The Economy

HC Deb 17 July 1996 vol 281 cc1148-245

[Relevant document: The Minutes of Evidence taken before the Treasury Committee on Monday 15th July and Tuesday 16th July, House of Commons Papers Nos. 614-i and-ii of 1995–96.]

Madam Speaker

I have selected the amendment standing in the name of the Leader of the Opposition. I regret that between 7 o'clock and 9 o'clock speeches must be limited to 10 minutes.

3.49 pm

The Chancellor of the Exchequer (Mr. Kenneth Clarke)

I beg to move,

That this House welcomes the publication of the Government's latest forecast, which shows growth strengthening, prosperity rising, inflation falling to within the Government's target of 2½ per cent. or less, and a further decline in Government borrowing; notes that the United Kingdom has a lower unemployment rate, a higher proportion of its people in work and a lower burden of tax and public spending than any other major European country; and recognises that the favourable economic outlook reflects the success of the Government's policies to promote a modern, deregulated, dynamic and more competitive economy. The motion is about the summer economic forecast. I make that obvious statement to start with because I do not believe that we shall hear anything about the summer economic forecast from Labour Members. They never ask for debates on the economy, they fear debates on the economy when they come and they do not talk much about the economy when they arrive.

There are some very good reasons for that. The 1996 summer economic forecast sets out an extremely attractive prospect for the British economy as it enters its fifth year of economic expansion. The overriding objective of all economic policy is to deliver jobs and prosperity to our constituents and to continue to deliver jobs and prosperity consistently over a period of years. That is what is happening now. Living standards are rising. Unemployment is falling. The total number of jobs has been increasing. The forecast shows that that is set to continue into the future, as long as we stick to the policies of this Conservative Government and we do not allow Labour to ruin it.

Mr. David Winnick (Walsall, North)

I notice that the Government's motion makes no mention of the Treasury document that has been leaked. Is it not important that the Chancellor should make some reference to what are obviously recommendations to destroy what is left of the welfare state? Why has that been left out of the motion, and does the Chancellor intend to speak about it?

Mr. Clarke

I wish that the hon. Member for Dunfermline, East (Mr. Brown) could have found someone better than that to raise that matter at this early stage. He spent all day trying to distract attention from the summer economic forecast with this ridiculous thing, and I think that we should start protecting gullible journalists from him.

A grade 7 civil servant in my Department produced a document, which does not advocate policies—it is not policy advice. It talks about the grading and management structure of the Department into the future in certain eventualities. It first appeared about eight weeks ago in the Daily Mail and people had to find it for me; I had never seen it. It had nothing to do with policy; it was not intended for Ministers; it did not emanate from the Government. I found that the Daily Mail had totally misreported it, and I forgot it.

I accept that I had underrated the hon. Member for Dunfermline, East. He saw this morning that unemployment was likely to come down. Our unemployment figures are down to the lowest since 1991. He had seen the summer economic forecast, he knew what the prospects were in it, and alas, poor Times, alas, poor British Broadcasting Corporation, out he went, with his document from my grade 7, and tried to describe it in a preposterous way. I feel that the world has gone mad when this justifies the front page and leader of The Times.

I do not mind debating my views and I believe that the Opposition have no answer to them, but I must tell the hon. Member for Walsall, North (Mr. Winnick) that that document will not give him any enlightenment and he should turn to the summer economic forecast to discover what actually matters to ordinary men and women in this country and their prospects for the future.

Mr. Gordon Brown (Dunfermline, East)

Given that this morning I also saw the minutes of the meeting with the Governor of the Bank of England at which the Chancellor of the Exchequer had to report that manufacturing output was down and manufacturing investment was very poor indeed, and given that the document from the Treasury that he talks about says that, under current policies, Britain will fall behind Thailand within the next 20 years, will the Chancellor, as the person in charge of the Treasury, tell us when he was first offered or received a copy of the document, and can he confirm whether it is true that a proposal under active consideration is the privatisation of the roads, to be treated as a utility rather than a public service? When did he see it? Are the proposals correct?

Mr. Clarke

There were several questions in that, and I will try to deal with them all.

The hon. Gentleman has seen the minutes of the meeting; I will return to that subject. I will give him time to prepare himself, because it poses a difficult question about interest rates. Those are things which, as Chancellor of the Exchequer, one has to raise or lower—they have an effect on the performance of the economy. The right hon. Gentleman finds that difficult to understand; usually he cannot even deal with the question. Does he agree with me, with the benefit of hindsight and having seen the Governor's opinion, on the direction in which interest rates should be moved?

Mr. Gordon Brown

Of course I do.

Mr. Clarke

Did the right hon. Gentleman say that he agreed with me? Good heavens!

