HC Deb 08 December 1994 vol 251 cc473-88 3.31 pm
The Chancellor of the Exchequer (Mr. Kenneth Clarke)

With permission, I should like to make a statement. It is a statement, not a Budget statement. I regard it as a corrigendum to an earlier Budget, on which the House has decided to change its mind.

Following the vote on Tuesday night, I told the House that the Government remained committed to taking all the necessary measures to put the public finances on a sound footing.

The reductions in the public sector borrowing requirement that I announced were welcomed at the time by the business community, by the financial markets and by the House. During the course of our Budget debate, very few right hon. and hon. Members questioned that judgment.

To keep those borrowing plans intact, I said on Tuesday that I would be bringing forward measures to make good the gap in the public finances from holding the rate of value added tax on domestic fuel and power at 8 per cent. I can now tell the House what those measures will be. A press note filling out the details of my proposals will be available from the Vote Office as soon as I have sat down.

Holding the rate of VAT at 8 per cent. will reduce revenue by about £1 billion in 1995–96 and, as a result of the quarterly profile of payments, £1.5 billion in subsequent years. Those are the amounts I have sought to recover.

As VAT on fuel will remain at 8 per cent. it would be quite wrong to increase social security expenditure by providing the full compensation package previously announced to help people with VAT at 17.5 per cent. We will adjust the amount that would have been paid had VAT on fuel been increased. By adjusting that amount, we will save about £200 million in 1995–96 and subsequent years.

We will, of course, keep in place the help already given for 8 per cent. VAT on domestic fuel and power. We will increase benefits fully in line with the relevant cost of living index, including the component reflecting the impact of last year's VAT increase. After those adjustments, pensioner couples will receive help of at least £1.05 a week from next April. This will be more than the average weekly cost to pensioners of paying 8 per cent. VAT on fuel. I am also keeping unchanged the increases in cold weather payments and spending on the home energy efficiency scheme which I announced in the Budget and in last Tuesday's debate.

That small change in the previously announced pension rates has a knock-on effect to the national insurance system, since the lower earnings limit is automatically linked to the single pension. National insurance contributions will therefore start at £58 rather than £59 a week from April 1995. The upper earnings limit will be unchanged. That will raise receipts from national insurance contributions by about £50 million next year.

So the remaining gap for 1995–96 amounts to about £800 million. My first option was to look at public spending. In my last two Budgets, I have been able to find savings of £43 billion in public spending over the four survey years. That is much larger than the increases in taxation that we found it necessary to make to restore healthy public finances after the recession. We have managed to find those savings while increasing spending in real terms on key public services, such as the national health service and the police. My objective remains to reduce Government spending to below 40 per cent. of total national output. Both Budgets made that objective much more achievable.

The details of this year's extremely tight public spending settlement have already been announced by the relevant Secretaries of State. I do not consider it practicable or sensible to reopen those settlements today. At the time of my Budget, I struck a balance between spending and revenue designed to ensure that the economy remains on track for steady and sustainable growth. Nothing that has happened since has led me to change that judgment for this year's settlement.

The next area that I considered to recover the shortfall in revenue was direct taxation. Since 1979, the Government have reduced the basic rate of taxation from 33p to 25p in the pound. We also introduced the new lower rate of 20p—one fifth of all taxpayers now pay tax only at that lower rate of 20p. When seeking to raise revenue in the 1993 Budgets, my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) and I considered it necessary to freeze personal allowances and reduce the married couple's allowance and the mortgage interest relief allowance.

I considered then that those increases in direct taxation were a sufficient and reasonable contribution to our revenue needs. That remains my view today. I do not intend to reverse my decisions to index the personal allowances and to over-index above inflation the elderly person's allowance and the 20p band.

As my next option, I also considered raising additional revenue through business taxation— [Interruption.] It is my clear impression from the debates that I have been listening to that hon. Members need to be taken through the options for the consequences of their votes. They need to be taken through them— [Interruption.] It is all very well voting at the behest of Conservative Euro-rebels, but certain consequences do follow.

I also considered raising additional revenue from business taxation. In my Budget, I provided as much help as I could for the business community. The reason was simple—strong and thriving businesses are essential for a strong and thriving economy.

During last week's debate, I also listened to the Labour party's proposals for closing loopholes and introducing a windfall tax on utilities. I have done some work to study them. The hon. Member for Dunfermline, East (Mr. Brown) asked me to do so.

The proposals are not serious options for revenue raising. This Government have never been a friend to the tax avoidance industry. Conservative Chancellor after Conservative Chancellor has closed loopholes, year after year. The last two Budgets speak for themselves. I will raise nearly £3.5 billion between 1994–95 and 1997–98 by closing loopholes. The hon. Gentleman's proposals on loopholes are undesirable changes in taxation on legitimate business. I have considered his proposal on executive share options many times. The policy behind the existing tax relief for such share options is geared to encouraging companies to motivate key employees and to benefit all shareholders. Executives are liable to capital gains tax once they sell their shares. The hon. Gentleman's suggestions totally exaggerate the cost of the scheme. He claims that I could raise £200 million by reforming it. The actual total cost of the relief is estimated at around £50 million to £60 million, which is all one would gain by abolishing it.

