretary's winding-up speech and the Division I used the procedure of the House for a couple of minutes without upsetting everyone. In the course of a visit to Hereford and Worcester that day, I was asked what I was doing about the Rooker-Wise amendment. The person concerned, having been sucked back into the tax system many times, understood how it worked. He was so close to the margin that he knew he would be in the system for half of the year and out of it for the remainder.

I understood the mechanics. He realised that the Budget would result in freezing—that, having been sucked into the tax system, he would stay there. He regarded that as wholly unfair. I told him that, having been on the Opposition Benches for 14 years, I did not have much responsibility for the situation but that I would go to the House of Commons at the first opportunity and raise the point.

Mr. David Shaw

This is why the hon. Gentleman is in opposition.

Mr. Rooker

Far from it.

The point that I am making illustrates the unfairness of freezing allowances. By definition, as everyone knows, the burden on those with less than average earnings is disproportionately great. The Government will not increase income tax by a penny in the pound, because that would have the reverse effect. They do not want to attack the well-off. Tory Governments are bound to adopt this attitude. They talk about tax cuts, but they raise taxes. They talk about decreasing the tax burden, but they increase it—not only the overall burden on the economy but also the burden on the lowest-paid.

We shall nail the Government with this. It will not be easy, as was demonstrated in 1987 and 1992. It is not easy to get this message across, even during general election campaigns. The Conservatives always quote the 83 per cent. and 98 per cent. tax rates under the last Labour Government, as in the ebb and flow of politics they are quite entitled to do, but nobody ever paid at those rates. The average rate was far less. It was stupid of the last Labour Government to have high tax rates that were not actually used. They were warned that those rates would be used against them. At the other end of the scale, the system was such that tax revenue could be raised from the low paid.

Then the Tory party thought that it would be a good idea to introduce some truth into the tax system. The get-out clause was introduced by a former Chancellor, now Lord Lawson. At the back of the noble Lord's mind was the idea that a Tory Government needed a get-out. The Financial Secretary appears not to know what a get-out is. Perhaps I will have an opportunity to explain to him later.

Our original amendment on indexation was cut and dried. There would have been no get-out, but for an amendment tagged on at the end by a specific vote in the House. That is how the tax law was left at the time. Today we are at least guaranteed a debate, and some of us are able to demonstrate that it is very unfair to put this extra tax burden on the low-paid. I invite the Financial Secretary to defend disproportionately great tax increases for those people: he cannot do it.

6.15 pm
Mr. Dorrell

Members of all parties agree that the hon. Member for Birmingham, Perry Barr (Mr. Rooker) takes a serious interest in these issues. Indeed, the Committee is indebted to him for the part that he played in 1977 in ensuring that we could have this debate today. He has said that at that time everybody was against him. As he would be the first to acknowledge, our parliamentary system does not work in quite that way.

Far from everybody being against the hon. Gentleman, the Conservative party of the time, of which I think my hon. Friend the Member for Beaconsfield (Mr. Smith) is the only representative present today, supported him. The Rooker-Wise amendment that has been referred to is, in fact, the Rooker-Wise-Lawson amendment. The action of the hon. Gentleman and his hon. Friend the Member for Preston (Mrs. Wise) was supported by the Tory party.

We do not resile at all from the decision that the Government took then. We believe that, as the hon. Gentleman has said, changes in the real level of allowances should be the subject of debate in the Chamber. That is precisely why we are having this debate. Thus far, at least, I go along with the hon. Gentleman. I shall refer later to some of his arguments that I found to be substantially less convincing.

I should like to start with something that ought to be obvious. My hon. Friends the Members for Dover (Mr. Shaw) and Beaconsfield said that this element of the Bill is part of the total package that my right hon. Friend the Chancellor introduced to deal with the budget deficit. It is most remarkable that a constant in the debates we have had on this Bill is the assertion—made sometimes in almost accusatorial tones by the Opposition—that these are revenue-raising proposals, as though we had somehow stumbled over them almost in a fit of absence of mind. It is true that many of the changes made in the Bill are put together as a revenue-raising package.

The reason for that should not be surprising or unfamiliar to any hon. Member. It is that my right hon. Friend the Chancellor faced the need to do something about the Budget deficit. The Government take the budget deficit seriously. As these debates proceed, it is becoming abundantly clear that the Labour party does not share our commitment to a policy of seriously addressing the deficit. Over the past few weeks and months, we have seen several examples of that lack of firmness of purpose. The hon. Member for Dunfermline, East (Mr. Brown) has been anxious to rule out options which may help deal with the budget deficit. In January, on the radio, he said: I'm not talking about raising income tax or national insurance or VAT. That was said by the shadow Chancellor, who acknowledges that the budget deficit is too high but is anxious to rule out the three key tax weapons available to do something about it. In March, just before the Budget was delivered, he said on television. I think at this particular point in time to raise income tax or national insurance or VAT would be a mistake. So all three major sources of revenue available to the Government were explicitly ruled out twice, on the record, by the hon. Member for Dunfermline, East.

While the hon. Gentleman has been busy telling the world what he would not do to address the budget deficit, his hon. Friend the Member for Peckham (Ms. Harman) has been going round telling the world what she would do to make the budget deficit worse. She has been committing the Labour party to extra expenditure on training and, as my hon. Friend the Member for Beaconsfield said, to more generous capital allowances. So, on the one hand, the Labour party says that the budget deficit needs attention: on the other, it either forecloses options for doing anything about it and opposes all proposals that are put to the House, or it comes forward only with proposals which would make the deficit worse.