Mr. Brown

Does the Chancellor recall that when the interest rate decision was announced I said that the state of manufacturing and of investment was such that an interest rate cut had to be justified? Will he also explain why, four years into what he says is a recovery, manufacturing output in the last quarter of last year and the first quarter of this year was technically in recession, and why investment has never recovered during this "recovery"?

Mr. Clarke

The right hon. Gentleman knows perfectly well from the minutes that the Governor agrees with me and with every other forecaster that the recovery is strengthening and will continue to strengthen. The Governor did express some concern about inflationary pressures building up in the economy if it grew too fast. It is absurd to read the minutes and then try to describe the Governor's advice as supporting the right hon. Gentleman's view that we are heading for decline.

This is the first time that the right hon. Gentleman has ever said that he agrees with me. Indeed, it is the first economic opinion that he has given us in two years. He talks of stimulating manufacturing production by means of an interest rate cut. That will worry the Governor a great deal. If the right hon. Gentleman intends to set monetary policy so as to demand-manage manufacturing, the Governor will deal with him sternly and he will find himself facing punitive financial markets which will rapidly put up interest rates whatever he may want to do.

We set interest rates to achieve an inflation target, and we have been successful in hitting that target. The reason why I was flabbergasted when the right hon. Gentleman said that he agreed with me about interest rates is that he does not have an inflation target. He used to have a slight excuse for never giving an opinion on interest rates—because he did not have an opinion on the policy determining what to do. One of the dangers of a Labour Government, if the right hon. Gentleman were ever in control, would be that inflation would rise and come back to destroy the British recovery.

The right hon. Gentleman asked me some questions about that fatuous document.

Mr. Dennis Skinner (Bolsover)

When did the Chancellor first hear of it?

Mr. Clarke

I first heard of the existence of the document when a report appeared in the Daily Mail seven or eight weeks ago. I imagined then that it had been leaked by the Labour party. After a while I discovered that the reference must be to this particular document; someone told me of its existence and produced the bit to which the Daily Mail seemed to be referring—which had been totally misreported. This morning I suddenly discovered that another bit of the document had been leaked by the right hon. Member for Dunfermline, East. This time he claimed to have found in the document a description of the end of the welfare state. On the way to the interview this morning I finally obtained a copy and began to go through it.

The right hon. Gentleman knows perfectly well that the document does not bear the construction that he has put on it. It is, as I say, not a policy document. It is not policy advice. It was written by a middle-ranking official in my Department. [HON. MEMBERS: "Ah!"] A grade 7 official; the highest grade is grade 1. This grade 7 had been asked to advise on future management structures as part of an exercise determining what the management and staffing of the Treasury should be. The document advocates no policies and describes none. It is certainly not worth the attention being paid to it.

The right hon. Member for Dunfermline, East talks about being overtaken by Thailand. He is a great league table man. It is nice to see him turn to a new league table—his last one was fairly useless. Thailand has roughly the same population as the United Kingdom but it is a much poorer country. We are achieving the fastest growth in western Europe; Thailand is achieving the growth of a south-east Asian tiger economy—it is doing very well. Sometimes I joke with Thai politicians whom I know, along the lines that if they were to keep their growth going at its current rate, and we kept ours going at our current rate, theoretically Thailand would have the same GDP as the United Kingdom by about 2020. This is not even a serious academic discussion because, as Thailand's economy matures, it will not grow at that rate. We shall be overtaken by Thailand only if a Labour Government are in power for so long that they destroy the recovery that we have in place and make us start to go backwards in this highly competitive world where things are changing.

Mr. Gordon Brown

I am glad to hear that the kids in the office have been promoted to middle-ranking officials in the course of just a few hours. Will the Chancellor answer my question: is the privatisation of the roads under active consideration, as the document says? Will he also deal with the point that a meeting is taking place today, at the Government's request, between the heads of Britain's largest insurance companies to discuss ways in which their industry can take over responsibility for the welfare state? The BBC has footage of people going into that meeting, so what is going on?

Mr. Clarke

I hope that the right hon. Gentleman did not send a journalist to that meeting. I shall no doubt eventually find out what it is about.

I doubt whether those officials have the first idea about what is going on as regards the Government's consideration of their roads policy because they are not at a sufficiently senior level to know. As the right hon. Gentleman well knows, we are changing the financing of the roads programme, and moving from the traditional method of capital provision into the design, build, finance and operate method. That method is used throughout the world, including in his beloved Thailand, to provide infrastructure investment in a modern way. The BBC and The Times may believe the right hon. Gentleman but nobody else believes that that means privatising the roads system, as he puts it. He should deal with the policies that we are putting forward—those which he knows I am following. He does not do so because he has no reply to them and is extremely frightened about producing the policies that he would have to follow if ever we made the mistake of giving him responsibility for my office.