The suggestion of a windfall tax is, by definition, a one-off tax—a one-off sum of money. It could not replace permanent annual loss of a flow of revenue. In any event, it appears to be based on the suggestion of taxing profits on gains, which, as the right hon. Gentleman appears to have discovered in this morning's press, are already liable to taxation. A windfall tax would simply be another tax on a particular sector of industry. Like other taxes on business, it would inevitably have adverse effects on that business sector's investment and prices.

My third and remaining option for 1995–96 therefore has been to look to indirect taxation. As the House has rejected an increase in indirect taxation to which the House had previously agreed, it is wholly consistent with my Budget strategy, and it preserves the shape of the Budget, to fill the hole with increases in indirect taxation. I have decided to bring forward certain increases in taxation in addition to those announced in my Budget, and the increases will take effect from midnight, 31 December 1994.

I propose that the duty on tobacco products, with the exception of hand-rolling tobacco, will increase by just under 4 per cent., equivalent to a further 6p on a packet of 20 cigarettes. This further increase in tobacco duty is consistent with our policy of increasing prices to discourage smoking.

I also propose that the duties on road fuels will rise by a further 1p a litre. I have kept these increases to the minimum to limit the burden on business users and the rural motorist. Even after these increases, petrol will still be cheaper in real terms than it was a decade ago, and it will still be cheaper than in our main European competitors.

The increase will also play a part in our strategy for curbing emissions of carbon dioxide. We remain fully committed to the target of reducing carbon dioxide emissions to 1990 levels by the year 2000, as do the Opposition.

Finally, I propose that duties on alcohol will rise by around 4 per cent. This is equivalent to 1p on a pint of beer, 5p on a bottle of wine and 26p on a bottle of whisky.

Mrs. Ann Taylor (Dewsbury)

What about champagne?

Mr. Clarke

Eight pence on champagne.

For the reasons set out in my Budget statement, I had hoped to spare these industries any increase in duty this year, but in present circumstances, as a result of my need to raise revenue from sources other than value added tax on fuel, I have reluctantly judged it necessary to raise some additional revenue from them.

Taken together, these increases will raise £180 million in the current financial year and nearly £800 million in 1995–96. In total this is sufficient to meet the shortfall next year. I therefore expect the public sector borrowing requirement next year to be the same as I announced in my Budget statement.

Let me turn now to the following year, 1996–97. For that year I need to raise £1.5 billion. The tax measures that I have announced today will raise an additional £850 million. The impact of the higher duties that I have announced today on the retail prices index will not be as great as the impact would have been from the second stage of VAT on fuel. Inflation will therefore be very slightly lower than expected, leading to further public spending savings on benefits of around £160 million in 1996–97 and in later years, and there will be savings of around £200 million from the withdrawal of help to compensate for the second stage of value added tax.

There will therefore remain a further gap of around £300 million to be filled in 1996–97. I propose to finance this gap by reducing the public expenditure control totals for those years. For the time being, I will score that reduction through a reduction in the provision that I have made for the reserve. The eventual consequence for departmental programmes—of course, there must be a consequence for departmental programmes—will be addressed in next year's spending round. Again, I expect the public sector borrowing requirement to be as I announced in my Budget statement in 1996–97 and in subsequent years.

Resolutions under the Provisional Collection of Taxes Act 1968 to hold VAT on fuel at 8 per cent. and to increase other taxes with effect from 1 January 1995 will be tabled very shortly. My right hon. Friend the Leader of the House will then be arranging a debate before the House rises for the Christmas recess.

I said in my Budget speech that the British economy is currently facing the most favourable set of economic circumstances that it has seen for many years. Trade figures published only this morning show that exports are up 14 per cent. in the last year, and are once again at record levels. The trade deficit is the lowest that it has been for almost 10 years. The outlook for jobs and future prosperity for men and women in this country is improving day by day.

The House and the political leadership of this country have an obligation to behave responsibly and to keep this healthy recovery on track. We have an obligation to act responsibly and not be tempted by short-term populist measures which would undermine confidence in the Government's commitment to public finances. The measures that I have announced today ensure that that commitment is fulfilled.

Mr. Gordon Brown (Dunfermline, East)

While the whole country will be relieved that the House has forced the Government to abandon the rise in value added tax on fuel, it will now ask why they had to take 18 months and four Budgets to bring forward the alternative measures—including the indexation of tobacco taxation which we will support—which the Government could have proposed in the first place. Does not today's statement show why the House of Commons was right to inflict a defeat on the Government on Tuesday?

On the compensation for pensioners, will the Chancellor confirm in specific detail that he expects pensioners to continue to meet fuel bills that are up by £1 a week on average as a result of the VAT that remains[Interruption.]—yes, they are up by £1 a week on average—with only 50p cash compensation in their hands and only £36 a year, even after price indexing, to meet average fuel bills of £505 a year?