The first thing that we have to be clear about in addressing the question is that we face a budget deficit that demands attention. The Government have a package of proposals to address the deficit. All the arguments from the Opposition Benches come from a party which has been anxious to foreclose as many options as possible for dealing with the deficit.

The hon. Member for Newcastle upon Tyne, East (Mr. Brown) was generous enough, as were other hon. Members, to acknowledge the second element: that the proposals for changes to allowances and thresholds have to be seen in the context of other proposals for changes to the income tax system, particularly the introduction of the lower rate band. The interrelationship between changes to allowances and changes to the lower rate band is a key element of the Budget package.

What the Committee would not have gathered from the speeches so far in the debate, particularly from the Opposition Benches, is that, for the single person who is a basic rate taxpayer, it is not a coincidence that the effect of the freezing of the allowances and of the widening of the basic rate band is precisely the same: they net out. For the single person on basic rate tax the freezing of allowances costs him £22.50 this year; the widening of the lower rate band benefits him to the tune of £22.50 this year. There is a statistical equivalent.

The married couple basic rate payer is £12.50 a year worse off as a consequence of the changes. Taking particularly the single person basic rate taxpayer, he is in precisely the same position after the changes as he would have been if the indexation proposal of the hon. Member for Perry Barr had been allowed to run its course in respect of both the lower rate band and the basic rate band.

There are differences. All higher rate taxpayers are losers as a consequence of the changes because the effect of freezing allowances is to ensure that the benefit available from the changes to the higher rate taxpayer is exactly the same as to the basic rate taxpayer. The hon. Member for Perry Barr was right to say that those who are marginal payers within the lower rate are to a varying degree losers in absolute terms, although I would argue strongly that they are also gainers in the sense that the marginal rate of income tax which they are paying is lower than at any time since the Government came to power.

The changes that we are introducing in the package are part of the progress that we can make to introduce a wider lower rate band which will have important positive benefits in dealing with the poverty trap, the unemployment trap and the sharpening of incentives, which must be an important priority for those on lower incomes.

Mr. Graham

Does the Minister realise that, for 14 years, we have been told that, once the Conservative Government got to grips with the economy, things would go well? For the past three years, we have been told that the end of the recession is round the corner. We have been told that by the Chancellor until he was blue in the face. The Minister is telling us that low wage earners will benefit. In God's honest truth, that is not the case. If we can prove that he is not right, will the Minister come back and reverse what he has said?

Mr. Darrell

The hon. Gentleman suggests that people on average earnings, or the majority of people, have not benefited from the logic of the changes which we have been introducing for the past 14 years. As I said in an intervention in the speech of the hon. Member for Perry Barr, that is not true. Those who are on half average earnings have benefited in their take-home pay from the economic record of the Government to the tune of £67.50 a week in real terms since 1979. In the period 1974–79, the same group saw their real take-home pay increase by just over £8 a week.

People on average earnings are more than £80 a week better off than they were in 1979. Their income grew in real terms over the five years of the Labour Government by just over £1 a week. So there was an increase of £80 a week under the Tories and £1 a week under Labour; that is the contrast that answers the point made by the hon. Member for Renfrew, West and Inverclyde (Mr. Graham).

I have said that we cannot consider the changes in allowances in isolation from the rest of the changes to the income tax system. Nor can we consider them in isolation from the other changes contained elsewhere in the Budget. I discussed that point with my hon. Friend the Member for Beaconsfield in an intervention based on the analysis of the Institute of Fiscal Studies. It took the Budget package as a whole and looked at the distributional effect of the increase in the tax burden which my right hon. Friend introduced in his Budget.

The institute—an independent organisation—concluded that the average loss as a percentage of net income was virtually the same right across the income scale, from the poorest 10 per cent. of households to the richest 10 per cent. All of them, to within a very narrow range of variance, contribute roughly 2.5 per cent. of their net income to the deficit reduction programme which my right hon. Friend introduced in his Budget.

Of course, if the Budget is addressing the deficit by means of revenue raising, there will be by definition an average loss in resources available to taxpayers. Those figures show that that loss is shared fairly across the income scale. We cannot consider it in isolation from other income tax changes, nor in isolation from other changes elsewhere in the Budget. Nor, most important of all, can we consider it in isolation from the history of the past 20 years. That is where the record of the Government bears very favourable comparison with the record of our predecessors.

The hon. Member for Perry Barr is entitled to mark himself out in regard to his responsibility for what happened to personal allowances under the Labour Government. The effect of his action on what happened during those years is extremely marked in the figures. The year in which he rebelled was the only year of the Labour Government's period of office in which personal allowances increased in real terms. Over their total period of office, the single personal allowance fell in real terms by 21 per cent. In the period since 1979, it has risen by 25 per cent.

6.30 pm

We will not accept any lectures from members of the Opposition Front Bench on the subject of the indexation of personal allowances; nor will we accept lectures from any member of the Labour party, even including the hon. Member for Perry Barr, on the subject of the living standards of people right across the income scale.