Several hon. Members

rose—

Mr. Clarke

I shall give way in a moment, but as I am still on page 1 of my speech, I should like to make some progress with it. I shall insist on putting on the record, so that those who read Hansard rather than newspapers misled by the Opposition's spin doctors can know, what the summary economic forecast reveals.

The United Kingdom has enjoyed the strongest recovery since 1992 of any major European country. I expect output to continue to grow at a healthy rate of 2½ per cent. this year, strengthening to 3¼ per cent. in 1997. For this year, that is a bit below the 3 per cent. that I expected at the time of the Budget, but all serious commentators have revised down their forecasts for most of the major economies, including the UK, as a result of the slowdown on continental Europe.

The OECD shares my view that the UK will remain easily the fastest growing major European economy in 1996, 1997 and beyond. [Interruption.]

As I turned to that part of the forecast which is extremely encouraging news for this country, I heard the hon. Member for Bolsover (Mr. Skinner) say, "Let's go to sleep". That is the Labour party's reaction to our enterprise economy and the way in which the Government are going. If the hon. Gentleman goes to sleep, let him dream of what would happen if the higher taxes, spending and borrowing of a Government with a Chancellor who has no targets or objectives were ever elected. He will then wake up and find that he is in an extremely attractive economic environment.

Mr. Skinner

The Chancellor misheard me. When he put his head down and started reading the brief from the new kids on the block, I said that the Tories behind him would now go to sleep, as they probably will. What moral authority does he have to talk to the British people about economic forecasts or anything else when all his Ministers say—he will probably repeat it—that to keep inflation down to 3 per cent., workers outside this building will have to get 3 per cent. or less? Yet he and his hon. and right hon. Friends abstained in the vote on whether every Cabinet Minister should get £103,000. If there is enough money in the country for Cabinet members to get £103,000, why should not pensioners and workers be treated the same?

Mr. Clarke

Earnings increases in this country are running at the rate of 3½ per cent. this year and that is far below the inflationary pay rises that people such as the hon. Gentleman used to inflict on the British economy whenever we had a flicker of recovery in the past. We have low inflation—the headline level of inflation is 2.3 per cent.—and that is one of the reasons why the real living standards of the people whom he and I represent are increasing. Sensible levels of pay settlements are paid for by productivity and performance. That is the world that the hon. Gentleman woke up to, but still does not like, only a few years ago and it is benefiting his constituents and mine.

In the recent parliamentary pay conflict, I voted in the same Lobby as the hon. Member for Bolsover (Mr. Skinner). It is unusual for our views to coincide—

Mr. Skinner

You abstained.

Mr. Clarke

I did not abstain on my salary. The figure that the hon. Gentleman cited was for a ministerial salary that I do not receive because it is meant to come into effect in the next Parliament. [Interruption.] When I take office in the next Parliament, it will not be for the money, but for the pleasure of keeping the right hon. Member for Dunfermline, East away from the nation's affairs.

Mr. Malcolm Bruce (Gordon)

rose—

Mr. Clarke

I shall give way to the Liberal Democrat spokesman in a moment, but I shall give the House a little more good news from the summer economic forecast while I have the chance to keep the debate roughly on the subject before the Labour party changes it to a subject that it would prefer.

Consumer spending will provide the motor for the accelerating growth that everybody—not just I—knows will occur later this year and next. Confidence has been strengthening steadily and the most recent figures from the Confederation of British Industry show reports from retailers of the strongest high street sales growth for more than five years.

Living standards are rising. Tax cuts and faster growth in real earnings mean that a family on average earnings is expected to be about £450 better off in real terms this year compared with last year. That is a substantial improvement. Such families are now £4,500 better off in today's money each year than they were in 1978–89 before the Government took office. My forecast is—and I do not believe that it will be challenged—that real personal disposable income will grow by 2.5 per cent. in 1996 and by 3 per cent. in 1997.

The forecast is not only about stronger consumer demand: I expect investment to strengthen, too. The climate for investment is excellent: growth is strengthening, profitability is high, company finances are strong and company taxes and interest rates are low. For all those reasons, I expect business investment to grow by more than 7 per cent. this year and next. The manufacturing sector should revive as stocks return to desired levels and as demand in Europe recovers.

I turn to the subject of employment.

Dr. Lynne Jones (Birmingham, Selly Oak)

rose—

Mr. Clarke

Perhaps the hon. Lady has a comment to make about employment.

Dr. Lynne Jones

The Chancellor talks about increased consumer spending and his forecast suggests that world trade in manufacturing will grow by more than 7 per cent. Is not he worried that manufacturing output in this country is set to rise by only 1.25 per cent? Is not he worried that consumer demand will lead only to an increase in imports because of his failure to create a sound economic manufacturing base?