Will the Chancellor now explain to the country's pensioners why he is withdrawing not only the 25p a week that he promised his party on Tuesday evening but the 30p a week that he promised last year, which was announced in the social security uprating and which has been written into pension books that are now being sent out? Will he confirm that it is true that the Government are now recalling pension books that have been issued?

Will the Chancellor now explain to 10,000,000 pensioners and others on low income why he is so out of touch and his priorities so unfair that he is clawing back the compensation for pensioners while he insists on going ahead with cuts in the price of bottles of champagne? Will he explain why he is punishing pensioners when it is the Conservative party that should be paying the price for its mistakes?

As for public spending cuts, will the Chancellor confirm that he plans to cut £320 million next year and £255 million the year after? Will he explain where he is planning to make those cuts and how he squares them with his promise that there would be no cuts in public investment, and with the Prime Minister's statement at the election that cutting public spending was "not economically right"?

On taxation, will the Chancellor confirm this: that, on top of the national insurance rise that people are already paying, on top of the income tax rises resulting from the mortgage tax relief being withdrawn and the cut in the married couple's allowance, and on top of the other five tax rises, the effect of the tax rises that he is announcing today is another 43p a week for the typical taxpayer? Will he confirm that that means that the typical burden faced by millions of people as a result of all the tax changes that the Conservatives have made is now £875 a year, which is in breach of election promises that there would be no tax rises at all?

On alcohol, will the Chancellor confirm his assessment of the number of jobs that will be lost as a result of his complete U-turn on the price of beer? [Interruption.]. I am referring, as Conservative Members know, to beer and to the lobby that the Chancellor should listen to about the effect on jobs in the industry as a result of his changes today.

As the Chancellor raises questions about the alternatives that the Labour party would put forward, will he now confirm in detail that, if removed—on the recommendation of the deputy chairman of the Conservative party, who said that they were unfair—executive share options and the tax privileges would raise not only the money that he saves from capital gains tax but the money from the spouses of people who hold those executive shares, and that the true figure, as calculated by all the experts throughout the country, is not £45 million, but £200 million in total? [Interruption.] Conservative Members opposite do not want to listen, because they do not understand the unfairness of a Government who put up the taxation of ordinary people while refusing to deal with abuses in the tax system.

Will the Chancellor confirm that, as far as the de-merger of the national grid is concerned, which he mentioned in his statement, the Government are in a position to raise £1,000 million in capital gains tax and corporation tax, and that that has not been included in the public expenditure and taxation estimates that have been brought to the House? Will he also confirm that it is not only the Large Energy Users Council but a former Tory Member of Parliament—the secretary of that council—who said that the case for a windfall tax on the utilities is now pressing and that it should now be introduced?

If the Chancellor says that our measures are a one-off, let me ask him in conclusion: is not the underlying truth of his Budget measures today that, to pay for the sole remaining policy that the Conservative Government now have—tax cuts next year—they will contemplate any tax rises? They will even take money that they promised to pensioners. They will contemplate additional reductions in living standards this year. Will he tell us specifically whether he agrees with the Governor of the Bank of England, who said this morning that the price of tax cuts next year could be interest rate rises as well?

This latest Budget statement shows a Government who have been stumbling from crisis to crisis, from panic measure to panic measure—a Government who are at their core incompetent and unfair. They are no longer fit to be in charge of our nation's finances. They are out of touch. They should now be out of office.

Mr. Clarke

I believe the hon. Member for Dunfermline, East (Mr. Brown) to be an intelligent and thoughtful man. If I did not, I would have come to the conclusion by now that he was completely unable to master his brief on either taxation or the economy. As I think that he can master it, I believe that he is trying to deceive people by pretending that there are accountancy devices that would produce money from nowhere to enable him to answer the questions that he is incapable of answering about the consequences of his own votes and his own irresponsible behaviour.

I deal first with the measures that I announced today, some of which the hon. Gentleman implied at one point he might support. They are not my first options; they are my second, and the hon. Gentleman has discovered that there are disadvantages with some of them. I shall tell him why I limited what I had already done in particular areas.

In the case of tobacco taxation, I had already committed myself to over-indexing it in the interests of health promotion, but there is a serious smuggling problem with tobacco, which is why I exempted hand-rolling tobacco, where the position is getting particularly bad. I had already increased tax on petrol and diesel, but had gone as far as I wished to go, bearing in mind the interests of the rural motorist and of business. I had been able to freeze again the tax on alcohol, again because of the smuggling problems, which we are going to tackle most vigorously by making our customs effort more effective, as it was yesterday.

I do not understand how the hon. Gentleman can have the nerve to start addressing me about the disadvantages of the measures that I have presented. Let him go and tell the Scotch Whisky Association, the Brewers and Licensed Retailers Association and the rural motorist why my statement had to be made. According to my recollection, only a handful of my hon. Friends were involved in the move to this second option. The hon. Gentleman has discovered rather late in the day that indirect taxation in other areas has disadvantages.