Mr. Graham


Mr. Dorrell

I said in answer to the previous intervention of the hon. Member for Renfrew, West and Inverclyde, who is encouraging me to give way to him again, that the effect of this Government's policies taken as a whole has been to deliver a substantial increase in real take-home pay and living standards right across the income scale, benefiting the average wage earner by £81 a week, at today's values, this year, and benefiting the group on which the hon. Member for Perry Barr was focusing by just over £67 a week.

Mr. Graham

Anyone who thinks that the 3 million unemployed, the pensioners and disabled people have benefited under this Government is living in cloud cuckoo land. I want to ask the Minister what the Government have done with the money that they got from oil. How did they fritter that away? Why should we expect a pensioner to pay VAT on fuel and power when we had billions of pounds' worth of oil in the north of Scotland and in other places? How did the Government absolutely squander that?

Mr. Dorrell

One of the things that we have done is to increase by more than 50 per cent. the amount of money spent on the national health service as a result of the improved economic performance. Since 1979, we have seen a substantial improvement in Britain's economic performance, and this has been delivered to the British people by improving real take-home pay and social services. That was the commitment that we gave in 1979, 1983, 1987 and again in 1992. We have been delivering it for 14 years, and we will go on delivering it.

Mr. Jim Cunningham

I could not believe my ears when the Chief Secretary to the Treasury said that over the last 14 years Britain's economic performance had improved. If that is the case, why are we talking about borrowing, and funding deficits? The Chief Secretary has fallen into the trap of believing his own rhetoric. Last week showed that the Government listen to themselves and nobody else, and live in a totally different world from the rest of Britain.

The tragedy of this Budget is that, once again, the burden has been put on those who can ill afford to pay. As the Chief Secretary said, we cannot look at allowances in isolation from the rest of the Chancellor's package. If we look at the burden imposed by the lack of action in relation to tax easement from the lower-paid, add to that such things as VAT, and then start to work out what inflation will be 12 months hence, we can see this tremendous burden unfold.

If I were the Chief Secretary to the Treasury, or any other member of the Government Front Bench, I would be ashamed to be a member of a party that, after 14 years, has brought a great country like ours to such a state that we have to borrow tremendous sums of money and raise money to pay it back.

One or two have to be answered. Two or three times today, hon. Members have alluded to these, and once again we have to take them up. The Chief Secretary, for example, referrred to issues that he must talk about that have arisen over the last 20 years. If we go back 20 years, we are talking about the Heath Government.

Has the Chief Secretary forgotten, when talking about industrial relations, the three-day week and the fact that prices rose considerably, particularly petroleum prices? The members of the Organisation of Petroleum Exporting Countries decided to put prices up, that led to inflation, and the 1974 Labour Government had to pick up the pieces. Let us remember a few facts when we talk about the improvement in Britain's economic position and start to compare records. I do not think that the Government have anything to be proud of.

The Chief Secretary talks about packages, and the Budget is a package, but nothing has been said during the debates or in anything that I have heard over the last few weeks about the balance of payments deficit. I wonder how much planning has gone into that. I wonder what taxes are in the pipeline for the future—or will it be higher interest rates, or perhaps a combination of the two?

Those are the things that the Government should start to think about, because we certainly do not want the stop-go situation again. The Government said 14 years ago that they would bring that sort of thing to an end. They were also elected on the slogan of lower taxation, but in reality we have had sneaky tax, hidden tax, and now taxation has been expanded through VAT. So, if they have not got on top of the deficit next year, will we see further expansion of VAT—for example, to newspapers, children's clothing, and so on?

Again, nothing has been done to help old-age pensioners or one-parent families. Instead, the burden on them has been increased.

That is a sorry indictment of this Government. They may try to find excuses, but the answer is that they have run out of alibis for their stewardship of this country over the last 14 years. The Chief Secretary must be very careful when he talks about improvements in Britain's economic performance, because the ordinary people in the street rejected his Government's policies last week. They are paying a terrible price for their tremendous efforts to put this country on its feet.

I welcome some of the initiatives to help businesses—I do not think that anybody who is concerned about unemployment could fail to do so—but we must ensure that small businesses get the benefits intended for them, and that sums of money in the form of grants are spent wisely.

This is a sorry Budget, a tragic Budget. The former Sir Geoffrey Howe's Budget in 1981 was supposed to set Britain in a new direction, on a new economic course, yet in 1993, we are looking at the same issues as we looked at in 1981. Those in the Government who call themselves accountants play ducks and drakes with figures, but the people of the country can do their homework; they can see the price that they have to pay for the follies of this Government. The Government may defend the highest 5 per cent., but we are very proud of the fact that we defend the lower-paid and people in the middle-income bracket.

The Government's recommendation must, I submit, be rejected tonight.

Dr. Berry

I had not intended to speak in this debate, but I want to respond briefly to a number of comments that have been made.

The proposal before us today is effectively to increase the tax burden on lower income groups, and we have been given some extraordinary reasons why this is appropriate. One extraordinary argument was that the tax burden had to be increased and it could not possibly be increased for those on higher incomes, who have benefited substantially from previous tax cuts.

Even good old Professor Laffer has been invoked, as if it is generally accepted that a little graph that the Professor scribbled on the back of a serviette in a restaurant in the United States a long time ago is somehow gospel and can be used to talk sensibly about tax policy.