Mr. Clarke

We had strong manufacturing employment when the recovery started, but that has stalled largely—not wholly, but largely—because of a fall in activity in our major markets in western Europe. As those markets pick up, there is every sign that manufacturing activity will pick up. The bit of involuntary stock building that seems to have happened will fall away and the manufacturing recovery will continue. These are good times for manufacturing in the United Kingdom and that is why people come to this country from Korea, when they want to manufacture goods, to make the largest investments in western Europe.

The hon. Member for Birmingham, Selly Oak (Dr. Jones) mentioned comparisons in trade growth between this country and the rest of world. One reason for the recent slowdown is that Britain remains strongest in north America and western Europe, which tend to be among the slower growing markets in the world compared with the seemingly remorseless growth in south-east Asia, Latin America and other emerging markets. We are competitive now in those areas and we have built up an investment portfolio. British firms are active in those areas and the prospects are right for us to gain a share of manufacturing trade.

Mr. Malcolm Bruce

The Chancellor is painting a rosy picture, as always. He has avoided referring to his borrowing forecast and to his reduced growth forecast. Yesterday, the Governor of the Bank of England said that he was uncomfortable with the current level of borrowing and that the Chancellor should also be uncomfortable with it. He also indicated that interest rates would be able to come down further if we had an independent central bank. In principle, the Chancellor is in favour of going into a monetary union, where we would have to have an independent central bank, and his leaked document said that if we stay out we will need an independent central bank. Is it not time that he made a common-sense decision about it?

Mr. Kenneth Clarke

The two subjects that the House should consider—if we had an Opposition worthy of the name—are the decisions on inflation and interest rates, and the public finances. They are the issues that we should debate when we look at a summer forecast. We have just heard that the Opposition do not have much to say on inflation and interest rates. On the public finances, it is a little difficult for a shadow Chancellor—who would go for higher taxation and higher spending—to explain where he stands on the public finances, apart from making a noise about them.

Today, the other news is that there has been a fall in the level of unemployment, which is at its lowest level since 1991. The United Kingdom is into its fourth year of good news on jobs. The number of people in jobs has been boosted by approximately 700,000 since the recovery began. Claimant unemployment has fallen by more than 800,000, and I expect it to continue to fall. Compared with the other major European countries, we have the lowest rate of unemployment, more of our people in work and the lowest costs on job creation—which is why employers come to this country. For every £100 in wages paid by an employer in Britain, overheads are £18 compared with £32 to £44 in Germany, France and Italy. It is attractive to create jobs here, and almost impossible to create jobs in western Europe, even where there is growth and recovery.

The Labour party should face up to the fact that a flexible labour market and low overheads have helped to make the United Kingdom a magnet for overseas investment. In 1995, the United Kingdom attracted more than £20 billion in foreign direct investment, which gives us a trading edge and is an attraction for inward investors. That would be directly threatened by the adoption of the social chapter, the minimum wage or the instinctive approach of the Labour party.

Mr. Denis MacShane (Rotherham)

Is the Chancellor aware that yesterday there was a critique of his policy launch in Yorkshire which said that the problem with the British economy is too much slow growth industry, too little innovation, too few good managers, too little investment in research and development, and too many children leaving school ill educated? That report was produced by the Yorkshire and Humberside regional office of the Government and it was launched by the Deputy Prime Minister. If the Deputy Prime Minister was telling the truth yesterday, what on earth is he doing today?

Mr. Clarke

I have not heard this particular version of the Deputy Prime Minister's launch in Yorkshire yesterday. I work with the Deputy Prime Minister, I know the Deputy Prime Minister, and the Deputy Prime Minister agrees with me on economic policy and shares my description of what is happening to the British economy. In desperation, the Labour party is saying that the Deputy Prime Minister is on its side on this issue—it is deluding itself. Those matters have been tackled, which is why things are going better.

I refer to the decisions on inflation and interest rates. All this has been achieved against a backdrop of falling inflation. Underlying inflation has been below 4 per cent. for three and a half years, the longest period of sustained low inflation for almost 50 years. We are well on course to hit the Government's inflation target of 2½ per cent. or less by the end of the year. Doubts have been raised about that achievement many times in debate in the House, but I do not think that we shall hear much about it from either side today. I expect underlying inflation to be 2½ per cent. by the end of 1996 and 2¼ per cent. by the middle of 1997.

Mr. Ken Livingstone (Brent, East)

Will the Chancellor give way?