Then the hon. Gentleman has the nerve to claim that I am withdrawing more compensation than is consistent with my judgment. He talks of my withdrawing compensation related to next year's VAT increase—an increase that has now been cancelled. He says that pension books have been sent out; 6,000 or so have been sent out, but obviously they will be withdrawn and replaced.

The hon. Gentleman wrote to me this morning; I have his letter before me. It stated that I must meet important requirements. Let me read out the most relevant: The Budget should ensure that there is proper compensation for pensioners and those on low incomes for the 8 per cent. VAT rise. The hon. Gentleman then has the brass neck to get up and demand compensation for the 17.5 per cent. charge as well. He has cost us the compensation for that charge; I shall deal with the effect on pensioners.

I have already said that the compensation for the 8 per cent. increase that we have allowed for a couple will pay the average bill. The average bill is paid by prosperous pensioners with large houses and incomes; they will pay large bills. Poorer pensioners tend to pay below-average bills, and many of them will be over-compensated It is absurd for the hon. Gentleman, in his most populist mode, to say cheerily that they should receive more on top of that over-compensation.

The hon. Gentleman asked me where I would find spending cuts. I do not know how he has the brass neck to lecture Conservative Members on the need for public expenditure control, which he votes against at every opportunity—every time a proposal for such control is presented to the House. The Budget debate was littered with criticisms from Opposition Front Benchers of the public spending o control that we were exercising on matters for which they were responsible.

The fact is that we are going to find more public spending cuts. For two years, we shall be controlling public spending within our present constraints. As I have made clear, we shall recover the £300 million—on top of whatever else is required—in years two and three of a properly and professionally conducted public spending round.

The hon. Gentleman referred to various measures. He is straightforwardly wrong about share options. As for the tax on the national grid, the national grid has not yet been sold. We do not know what capital gain will be made, but whatever gain is made will he subject to capital gains tax.

The hon. Gentleman appears to imagine that I can start making guesstimates now of the bill that a particular taxpayer might pay next year, and start adjusting the Budget to take account of it. That is infantile. The hon. Gentleman is still talking about a windfall tax for industry, on top of the tax that industry is already paying—thereby tackling the gains that have been made, including the 3 per cent. downward effect on its charges.

I cannot believe that someone who graces the title of shadow Chancellor has come here and said that he has read in the newspapers that a particular taxpayer might pay a large bill next year, which might or might not affect the estimates that we have already made for corporation tax. That, apparently, is how a complete Budget should be altered to compensate for a loss of a tax.

A previous Labour Chancellor was fond of using the phrase "silly billy". I think that that is an accurate description of the hon. Member for Dunfermline, East.

Several hon. Members


Madam Speaker

Order. The House will recall the Chancellor of the Exchequer saying that we shall have a debate on this matter before Christmas. I inform hon. Members that I shall not let the debate on the statement run a long time, so I want brisk questions and answers from now on.

Sir Terence Higgins (Worthing)

Is my right hon. and learned Friend aware that his maintenance of tough action on the deficit will be welcomed by the financial markets? Is he further aware that his analysis of the choices available and the choice of tobacco and petrol duty are the right ones? But is not the reaction of the hon. Member for Dunfermline, East (Mr. Brown) extraordinary?

It is true that, as a result of the vote the other night, some pensioners will lose. It seems odd, however, that the hon. Gentleman should then come here and complain about it, given the way he voted. Is it not the case that my right hon. and learned Friend's approach to pensioners, generally speaking, has been sympathetic, and that they should welcome the overall effect of the Budget?

Mr. Clarke

I am grateful to my right hon. Friend. Despite the extraordinary and excited events of the past fortnight, we have kept confidence in our policy in the financial markets. We have kept confidence in our policy in the business community. That matters to a much wider group of people. I am not a man from the City or from the business community. It matters to men and women around the country who are trying to earn their livings and to make their jobs safer in the fevered political climate that is coming out of the House of Commons.

I agree that the hon. Member for Dunfermline, East will neither tell us what he would do nor take responsibility for his actions when he cast votes against measures that we had already proposed.

As my right hon. Friend the Member for Worthing (Sir T. Higgins) says, we are compensating pensioners. The campaign about VAT on pensioners was accompanied by pictures in some of the newspapers of little old ladies who would be taxed sitting in small rooms with bar fires. Those people with below-average bills were over-compensated by our proposal. The people at the very bottom end—the poorest pensioners with the smaller bills—have lost money as a result of the vote that the House cast earlier this week. The hon. Member for Dunfermline, East will not face up to the need to find £1,500 million of revenue to replace that which we have lost.

Mr. Malcolm Bruce (Gordon)

Does not the Chancellor of the Exchequer realise that he is demonstrating before the House this afternoon the politics of pique? He had in his Budget £1 billion, which he could have used, if he had chosen to do so, to prevent the VAT increase on fuel, without the need arising of having to come back to the House today. He chose not to do so. Is it not also extraordinary that he replaced one tax increase with no fewer than three, which demonstrates the enthusiasm with which the Tory party now increases taxes?