I have to say that it cannot. The point is a very simple one. The argument rests on the proposition that, if we reduce people's taxes, they will work harder, so their incomes will he higher, and therefore they will pay more taxes. Ministers have given no evidence whatsoever that if, as has happened, the direct tax burden on higher income groups is reduced, they will work more overtime and consequently pay more income tax. The reason that they have not offered that evidence is that no such evidence exists. Exhaustive studies, not least by Professor C. V. Brown, have shown that income tax cuts on high income groups do not encourage greater efforts to pay even more income tax. It really is nonsense.

The Minister said that the budget deficit has to be corrected, but he did not recognise that it is so high precisely because of the Government's economic performance. I repeat my earlier point: that the Government have the worst record on economic growth of any post-war Government—1.9 per cent. per annum. The Government responded by saying, "No, you misunderstand. Living standards have improved".

Of course they have. If the Government had achieved the remarkable feat of negative growth, no doubt average living standards would have fallen, but even the present Government have managed to secure some economic growth over the past 14 years. It is the natural order of things. However, they have managed to reduce that rate of growth.

Living standards have improved for some people, because they have borrowed extensively in the financial regime created in the late 1980s. I advise the Government to worry as much, if not more, about the scale of private sector debt as they do about public sector debt. If they honestly believe that our economy is capable of sustaining increased living standards in the way that they have suggested, they are deluding themselves.

The clause is part of a tax package that in one sense is perfectly consistent with everything the Government have done. They have increased the tax burden over the past 14 years. It may be a useful device to tell people that they have not, but it is dishonest.

The Government have shifted the tax burden from the higher income groups to the lower. Not one person who has seriously examined the statistics would attempt to deny that charge. It is a charge, an accusation and a criticism. How can anyone conceivably support a tax regime that, year by year, is being geared to ensure that those on higher incomes get more and those on lower incomes get less?

Apparently, in order to encourage those on higher incomes to work harder, they have to pay less tax. Those on lower incomes are encouraged to work harder by paying more tax. That is the nonsense of the Government's position and I hope that the amendment will be supported in the Lobby.

Mr. Thomas Graham (Renfrew, West and Inverclyde)

The Minister told us about the regime that will operate, but he made no apologies for the fact that the wealthy people in Britain will become more wealthy as a result. The rich are getting richer and the poor are getting poorer. Quite clearly, the Treasury had an opportunity to redress the balance and tax the rich people in Britain substantially more and reverse the trend that the Government have been applying for a long time.

I was amazed to hear the Minister's glib reply to me about how the Government frittered away billions of pounds of North sea oil revenue. I wonder what happened to North sea gas, as the gas from the Government is quite stinking. We have the sickest geriatric Government ever. They are so old-fashioned that they are not just getting grey hairs; they are dying on their feet.

6.45 pm

Last week, the English and the Welsh consigned them to the bin and left them with just one council. That is no wonder, because they are utterly mismanaging the economy. There is no way they will get away with that anywhere in Great Britain. I would love the folk of Scotland to have an opportunity to register their protests, which would swing the boot at the Government. Perhaps the Government would then take a responsible attitude, instead of putting VAT on fuel and power, and at least folk would be able to live in a wee bit of comfort.

Will the Treasury Minister think about one issue that I have looked at recently? One of my constituents wrote to me and said, "Tommy, do you remember the hated poll tax, when the Minister came up with a rebate to get us out of the hole that we were in?" The people of Britain went bananas, they wanted rid of the poll tax.

Now the Government are committed to the council tax, and they have had to decide how to cover it. They increased VAT to 17.5 per cent. to provide an acceptable form of local government taxation because of the Government's absolutely massive blunder on local council finance.

The Treasury is producing these ways of balancing the revenue because they clearly got it wrong. They increased VAT to 17.5 per cent. VAT when the poll tax was abolished. Now the Minister expects elderly, disabled and unemployed people to pay 17.5 per cent. more for fuel and power.

I shall be glad to hear the Minister's reply in summing up. I find it amazing that VAT has been increased from 15 per cent. to 17.5 per cent. to cover the council tax. Now they expect 9 million elderly folk, 3 million unemployed folk and all the sick and disabled folk to pay extra. It is absolutely incredible. I am delighted to give way to the Minister.

Mr. Dorrell

I have summed up. I have certainly said all I have to say on the subject, but I should like to correct one wrong figure I used in my speech and in an intervention in that of the hon. Member for Perry Barr—and I apologise to him for that. I flattered the record both of the Government and our predecessors in terms of the effect on the real take-home pay of those on half average earnings. The figures should be that, between 1974 and 1979, those people saw their real take-home pay rise by just over £3 a week, and since 1979 by just over £25 a week.

Mr. Graham

When the Labour Government were in power, some folk in the House of Commons were still in primary school. I do not need a history lesson from any Minister. I remember the days when I started work. There was a Labour Government and I was employed in an apprenticeship. When I finished my apprenticeship, I went to work. I had a good job with good pay and could afford to go on holidays and buy my clothes: I definitely did not need to go to jumble sales and bag sales. That is what the Government have inflicted on the low-paid, the unemployed and the disabled. The Minister should come with me and see the result of his economic plan.

Mr. Brian H. Donohoe (Cunninghame, South)

Will my hon. Friend tell me how many charity shops there are in his constituency? If it is anything like mine, he will find that in the past five years the only expanding industry is charity shops. What is the situation in his constituency?

Mr. Graham

I am grateful for my hon. Friend's intervention. I can see the Minister's face getting whiter, but it is not as pale as some pensioners will be in the winter, when they cannot afford heating because of the Government's VAT policy.