Mr. Clarke

No, I must address the key points and explain what has happened in the past six weeks. The excellent inflation performance has enabled me to cut interest rates four times since last year's Budget. The most recent cut—to 5¾ per cent.—occurred after my monthly meeting with the Governor on 5 June. The minutes of that meeting—which were published today—show that, on balance, the Governor thought that interest rates at that time should remain at 6 per cent. It was a fine judgment, and I decided to move to 5¾ per cent.

That decision will be analysed, but we must examine the background in order to see how the Governor and I are handling the pursuit of a policy to which we are strongly committed. The inflation record that I cited—our best for 50 years—proves that the Ken and Eddie show is a pretty successful team performance. Six weeks ago, the Governor and I differed by just ¼ per cent. The Governor agrees that, by any standards, it is a narrow debate. He accepts, as I do, that there are risks on both sides. In his Mansion House speech—his public pronouncement made shortly after our meeting—he said: There is a … downside risk to activity in the short term. There is, on the other hand, accumulating evidence of strengthening demand … which could come to represent an upside risk to the inflation target, further ahead. As we can see from those remarks, he was concentrating on what he believed to be the dangers of the upside demand growing too quickly and not on the depressing statistics referred to by the right hon. Member for Dunfermline, East.

We came to a decision. We share a commitment to achieving a low inflation economy, although we are often reported as disagreeing about other matters. Yesterday, by chance, I had lunch with the Governor and we were amused that, after giving evidence before the Select Committee for five hours, commentators had to scratch around trying to find any differences between us.

My final decision six weeks ago was based on careful assessment and particularly on the lack of inflationary pressures in the economy. We have easing cost pressures, spectacularly good producer prices—both input and output prices—spare capacity and moderate earnings growth which has abated slightly since then. I judged that another ¼ per cent. cut was sensible and posed no threat to the Government's inflation target. That target must continue to guide me; I will not take any risks with inflation. On the basis of that determination, the Governor and I work comfortably together in pursuit of the same objectives.

Since that meeting—I do not know whether we will ever know whether the ¼ per cent. cut was quite right; it may become clear in 18 months—the good news on inflation has continued, with some of the lowest rates of producer price inflation for a decade and input prices nearly 5 per cent. lower than a year ago. Moderation in earnings growth is continuing, with earnings growth at 3½ per cent. in May—down from 3¾ per cent. in April. In the immediate aftermath, inflationary pressures remain very subdued and I am confident that, 18 months out, we will still be on a safe course.

I sought—and, rather surprisingly, got—the views of the right hon. Member for Dunfermline, East regarding the interest rate change. He gave rather bizarre reasons for supporting it. In the past, he has advocated that I reduce interest rates in each and every circumstance. I hope that he will study the minutes of the meetings carefully, begin to cotton on to what is happening and appreciate that we have combined the recovery with the lowest inflation rates that this country has seen for half a century.

If the right hon. Gentleman is minded to address those issues in his speech, I ask him also to clarify other issues besides interest rates. Does he agree with my inflation target? He does not have one of his own, but what does he think of my target of 2½ per cent? Does he dare comment? Does he agree with my borrowing target? That was the other issue raised. [Interruption.] There is some excitement about borrowing; I look forward to discussing with a big-spending political party how we will tackle borrowing in this country. If we are to have a serious debate about borrowing, the right hon. Gentleman should say whether he agrees with my borrowing target.

Mr. Skinner

Which one?

Mr. Clarke

Bringing the Budget towards balance over the medium term is the only objective that I have ever pursued.

Does the right hon. Gentleman agree with my spending target, to bring expenditure down to 40 per cent. of GDP? He is not usually able to answer that. Does he agree with my taxation target, to get the basic rate down, when we can afford it, to 20p in the pound? The truth is that he does not dare to answer any of those questions. He knows the reality that lies behind his silence. He knows that all those objectives would be utterly beyond the reach of any Labour Government who could ever get elected to power in this country.

The right hon. Gentleman will not tell us his opinion on what I do, and he will not tell us what he wants to do. That is the difference between Government and Opposition.

Several hon. Members

rose—

Mr. Clarke

I shall deal with borrowing and then give way to the hon. Member for Coventry, North-West (Mr. Robinson), who has been persistent.

Government borrowing is steadily coming down from the £45 billion that we reached at one point. The PSBR in the past financial year was £32.2 billion—£3 billion higher than I anticipated at the time of the Budget. That was because people paid less taxes than I expected at the time of the Budget. In the forecast, I expect the PSBR to continue to come down to £27 billion in 1996–97, and to come down further to £23 billion in 1997–98. My commitment to keep the PSBR coming down towards balance in the medium term remains as strong as ever. Under the right hon. Member for Dunfermline, East, the PSBR would go in only one direction—upwards yet again; up and up and threatening our recovery.