Will the right hon. and learned Gentleman explain why he chooses to increase the tax on whisky and gin, which we make, while protecting the makers of champagne, who are not British? Will he not recognise that he could have found all that money with no extra tax increases if he had cut waste in Government Departments on consultants, on advertising and on entertaining? He simply demonstrated the politics of pique, and the pain and anguish could have been avoided if he had only listened to the people in the first place.

Mr. Clarke

With the greatest respect to the hon. Gentleman, we have a strong and recovering economy, and the Liberal party and Labour party sound like the sort of politicians who ruined South American countries' recoveries when their economies got out of hand. I have the hon. Gentleman's letter about his policies. He is into share options as well. He does not like the duties that I am raising, but one of his suggestions is: extend employers' national insurance contributions to benefits in kind. Does he realise the consequence for small employers of having to account, in calculating national insurance stamps, for all the benefits in kind as if they were an income tax? That is an extraordinary proposal for him to make, which would be costly to business. He has no alternatives.

Again, I can scarcely believe my ears when the hon. Gentleman talks to me about cutting waste in Government Departments. What I have announced in this year's public spending plans means level central Government running costs in cash terms over the next four years. I do not believe that the Liberal party could achieve that in a thousand years. Nor does it ever speak about any way in which it could do it. Despite the totally irresponsible behaviour of both Opposition parties, we have a package of measures and a Budget to keep the recovery on the rails and to help people out there in the real world, earning their livings and making this country more prosperous.

Mr. Peter Brooke (City of London and Westminster, South)

Does my right hon. and learned Friend agree that it is one of the laws of human affairs that, if one proceeds with one's eyes firmly fixed on the ground, looking for windfalls, one increases the danger of hanging oneself up on a loophole?

Mr. Clarke

I quite agree with my right hon. Friend. I hope that, between now and next year, some homework is done by the Labour party. My right hon. Friend and I welcome the serious challenge and various responsibilities that we have faced. Next year, perhaps someone from the Opposition will explain precisely their alternative, or at least give us another source of innocent merriment to match that provided by my right hon. Friend.

Mr. Robert Sheldon (Ashton-under-Lyne)

Is the right hon. and learned Gentleman aware that the Red Book reveals serious errors of £10.5 billion each year in assessing the PSBR? Why is he seeking a spurious accuracy? He talks about £800 million when he makes errors of £2.5 billion every year. Could he not have waited? Why this frantic rush to try to achieve a spurious accuracy?

Mr. Clarke

I am not claiming a spurious accuracy. The PSBR estimates in the Red Book are properly worked out. I query them and go through them. We produce the best judgment we can of the profile for the PSBR. A wide margin for error exists on either side, because, as everyone has discovered, economic forecasting is a rather difficult process. The margin of error is around a calculated mean. If one raises that by £1.5 billion, the margin of error at the top and bottom goes up by £1.5 billion.

The right hon. Gentleman is arguing that, if we lose £1.5 billion, as we did in the rather extraordinary circumstances of Tuesday, we should ignore it. He is a former Treasury Minister and he knows perfectly well that he would never have advocated such an irresponsible step—or perhaps he might have done, given the Chancellor for whom he worked.

Mr. John Townend (Bridlington)

May I say how pleased I am that the Chancellor has maintained his Budget stance, so that we will have a Budget surplus within the next three to four years? He will not be surprised, however, if I am slightly saddened that all the burden of filling the gap has fallen on the taxpayer, while no further cuts have been made in expenditure. I am rather mystified that we should attack the brewing and distilling industries, especially when we have a problem with smuggling, whereas expenditure on overseas aid and the heritage budget is sacrosanct.

Mr. Clarke

My hon. Friend is always consistent and extremely clear in the strategy that he urges. I know that he welcomes the fact that more than £40 billion has been saved from public spending plans so far. As I have made clear to him, a further £700 million—two sums of £350 million—will come out of those public spending plans in the next two years, quite apart from any judgment we may make about the practicability of making further cuts in those plans.

I assure my hon. Friend that I looked closely at the prospects for further cuts in year one, on top of the £28 billion in total Government spending already announced in my recent Budget. At this stage of the year, all the decisions have been announced, the plans have been made and budgets are being set by local authorities and health authorities, so one cannot resume a full public spending round. The only way to approach that would be by making a discretionary cut across all programmes to try to raise the necessary money. That would pose difficulties for defence, the health service, the police and many other services.

We are responsible for competent government, and the decisions we have taken, which have dramatically reduced public spending, have been made as a result of properly conducted public spending rounds. That is how we will get the £700 million required in years two and three, but at this stage it is obviously necessary to raise revenue. As I have already said to my hon. Friend, I regret the necessity to raise the revenue. It is my second choice. It would not have been my first choice, or that of my hon. Friend, but given that he has supported the Budget judgment so strongly, I hope that he will accept that it is necessary to raise that revenue to keep the recovery on course.

Mr. Giles Radice (Durham, North)

As the Government have trouble in getting their financial measures through the House, would not it be sensible to consult the Opposition as well as Tory rebels before bringing forward such measures?