My hon. Friend is right. In my area, there has been a tremendous boom in charity shops. The Government have cut charity funding so much that they have had to open shops while folk have a wee bit of money. It is not the wealthy people who make contributions to charity; it is folk like mothers, aunties, brothers and sisters who do not have a lot of money, but will not go by the tin can.

I make this point to the Minister, and I will make him an offer. I would love the whole Cabinet to come with me on those visits. It would probably help them to make a bit more sense of their taxation regime. I would love them to come to the jumble sales, the boot sales and the charity shops. I would like to take them on a Friday and Saturday night to some of the supermarkets, where they will see the elderly women scurrying about to try and buy goods which are near their sell-by date at half-price. They will see something that I never thought I would see again—the queues for the second-hand clothes and all the women scrabbling for something that costs 50p. That is what the Government taxation system has created for our folk; it has got them begging.

My offer is a sincere one. I notice that the local Conservatives in my constituency have jumble sales, and do very well. They occasionally go along and buy the boots that the lords have thrown in—or even Tory Members have thrown in. We do very well; we may buy a pair of boots for 50p that will give us a couple of weeks more wear. Then they announce in the local paper that the local Conservative fete made a few hundred pounds this week.

Then, in the next couple of weeks, we notice that they are asking local Conservative Members if they will donate old clothes—there is a great need for old clothes in my constituency—so that they can sell them to make a few bob in order to return a regime which imposes a taxation system on the low-paid and which cripples and kills the elderly behind their doors in winter.

Already the price of fuel—coal, gas and oil—is so high that pensioners are dying behind their doors. This is absolutely genuine—I am not conjuring up a fairy tale. I can see from all hon. Members' faces that they know I am telling the truth. The taxation system has been wrong for the last 14 years. For 14 years, the Government have plundered this country's resources; they have squandered the money raised by privatisation and thrown it into the bin—the dustbin of unemployment. They have wrecked the economy by squandering North sea oil and gas.

I only wish that we could have a general election tomorrow. I am sure that a general election tomorrow would not just produce a change of Government, but would enable the elderly folk, the disabled and the unemployed to walk with pride again. They could look forward to a future with jobs, to where the grass grows green and is not made dry and arid by this barren Government. They are a hopeless Government; they have had their day. Let us give them a real knuckleduster. If they are so confident of their tax regime, let us have a general election now.

Mr. Nicholas Brown

During the excellent speech of my hon. Friend the Member for Renfrew, West and Inverclyde (Mr. Graham), I distinctly heard Conservative Members shout, "Tommy for Chancellor." I know that they are desperate to get rid of the present incumbent; nevertheless, I urge my hon. Friend not to cross the Floor to take over the job.

I also understand my hon. Friend's desire to take Conservative Members to charity shops, but he would probably get more for their suits than he would for their Government. I believe that the consumers in his constituency are a fairly discerning bunch: while they might purchase, at a knockdown price, suits that Conservative Members can clearly afford, I doubt that they would purchase a Government whom the country clearly cannot afford.

Let us not obscure the main point of today's debate —that the Government hope to raise an extra £2.7 billion in the financial year 1995–96. That is an awful lot of money. Of course the Government are trying to obscure the way in which it will be done; of course their proposals are not set out bluntly in the form of direct tax increases, as a number of my hon. Friends have pointed out. None the less, that will be the effect of the freezing of these allowances.

Interestingly enough—as my hon. Friend the Member for Kingswood (Dr. Berry) pointed out—the recession is affecting people with savings and people with private-sector debt in a similar way. Those with savings are trying to hold on to them, because they are frightened of spending and uncertain about their future. Labour believes that the only way to weather the present crisis is to deal with unemployment first: it is the core issue, and the Government should concentrate on it first.

Of course the public sector borrowing requirement, and indeed the revenues available to Government, are affected by growth rates. Of course, if the Government were able to restore economic growth to the point at which it should now be, more revenue would be available and they would be able to reduce the deficit. That, however, is not the history of recent years: we have experienced 10 successive quarters of negative economic growth. That affects not only the PSBR, but the tax burden required to service or even reduce it.

I agreed with the Financial Secretary when he cited the work of the Institute for Fiscal Studies about the distributional effect of the whole of the Chancellor's Budget—although, of course, that same distributional effect does not apply just to the details of the allowances that we are discussing.

However, although what the IFS said about the distributional effect of the totality of this year's measures was correct, that does not apply to the whole range of tax changes that the Government have made since 1979. The main change has been the substantial shift from direct to indirect taxation, particularly through VAT increases: that has had a regressive effect on the poor.

The Financial Secretary's favourite line seems to be that real take-home pay has increased throughout the Conservatives' period of office. They are proud of that. The hon. Gentleman, however, is talking about—I believe —58 per cent. of our fellow citizens, who are in work. What about the other 42 per cent.—the unemployed, and pensioners? What has happened to their real earnings since 1979? They have not been as well off under the measures promoted by the present Government.

If we take the lower rate band alongside the freezing of allowances, it is clear that those earning below median earnings will be adversely affected by the Government's proposals—not the very poor; not those who do not pay income tax, and therefore are not affected by the positioning of allowances in lower-rate bands; but those on low earnings. As if that were not enough, I believe that there is widespread public resentment about the way in which the Government have gone about raising the taxes they need in order to deal with the current deficit.