Much nonsense has been written in recent days about our revenue forecasts. Let me set the record straight so that we are all clear about how the forecasts have been adjusted. Tax revenues are rising quite strongly because the economy is strengthening. It is precisely because our tax revenues are rising and because we are holding public spending so firm that public borrowing is falling, as I have just described. Where the forecasts have changed is that taxes are not rising quite as fast as we expected and borrowing is not falling as fast as we expected. People are not paying as much tax as I expected, even after the tax cuts that I made last November. That, if anybody wants to address what is set out in the forecasts, is the real nature of the issue.

I said a lot about forecasts to the Select Committee. Forecasts are needed, but they should not be used—particularly forecasts for tax revenues—in this slightly ridiculous fashion to comment, as some people have in the past few days. Forecasting tax revenues is about forecasting people's behaviour. What my boffins, as I called them the other day, had to do, was to a make a judgment—which is all they can do of people's behaviour, based on all the past evidence. The Treasury makes no secret if its forecasts change, which is why we have two forecasts a year, or if they are subject to a margin of error, as they always have been.

The key fact is that the policy is intact. Revenues are rising, despite my reducing tax rates, because the economy is strengthening and the revenue is coming in. Borrowing is going down. I would prefer to see borrowing come down faster, but the right hon. Gentleman exaggerates the problem absurdly. He has to, poor thing, as he has little else to complain about in the economic outlook.

Mr. Clive Betts (Sheffield, Attercliffe)

The Chancellor is relying on forecasts to say that the PSBR is coming down. Does he accept that his PSBR forecast for the last financial year, in the summer of 1995, was lower than his current PSBR forecast for this year? His PSBR forecasts are rising. Is not that a travesty for a Government who in 1992 said that the PSBR would come down to balance in the medium term? Is not his policy a shambles; or in 1992 did he and his party deliberately mislead the electorate in the general election?

Mr. Clarke

Now I know why Sheffield city council went bust. The hon. Gentleman, an expert on borrowing and the difficulties caused thereby, is comparing one year's forecast with others and is using that to try to refute my description of a PSBR that is steadily falling in reality and of revenues that are steadily rising for good reasons. The economy is improving and the revenues are coming in. Alas, the poor citizens of Sheffield had a foretaste of what would occur to the citizens of the United Kingdom if such an approach to borrowing, and the complete absence of any suggestion about what should be done about it, were to come from the Labour party.

The facts are these. We will have halved public borrowing as a share of gross domestic product over three years, and we will be heading towards balance. Staying on that path enables me to keep interest rates and inflation down. It is one of the ways in which I intend to make Britain the most successful economy in western Europe—and the way in which to keep all that on course is to impose tight control on public spending.

Mr. Geoffrey Robinson (Coventry, North-West)

The Chancellor made a good point about the fall in the public sector borrowing requirement. It is coming down, of course, but, as the Chancellor must know, it is coming down much less quickly than it should be at this point in the cycle. It is not just that the forecasts have been so way out, although by any sensible standard they have been lamentable; nor is the hole in the public sector entirely attributable to the fact that the Chancellor is receiving lower tax revenues than he expected. This is a structural problem.

There must be some poor member of grade 7 in the Chancellor's Department whom he could lambast yet again, and whose career prospects he could blight with his sarcasm de haut en bas. Will he tell the House what the borrowing requirement should be at this point in the cycle? That is the key question. Are we £5 million out, or £10 million out, and what will the Chancellor do about it?

Mr. Clarke

It is not possible to pluck out a figure and say that that is the stage that the recovery has reached. What we should achieve is balance in the medium term, so that we can ride out the cycle. The hon. Gentleman has conceded that borrowing is coming down; the important thing is that it should continue to come down. It is coming down because we have controlled public spending, despite the Labour party's opposition every time we have made the necessary decisions. As I have said, revenues are not rising as quickly as we anticipated, and we must address that in policy terms—which means continuing control of public spending. We do not have a structural problem, as the hon. Gentleman suggests. I must point out to him not only that he and his party have opposed past reductions in, and controls on, public spending, but that his party would pose a structural problem in regard to public spending and public borrowing if it ever came to office.

Let me underline my conviction that we can embark on the process that I have described by explaining what has happened to Britain's public spending. That will help the hon. Gentleman to understand how we are controlling public spending by protecting all the priority public services which I believe it is our duty to improve and maintain. In the 1980s, after we took over from Labour, across the rest of Europe the modern state remorselessly took an ever greater share of almost every nation's wealth—going in the direction that would obviously be followed by a Labour Government, whether they called themselves new Labour, old Labour or anything else. We in Britain have had a Conservative Government, and we have held the line since the early 1980s. Having a Conservative Government has produced a huge improvement in our economic conditions, compared with those created by social democracy—and even Christian democracy—in the rest of western Europe. A far lower proportion of our GDP goes into Government spending than is the case in any other major European country. That was not so before we had a Conservative Government, and it is one reason why we are performing better than our neighbours.