Mr. Clarke

If the hon. Gentleman counts my attendance at various stages of the Budget debate, I suppose that I have spent five days consulting the Opposition, and answer came there none. So far, we have had no difficulty in getting this year's Budget measures through, and we have had no difficulty in getting previous years' Budget measures through. But the Opposition—because they did not have very much to say about this year's Budget—irresponsibly decided to readdress the question of VAT on fuel. [Interruption.] There was a difficulty, and I have accepted the wish of the House. I am sure that the hon. Member for Durham, North (Mr. Radice)—with his views on Europe—will accept that it was a very curious coalition indeed which defeated the Government on Tuesday, and it certainly was not one with any economic expertise.

Mrs. Jacqui Lait (Hastings and Rye)

May I welcome my right hon. and learned Friend's recognition that there is a problem with the smuggling of hand-rolling tobacco? May I suggest to him that the higher the profit that is to be made from alcohol and smuggled tobacco, the greater the availability, and hence the greater long-term effect on health. Other than prevention—which does not work—how does my right hon. and learned Friend propose to deal with the problem of smuggling?

Mr. Clarke

I am glad to say that we recovered an extremely successful haul yesterday, and serious charges will flow from that. We are being increasingly succesful in tackling organised smuggling, although I accept that a lot of revenue and trade has been lost through the differentials which legally apply in legitimate cross-border trading. Those must be addressed by trying to get an approximation of duty levels as soon as we reasonably can in the single market.

Our review of Customs and Excise is concentrating on further improving the effectiveness of our efforts to counter smuggling. There have been some criticisms, from the Opposition particularly, about some of the manpower consequences of the changes, because random checks and so on are not the most effective ways of dealing with the problem. One requires modern technology, efficient organisation and improving the flow of intelligence, and I hope that yesterday's news underlines to my hon. Friend that we are determined to tackle what I wholly agree with her is an extremely serious problem for legitimate traders and manufacturers.

Mr. Stanley Orme (Salford, East)

On the right hon. and learned Gentleman's last point, surely he should explain why the cuts are taking place in Customs and Excise when the organisation needs to be strengthened. How can the Chancellor justify what he has just said to the House?

Mr. Clarke

The right hon. Gentleman is assuming that the only way to intensify effort is by increasing manpower. [Interruption.] I understand the campaign from the trade unions which are involved, and Opposition Members are perfectly entitled to represent that. [Interruption.] That is the case—Opposition Members are bound to argue that.

If one is looking to improve the effectiveness of an organisation, one must target its efforts to those areas where it is obvious that one is having the most effective results. One must also make sure that those aspects of activity which produce the best results have the proper resources and are taken further. Customs and Excise has an enormous job to tackle today, and I congratulate it on the steady stepping up of its efforts, which are beginning to produce spectacular results.

Mr. Quentin Davies (Stamford and Spalding)

Does my right hon. and learned Friend agree and accept that there will be widespread admiration for a very astute, exemplary and sound package of measures which he has announced this afternoon? Will not the whole country draw the obvious conclusion from the fact that the shadow Chancellor got his sums shambolically and embarrassingly wrong?

Mr. Clarke

I am grateful to my hon. Friend, who does have considerable expertise in these matters. I am glad that he understands the options which I had before me, and I am also glad that he accepts that the shape for which I have opted and the measures which I have proposed are the right ones to preserve the strategy of the Budget and to keep on course the present extremely healthy recovery, which must continue if it is to deliver benefits to men and women across the country.

Mrs. Anne Campbell (Cambridge)

If the handful of Conservative Members to whom the Chancellor referred a moment ago as Euro-rebels vote for the package, will the Whip be restored to them?

Mr. Clarke

Matters of the restoration of the Whip are not for me, but they are usually governed by the practice of voting for a Conservative Government. The same practice has been followed by the Labour party when it has had similar difficulties from time to time. I am quite sure that we will continue to have such difficulties frequently in the future.

Mr. Kin Duncan Smith (Chingford)

Does my right hon. and learned Friend accept that many Conservative Members regret his having to appear before us today with those measures? Furthermore, will he instruct all those in business who transport goods, publicans, those who run off-licences and everyone else engaged in the legitimate sale of alcohol now to take all their comments to the hon. Member for Dunfermline, East (Mr. Brown) and ask him why we have had to make their business much harder?

Mr. Clarke

I am grateful to my hon. Friend. Like me, he realises that this is a difficult package. He and I did not want to see the price of petrol, diesel, tobacco and alcohol go up in that way. I share his reaction. The next time Opposition Members attend gatherings allegedly to further the interests of those industries and the people who work in them, people should tackle them about how far their actions match the lobbying letters they write to me and the representations they make in the House.

Mr. Dennis Skinner (Bolsover)

Is the Chancellor aware that there was another option? In the past 15 years of this Tory Government, the richest 10 per cent. have had £50 billion-worth of accumulated tax cuts. Instead of putting extra tax on fags, beer and petrol, the Chancellor could have chosen to take a couple of billion pounds back from the super-rich. Instead, he decided to hammer the working class. I shall give him this tip: when Labour gets into power shortly, I shall encourage those on our Front Bench to do exactly that.