Before the election, we were told that the Conservative party was committed to reducing taxation; then, in the Budget, we are told that VAT must be extended to domestic electricity and to charities. That is probably the most regressive single VAT adjustment that could have been made. We are told that employees' national insurance must be increased, not just for those earning above average incomes—the Labour party's proposal before the general election—but for everyone. That was after the Conservative party promised at the election that they would do no such thing. Moreover, we now have the adjustment of allowances proposed in the Bill.

What is done is regressive. It is a substantial increase in tax—£2.7 billion. I do not think that the Financial Secretary has made the case against the amendment, so I urge hon. Members to vote for the amendment standing in my name.

Question put, That the amendment be made:—

The Committee divided: Ayes 236, Noes 277.

Division No. 266] [7 pm
Abbott, Ms Diane Austin-Walker, John
Adams, Mrs Irene Barnes, Harry
Ainger, Nick Barron, Kevin
Ainsworth, Robert (Cov'try NE) Battle, John
Allen, Graham Bayley, Hugh
Alton, David Beith, Rt Hon A. J.
Anderson, Donald (Swansea E) Bell, Stuart
Anderson, Ms Janet (Ros'dale) Benn, Rt Hon Tony
Armstrong, Hilary Benton, Joe
Ashdown, Rt Hon Paddy Berry, Dr. Roger
Ashton, Joe Betts, Clive
Blair, Tony Hill. Keith (Streatham)
Blunkett, David Hinchliffe, David
Boateng, Paul Hoey, Kate
Boyce, Jimmy Hogg, Norman (Cumbernauld)
Boyes, Roland Hood, Jimmy
Bradley, Keith Hoon, Geoffrey
Bray, Dr Jeremy Howarth, George (Knowsley N)
Brown, N.(N'c'tle upon Tyne E) Howells, Dr. Kim (Pontypridd)
Bruce, Malcolm (Gordon) Hoyle, Doug
Burden, Richard Hughes, Kevin (Doncaster N)
Byers, Stephen Hughes, Simon (Southwark)
Callaghan, Jim Hutton, John
Campbell, Mrs Anne (C'bridge) Illsley, Eric
Campbell, Menzies (Fife NE) Jackson, Glenda (H'stead)
Campbell, Ronnie (Blyth V) Jackson, Helen (Shef'ld, H)
Campbell-Savours, D. N. Jamieson, David
Canavan, Dennis Janner, Greville
Cann, Jamie Jones, Ieuan Wyn (Ynys Môn)
Carlile, Alexander (Montgomry) Jones, Jon Owen (Cardiff C)
Chisholm, Malcolm Jones, Lynne (B'ham S O)
Clark, Dr David (South Shields) Jones, Martyn (Clwyd, SW)
Clarke, Eric (Midlothian) Jones, Nigel (Cheltenham)
Clarke, Tom (Monklands W) Jowell, Tessa
Clelland. David Kaufman, Rt Hon Gerald
Clwyd, Mrs Ann Keen, Alan
Cohen, Harry Kennedy, Charles (Ross, C&S)
Cook, Frank (Stockton N) Khabra, Piara S.
Corbett, Robin Kinnock, Rt Hon Neil (Islwyn)
Corston, Ms Jean Leighton, Ron
Cousins, Jim Lestor, Joan (Eccles)
Cryer, Bob Lewis, Terry
Cunningham, Jim (Covy SE) Livingstone, Ken
Cunningham, Rt Hon Dr John Lloyd, Tony (Stretford)
Dafis, Cynog Llwyd, Elfyn
Darling, Alistair Lynne, Ms Liz
Davidson, Ian McAllion, John
Davies, Bryan (Oldham C'tral) McAvoy, Thomas
Davies, Rt Hon Denzil (Llanelli) McCartney, Ian
Denham, John Macdonald, Calum
Dewar, Donald McFall, John
Dixon, Don McKelvey, William
Dobson, Frank Mackinlay, Andrew
Donohoe, Brian H. McLeish, Henry
Dowd, Jim Maclennan, Robert
Dunwoody, Mrs Gwyneth Madden, Max
Eagle, Ms Angela Mahon, Alice
Eastham, Ken Mandelson, Peter
Enright, Derek Marek, Dr John
Etherington, Bill Marshall, David (Shettleston)
Ewing, Mrs Margaret Marshall, Jim (Leicester, S)
Fatchett, Derek Martin, Michael J.(Springburn)
Field, Frank (Birkenhead) Martlew, Eric
Fisher, Mark Maxton, John
Flynn, Paul Meacher, Michael
Foster, Rt Hon Derek Michael, Alun
Foster, Don (Bath) Michie, Bill (Sheffield Heeley)
Foulkes, George Michie, Mrs Ray (Argyll Bute)
Fraser, John Milburn, Alan
Fyfe, Maria Miller, Andrew
Gapes, Mike Mitchell, Austin (Gt Grimsby)
Garrett, John Morgan, Rhodri
George, Bruce Morley, Elliot