Twenty years ago, the share of national income taken by Government spending in the United Kingdom was above the western European average. This year, it is expected to be 7 per cent. below that average. The rest of Europe has woken up to that, and is facing up to problems that we have already tackled. The German Government have a medium-term target of cutting the share of public spending in national income by 4 per cent., after which the figure will still be 46 per cent. of GDP. In France, the share looks likely to remain above 50 per cent. for some time. The United Kingdom, however, has a structured policy. I expect our share of national income that goes on public spending to fall sharply over the forecast period, from 42.25 per cent. last year to just 40.5 per cent. in 1997–98. That is within sight of the Government's target of 40 per cent. of GDP.

We have hit our public spending targets each year for the past three years. Taken together, my three Budgets have cut £53 billion from the published public expenditure plans. We have taken a tough approach each year in order to find funds for our priorities. We have achieved that reduction while increasing expenditure on the national health service, schools, the police and other services on which the country depends. We are now therefore facing up, as everyone knows, to a public spending demand that meets the need to get public sector borrowing firmly back on the right course, as it should be.

I always get a lot of advice on that from the touchline. I have had three years, I think, of the toughest public spending rounds of any modern Chancellor because these are low inflationary days and there are none of the old fudges to hide the problem away. I am always grateful, however, for such advice, as most people are on these occasions, but the key thing is that we carry conviction when we say that we can control spending and deliver our priority services. Our opponents do not have any credibility on that.

My policy is to lower borrowing and to cut taxes whenever sensibly possible. I want taxes to come down. Lower direct taxes are a spur to entrepreneurship and improve the real economy's efficiency, but that involves proper control of public expenditure. That is not confronted by the Labour party. There is no sensible debate on public finances in the Labour party, except these comments on the public sector borrowing requirement. There is no debate. There is merely delusion.

We have seen the Labour party's advance manifesto, which trailed five commitments and claimed to identify how to pay for them. The method of paying for them appeared to be a windfall tax, which has to be paid by someone, if it is ever levied. It will fall either on consumers, shareholders or employees. The Labour party does not appear to know. It does not know which companies will pay for it. A windfall tax is a one-off tax. There is no explanation of how the Labour party will continue spending money on those policy commitments, even if it were mad enough to introduce the policies.

The abolition of the assisted places scheme was going to pay for some desirable things, except that the Labour party got the mathematics all wrong. The only other source of revenue of which I have heard is that, apparently, a Labour Government will cut child benefit to all parents whose children stay on in the sixth form or go on into further education. That is it on where the money comes from. There were a few pledges in the paper, but we have been considering the Labour party's other pledges and we reckon that a lot of pledges are not in that document. It continues not to say anything about those pledges. Anyone who knows anything about Labour's recent policy statements knows that it is committed to many more policies than that.

Even in his last conference speech, the right hon. Member for Dunfermline, East committed himself to regional development agencies. We still do not now how they would be run and how much they would cost. That is only one of many commitments that Labour would have to finance. It gives some undertakings on tax. It says nothing, wisely from its point of view, about capital or corporate taxes. It refuses to rule out increasing the higher rate of income tax. It even refuses to rule out increasing the basic rate.

The Labour party's mini-manifesto uses just waffle such as establishing a new trust on tax with the British people. How can anyone trust the Labour party on tax if it will not give people even an inkling of its basic tax plans for everyone? Here is the clarity that Labour musters on the subject: Democratic socialism is not about high taxes on ordinary families". Is that concrete enough for anyone to believe that Labour poses no danger? The warning is clear: watch out for what the Labour party would define as an "ordinary family" and for what it means by "high taxes". What it is actually talking about is taxing the British people and economy much more heavily than at present and certainly more heavily than we will.

Mr. Tam Dalyell (Linlithgow)

Will the Chancellor of the Exchequer give way?

Mr. Clarke

I must conclude.

I say without fear of sensible contradiction that the UK is facing the most promising prospects for a generation. How different things looked in 1979, when we inherited a shambolic, inflation-prone economy. [Interruption.] Let me take the 1979 comparison. Hon. Members say that we have slipped behind in the league tables. In 1979, when the Conservatives came in, the Organisation for Economic Co-operation and Development report said of the UK economy: By the Spring of 1978 the rate of increase in consumer prices had fallen from its peak of nearly 27 per cent in 1975 to about 7 per cent". That was supposed to be a pat on the back for the previous Government. In 1996, the OECD said: Inflation performance over the past four years has been remarkably good. In 1979, the OECD said: By the end of 1978 British external competitiveness was at its worst level since 1966". In 1996 the OECD said: International cost competitiveness remains sound". In 1979, the OECD reported: Amendments to the Finance Bill in Parliament by the Opposition Parties led to a reduction in the basic rate of income tax from 34 to 33 per cent. Contrast that with this year's OECD report, which states: Tax measures announced in the 1996–97 Budget included: basic rate of income tax reduced from 25 to 24 per cent.; a widening of the 20 per cent. lower rate band by £700; standard rate of tax on savings income cut from 25 to 20 per cent.