Mr. Clarke

I well remember the hon. Member for Bolsover (Mr. Skinner) delivering a shadow Budget on the Floor of the House many years ago. I sat throughout it—he took more than an hour but put nobody to sleep. Indeed, it was an extremely well put together shadow Budget, and very much better than anything that I have ever heard today's occupants of the Opposition Front Bench outline.

At least the hon. Gentleman is consistent. He knows what the Labour party is for, and has always advocated taxing the rich as he describes. We have discovered and experienced that, if we tax those rich, we drive them abroad and damage British industry. We have also found that the proportion of total taxation now paid by higher earners has increased as a result of getting rid of the high levels of penal taxation that satisfy the politics of the hon. Gentleman and for which he still yearns.

Mr. Richard Alexander (Newark)

May I remind my right hon. and learned Friend that one of the less well publicised aspects of his first Budget statement was the fact that the breakdown between pension increase and VAT was to be made clearer in the pension book? Despite Tuesday's vote, will he confirm that, in future, people will know from their pension book how much of the component of what they get is represented by VAT compensation?

Mr. Clarke

Because of the changes that are being made, my right hon. Friend the Secretary of State for Social Security is considering that matter. It is clearly a matter for him and I shall ensure that my hon. Friend's representations are passed on to him this afternoon.

Mr. Alex Salmond (Banff and Buchan)

The Chancellor's flippant remarks about old-age pensioners and fires come ill from somebody who will never have to go cold in the winter. Given the money that he is looking for, which he has admitted is only 10 per cent. of the standard error on the public sector borrowing requirement, is it not an issue only because of his extraordinary behaviour over the past few days? Has he not replaced one anti-Scottish tax of VAT on fuel with two anti-Scottish taxes on petrol and whisky? Why should the people of Scotland pay for the Chancellor's incompetence and the Prime Minister's petulance?

Mr. Clarke

I, personally, gain from the vote cast on Tuesday, as my heating bills will be reduced now that the higher rate of VAT will not be put on fuel. A pensioner in a small property with low bills loses as a result of Tuesday's vote, because the compensation would have exceeded the value added tax. There is no point in my arguing the case again. It was not accepted, and I accept the judgment of the House.

The hon. Gentleman must face up to the consequences of his actions. I regret the effect on rural motorists in Scotland, but it might have been less if the hon. Gentleman could do his arithmetic and work out the consequences of the votes he casts when he comes here.

Mr. Toby Jessel (Twickenham)

I warmly welcome the increase in tax on tobacco, which I urged on Monday in my speech in the Budget debate, on the grounds that it would tend to reduce the number of deaths from lung cancer and other appalling diseases, and deter with more force the number of young people starting to smoke. Has my right hon. and learned Friend noticed the deafening silence from Opposition Members who claim to care about health? How does he expect them to vote on that?

Mr. Clarke

It is an ill wind that blows nobody any good. I know my hon. Friend's fierce commitment to the cause of reducing smoking, and increasing taxation on it to help that cause. He and those right hon. and hon. Members who agree with him will, I am sure, be pleased that their campaign has been reinforced by my being obliged to go back and take more money from tobacco in addition to the significant increase, in excess of inflation, that I had already imposed.

Mr. D. N. Campbell-Savours (Workington)

Is there not a real problem that an increasingly uneven playing field is now developing between Britain and the rest of the European Union in taxation of tobacco and spirits? Is it not clear that what the Chancellor has done today, in spite of the problems, is to invite more job losses in the United Kingdom in both those industries? Is it not about time that British Chancellors went to Community economic summits and demanded harmonisation of the duties throughout the Community, so that at least there was a level playing field for production?

Mr. Clarke

If I went along and demanded harmonisation of taxation, quite a lot of hon. Members on both sides of the House might suddenly decide that they did not want that.

Mr. Peter Shore (Bethnal Green and Stepney)

indicated assent.

Mr. Clarke

The right hon. Member for Bethnal Green and Stepney (Mr. Shore), sitting behind the hon. Member for Workington (Mr. Campbell-Savours), is nodding strongly about that.

I used the phrase "approximation of duty". I believe that the policy on taxation is a policy for the nation states, so I actually agree with the right hon. Member for Bethnal Green and Stepney, but obviously it is for those nation states to consider the consequences across their borders. I think that it is right for the member states of the European Union to seek to achieve greater approximation of duty, so that smuggling and artificial movement of trade is reduced, and that we will endeavour to do. There will be talks on that next year.

The difficulty is that Britain—like Ireland and Denmark—has always traditionally imposed high levels of tax on alcohol, compared with continental countries, which have a broader base for VAT. We have considerable zero rating of VAT, and we therefore do not obtain as much VAT as other countries do: and traditionally, for I think about 200 years, we have always raised far more revenue from alcohol and tobacco. We are entitled to make our choice; it is our national pattern of taxation and it always will be, but we do have to look to our trading interests, as do the other countries, and a closer approximation of duties is very much overdue.