Gerrard, Neil Morris, Rt Hon A.(Wy'nshawe)
Gilbert, Rt Hon Dr John Morris, Estelle (B'ham Yardley)
Godsiff, Roger Morris, Rt Hon J.(Aberavon)
Golding, Mrs Llin Mowlam, Marjorie
Gordon, Mildred Mudie, George
Gould, Bryan Mullin, Chris
Graham, Thomas Murphy, Paul
Grant, Bernie (Tottenham) Oakes, Rt Hon Gordon
Griffiths, Nigel (Edinburgh S) O'Brien, Michael (N W'kshire)
Griffiths, Win (Bridgend) Olner, William
Grocott, Bruce O'Neill, Martin
Gunnell, John Parry, Robert
Hall, Mike Pendry, Tom
Hanson, David Pickthall, Colin
Harman, Ms Harriet Pike, Peter L.
Harvey, Nick Pope, Greg
Henderson, Doug Powell, Ray (Ogmore)
Heppell, John Prentice, Ms Bridget (Lew'm E)
Prentice, Gordon (Pendle) Steel, Rt Hon Sir David
Prescott, John Steinberg, Gerry
Primarolo, Dawn Strang, Dr. Gavin
Purchase, Ken Taylor, Mrs Ann (Dewsbury)
Quin, Ms Joyce Taylor, Matthew (Truro)
Raynsford, Nick Tipping, Paddy
Reid, Dr John Turner, Dennis
Rendel, David Walker, Rt Hon Sir Harold
Robinson, Geoffrey (Co'try NW) Wallace, James
Roche, Mrs. Barbara Walley, Joan
Rogers, Allan Warden, Gareth (Gower)
Rooker, Jeff Wareing, Robert N
Rooney, Terry Watson, Mike
Rowlands, Ted Welsh, Andrew
Ruddock, Joan Wicks, Malcolm
Salmond, Alex Wigley, Dafydd
Sedgemore, Brian Williams, Rt Hon Alan (Sw'n W)
Sheerman, Barry Williams, Alan W (Carmarthen)
Sheldon, Rt Hon Robert Wilson, Brian
Shore, Rt Hon Peter Winnick, David
Short, Clare Wise, Audrey
Simpson, Alan Worthington, Tony
Skinner, Dennis Wray, Jimmy
Smith, Andrew (Oxford E) Wright, Dr Tony
Smith, C.(Isl'ton S & F'sbury) Young, David (Bolton SE)
Smith, Llew (Blaenau Gwent)
Soley, Clive Tellers for the Ayes:
Spearing, Nigel Mr. Gordon McMaster and Mr. Alan Meale.
Spellar, John
Ainsworth, Peter (East Surrey) Clappison, James
Aitken, Jonathan Clark, Dr Michael (Rochford)
Alison, Rt Hon Michael (Selby) Clifton-Brown, Geoffrey
Allason, Rupert (Torbay) Coe, Sebastian
Amess, David Colvin, Michael
Ancram, Michael Congdon, David
Arbuthnot, James Conway, Derek
Arnold, Jacques (Gravesham) Coombs, Anthony (Wyre For'st)
Arnold, Sir Thomas (Hazel Grv) Coombs, Simon (Swindon)
Ashby, David Cope, Rt Hon Sir John
Aspinwall, Jack Couchman, James
Atkinson, Peter (Hexham) Cran, James
Baker, Rt Hon K.(Mole Valley) Currie, Mrs Edwina (S D'by'ire)
Baker, Nicholas (Dorset North) Curry, David (Skipton & Ripon)
Baldry, Tony Davies, Quentin (Stamford)
Banks, Matthew (Southport) Davis, David (Boothferry)
Bates, Michael Day, Stephen
Batiste, Spencer Deva, Nirj Joseph
Bellingham, Henry Devlin, Tim
Bendall, Vivian Dickens, Geoffrey
Beresford, Sir Paul Dicks, Terry
Biffen, Rt Hon John Dorrell, Stephen
Blackburn, Dr John G. Dover, Den
Body, Sir Richard Duncan, Alan
Bonsor, Sir Nicholas Duncan-Smith, Iain
Booth, Hartley Dunn, Bob
Boswell, Tim Dykes, Hugh
Bottomley, Peter (Eltham) Eggar, Tim
Bottomley, Rt Hon Virginia Elletson, Harold
Bowis, John Emery, Rt Hon Sir Peter
Boyson, Rt Hon Sir Rhodes Evans, David (Welwyn Hatfield)
Brandreth, Gyles Evans, Jonathan (Brecon)
Brazier, Julian Evans, Nigel (Ribble Valley)
Bright, Graham Evans, Roger (Monmouth)
Brooke, Rt Hon Peter Evennett, David
Brown, M.(Brigg & Cl'thorpes) Faber, David
Browning, Mrs. Angela Fabricant, Michael
Bruce, Ian (S Dorset) Field, Barry (Isle of Wight)
Budgen, Nicholas Fishburn, Dudley
Burns, Simon Forman, Nigel
Burt, Alistair Forth, Eric
Butler, Peter Fowler, Rt Hon Sir Norman
Carlisle, John (Luton North) Fox, Dr Liam (Woodspring)
Carrington, Matthew Fox, Sir Marcus (Shipley)
Carttiss, Michael Freeman, Roger
Cash, William French, Douglas
Channon, Rt Hon Paul Fry, Peter
Chapman, Sydney Gale, Roger
Churchill, Mr Gardiner, Sir George
Garel-Jones, Rt Hon Tristan Merchant, Piers
Garnier, Edward Milligan, Stephen