Mr. Phil Gallie (Ayr)

May I congratulate my right hon. and learned Friend on sticking to the objectives of a Budget that, overall, was a very good Budget indeed? Can he rest assured that I will meet my responsibilities to the Scotch Whisky Association, just as I expect every Opposition Member to do, especially the Scottish Members? Can I say to my right hon. and learned Friend, having exposed the windfall tax as a windbag tax, that he can be assured of my support in the Lobby?

Mr. Clarke

I am grateful to my hon. Friend, and I congratulate him on the consistency and fairness of his position, and the way in which he puts it today. When disparaging the Labour party, I made disparaging remarks about one or two of those hon. Members who voted against my opinion on Tuesday. Last year, my hon. Friend came to visit me and told me what he thought about VAT on fuel. This year, he came and told me what he thought about VAT on fuel. He told me that he would not vote for it. His reasons were connected with VAT on fuel, and his constituents in Ayr. My disparaging remarks were made about one or two of his hon. Friends who told me one thing and then did another, and found themselves in alliance with the opportunists sitting on the other side of the House.

Mr. George Foulkes (Carrick, Cumnock and Doon Valley)

I am grateful to the Chancellor. Will he confirm that, as his demeanour today suggests, he is disappointed that he was unable to raise the cost of fuel for pensioners, the poor and the disabled?

Mr. Clarke

The compensation package that we produced for the poor, disabled and pensioners meant that that section of the population was the least affected by the tax changes that we were making. The House is full of men and women who personally benefit from the vote on Tuesday to a much greater extent than the average pensioner.

Mr. David Shaw (Dover)

Does my right hon. and learned Friend accept that most people in this country will regard the proposals as sensible, fair and just? Does he also accept that now, only two political parties in this country have a commitment to a carbon energy tax—the Labour party and the Liberal party? Can he confirm that there is indeed a crisis in this country—in the ranks of the Opposition, who cannot produce a properly costed Budget?

Mr. Clarke

I entirely agree with my hon. Friend, who is right to point out the commitments to a carbon energy tax. The Liberals are certainly committed to that tax—the Labour party sometimes is and sometimes is not. As my hon. Friend says, it would have a dramatic effect on fuel bills in this country. It would have a crippling effect on the cost of business and industry, which would damage our competitive position at a time when we are trading so well and coming out of the recession.

Mr. Terry Lewis (Worsley)

Before the Chancellor leaves the House, will he apologise to the poor, the elderly and the invalids whose pockets the House prevented him from picking?

Mr. Clarke

I have explained repeatedly that the hon. Gentleman did not vote to the particular advantage of the poor, the elderly and invalids on Tuesday. He voted because his right hon. and hon. Friends could not think of any other point to make about this year's Budget and returned, in a misleading way, to previous debates.

Mr. George Kynoch (Kincardine and Deeside)

Does my right hon. and learned Friend accept that, despite what has been said by the nationalists, my constituents will welcome his retention of the significant upgrading of cold weather payments and the home energy efficiency scheme, as well as the significant increase in the age allowance, which is well in excess of inflation? Most of all, they will be pleased that my right hon. and learned Friend has not been deflected from his overall policy of going for strong, sustainable growth—something that the Opposition parties cannot understand and are trying to destroy.

Mr. Clarke

I am extremely grateful to my hon. Friend. This Government invented the system of cold weather payments and keep improving it—we have raised the payments to £8.50, which will benefit many Scottish people if we have a freezing spell this winter. In the course of the debate, I kept dramatically raising the amount of money available for the home energy efficiency scheme. That scheme improves the comfort of its beneficiaries—it dramatically reduces their fuel bills. It is an effective way of improving energy efficiency.

We have directed ourselves to the causes that my hon. Friend has identified, together with the main causes that must dominate this country at present—reducing unemployment, increasing prosperity and ensuring that we have a strong and thriving economy in this country.

Mr. Rhodri Morgan (Cardiff, West)

Does the Chancellor accept that he and his hon. Friends have this afternoon been behaving like demented Corgis—voting to give away Korean cook books for Christmas? Does he also agree that, when it comes to cooking the books, his statement about the raiding of the contingency reserve to close 25 per cent. of the finance gap that has arisen is most unorthodox in terms of fiscal propriety? Does he not agree that that reserve is not meant to cover shortfalls in revenue? Will he explain how 25 per cent. of that gap remains unallocated and unexplained as of this afternoon?

Mr. Clarke

As I have said, that gap will be dealt with by cuts in public expenditure provision over and above those that we would otherwise have made in the relevant years—the second and third years of the survey. I mentioned in passing how we would account for that provision to underline our commitment to it. At this stage, it will be based on the lines of the provision that I have made for the future contingency reserve. It will come out of programmes and public spending control when we have carried out a proper public expenditure survey for years two and three of the present survey years.

Several hon Members


Madam Speaker

Order. We shall move on now to the business statement.