Gill, Christopher Moate, Sir Roger
Gillan, Cheryl Moss, Malcolm
Goodlad, Rt Hon Alastair Needham, Richard
Goodson-Wickes, Dr Charles Nelson, Anthony
Gorman, Mrs Teresa Neubert, Sir Michael
Gorst, John Newton, Rt Hon Tony
Greenway, Harry (Ealing N) Nicholls, Patrick
Greenway, John (Ryedale) Nicholson, David (Taunton)
Griffiths, Peter (Portsmouth, N) Nicholson, Emma (Devon West)
Grylls, Sir Michael Norris, Steve
Gummer, Rt Hon John Selwyn Onslow, Rt Hon Sir Cranley
Hague, William Oppenheim, Phillip
Hamilton, Rt Hon Archie (Epsom) Ottaway, Richard
Hannam, Sir John Page, Richard
Hargreaves, Andrew Paice, James
Harris, David Patnick, Irvine
Haselhurst, Alan Patten, Rt Hon John
Hawkins, Nick Pattie, Rt Hon Sir Geoffrey
Hawksley, Warren Pawsey, James
Hayes, Jerry Peacock, Mrs Elizabeth
Heald, Oliver Pickles, Eric
Heath, Rt Hon Sir Edward Porter, David (Waveney)
Heathcoat-Amory, David Portillo, Rt Hon Michael
Hendry, Charles Powell, William (Corby)
Hicks, Robert Redwood, John
Higgins, Rt Hon Sir Terence L. Renton, Rt Hon Tim
Hill, James (Southampton Test) Richards, Rod
Hogg, Rt Hon Douglas (G'tham) Riddick, Graham
Horam, John Rifkind, Rt Hon. Malcolm
Hordern, Rt Hon Sir Peter Robathan, Andrew
Howard, Rt Hon Michael Roberts, Rt Hon Sir Wyn
Howarth, Alan (Strat'rd-on-A) Robinson, Mark (Somerton)
Howell, Rt Hon David (G'dford) Roe, Mrs Marion (Broxbourne)
Hughes Robert G.(Harrow W) Rowe, Andrew (Mid Kent)
Hunter, Andrew Rumbold, Rt Hon Dame Angela
Jack, Michael Ryder, Rt Hon Richard
Jackson, Robert (Wantage) Sackville, Tom
Jenkin, Bernard Sainsbury, Rt Hon Tim
Jessel, Toby Scott, Rt Hon Nicholas
Johnson Smith, Sir Geoffrey Shaw, David (Dover)
Jones, Gwilym (Cardiff N) Shaw, Sir Giles (Pudsey)
Jones, Robert B.(W Hertfdshr) Shephard, Rt Hon Gillian
Jopling, Rt Hon Michael Shepherd, Colin (Hereford)
Kellett-Bowman, Dame Elaine Shepherd, Richard (Aldridge)
Key, Robert Shersby, Michael
King, Rt Hon Tom Sims, Roger
Knapman, Roger Skeet, Sir Trevor
Knight, Mrs Angela (Erewash) Smith, Tim (Beaconsfield)
Knight, Greg (Derby N) Soames, Nicholas
Knight, Dame Jill (Bir'm E'st'n) Spicer, Sir James (W Dorset)
Knox, David Spicer, Michael (S Worcs)
Lait, Mrs Jacqui Spink, Dr Robert
Legg, Barry Spring, Richard
Lennox-Boyd, Mark Sproat, Iain
Lester, Jim (Broxtowe) Squire, Robin (Hornchurch)
Lidington, David Stanley, Rt Hon Sir John
Lightbown, David Steen, Anthony
Lilley, Rt Hon Peter Stephen, Michael
Lloyd, Peter (Fareham) Stern, Michael
Lord, Michael Streeter, Gary
Luff, Peter Sumberg, David
Lyell, Rt Hon Sir Nicholas Sykes, John
MacGregor, Rt Hon John Tapsell, Sir Peter
MacKay, Andrew Taylor, Ian (Esher)
Maclean, David Taylor, John M.(Solihull)
McLoughlin, Patrick Taylor, Sir Teddy (Southend, E)
McNair-Wilson, Sir Patrick Temple-Morris, Peter
Madel, David Thomason, Roy
Maitland, Lady Olga Thornton, Sir Malcolm
Malone, Gerald Thurnham, Peter
Mans, Keith Townsend, Cyril D.(Bexl'yh'th)
Marland, Paul Trend, Michael
Marlow, Tony Trotter, Neville
Marshall, John (Hendon S) Twinn, Dr Ian
Marshall, Sir Michael (Arundel) Vaughan, Sir Gerard
Martin, David (Portsmouth S) Viggers, Peter
Mawhinney, Dr Brian Waldegrave, Rt Hon William
Mayhew, Rt Hon Sir Patrick Walden, George
Waller, Gary Wilshire, David
Wardle, Charles (Bexhill) Winterton, Mrs Ann (Congleton)
Waterson, Nigel Winterton, Nicholas (Macc'f'ld)
Watts, John Wolfson, Mark
Wells, Bowen Wood, Timothy
Wheeler, Rt Hon Sir John Yeo, Tim
Whitney, Ray Young, Sir George (Acton)
Whittingdale, John
Widdecombe, Ann Tellers for the Noes:
Wiggin, Sir Jerry Mr. Timothy Kirkhope and Mr. Andrew Mitchell.
Wilkinson, John
Willetts, David

Question accordingly negatived.

Clause 52 ordered to stand part of the Bill.

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