Mr. Skinner

They are falling asleep behind you.

Mr. Clarke

Opposition Members should try to wake up their Front-Bench team. They should be taken out of the torpor of persuading themselves that the British economy is not a success and is not headed for more success. They should face up to the responsibility of deciding how they are going to face that.

Those are the successes of 17 years of Conservative Government—successes that I am proud of and that we are not going to throw away. Only the return of a Labour Government could blight the prospects of the public beginning to enjoy the full fruits of that economic success.

4.35 pm

Mr. Gordon Brown (Dunfermline, East)

When I heard the Chancellor warming to his theme that Britain faces the best prospects for a generation, I wondered where we had heard that before—where we had heard the same boasts, the same promises of a balanced Budget, and the same prospects outlined for higher investment and growth. Perhaps I can jog the right hon. and learned Gentleman's memory. We faced the best economic outlook that most people of today's working generation have ever faced in their lifetime. Yes, that was the Chancellor, speaking as industry spokesman, on 20 March 1986, before the Conservatives led us into an election and then a recession as a result of their policies.

What else did the Chancellor say that he has said today? That we have the best record for growth of any major economy in Europe. That was on 3 June 1986, before the Conservatives let spending get out of control and forced us into a recession again.

The summer forecast states: exports have been fairly flat … manufacturing output has been roughly flat … construction has been roughly flat … investment yet to show a very clear cyclical upturn". That is the problem of the Government's recovery—it is neither investment nor industry-led, nor is it now export-led. As in 1986 and 1987, the Government are relying on a one-off consumer boom.

The Chancellor quoted the OECD, but let me tell him where we are in the OECD league. We are 20th out of 24 for growth, 13th for inflation—we are 18th for this year—19th for employment growth, and 17th for unemployment rates over the past 17 years. The reason is that manufacturing investment has barely recovered since 1979, and manufacturing output is now only 20 per cent. of the economy. We have heard all these boasts from the Chancellor and the Conservative party in the past 17 years: the pound to be stronger than the deutschmark; zero inflation; the transformation of our prospects; the productivity revolution; and then, the enterprise centre of Europe.

Let me remind the Chancellor that, last week, the regional statistics of the Conservative Government—not a leaked document—which are published in "Regional Trends", clearly showed that Britain is not top of the European league but ninth. Every one of our nine regions except the south-east and East Anglia is below the European average. In half our regions, income per head is about half that of the most successful region in Europe.

Is it not surprising to discover, therefore, that, in contrast to the bluster from the Chancellor and his smug and self-satisfied account of the economy today, in private the Treasury does not believe a word of it? His Department's view of this country's economic prospects under the Government is such that it believes that we will continue to decline in the economic league of world nations. The only solution that they can contemplate and put to the Chancellor is the privatisation of the welfare state.

The document says: There is a further proposal under active consideration for the privatisation of roads. Will he answer that question?

Mr. Kenneth Clarke

I have answered it once. The document contains no proposals on the privatisation of the welfare state, as the right hon. Gentleman knows. It is preposterous to waste the time of the House with a management document. The only recommendations that this document makes are on grading levels and on possible needs for expertise in the next century under a variety of configurations. It is pathetic to produce documents of this kind as a substitute for having to debate economic policy on the floor of the House of Commons.

Mr. Brown

The Chancellor protests too much. He is trying to reduce the document to the status of some work experience project that went wrong in the Treasury.

We know from the interview given by the Financial Secretary at lunchtime that the document was instigated by, and went directly to, the permanent secretary to the Treasury. The Chancellor now tells us that it was available to him, if he had bothered to read it, several weeks ago. We now know that all the directors in the Treasury have been involved in its planning. Will the right hon. and learned Gentleman now answer my question: is privatisation of the roads under active consideration?

Mr. Clarke

I do not know how the right hon. Gentleman defines those terms; the document does not do so. He is asking a question about a subject that he cannot define. I have explained the Government's perfectly well known policy on the private financing of infrastructure, and I thought that the Labour party was in favour of it. He is scratching about. Is this reference to privatising the roads programme the extreme agenda for abolishing the welfare state? I have not discussed the report with officials, because they did not think that it would arise. What exactly does he want to find out?

Mr. Brown

The Chancellor will not answer the question. Is the privatisation of roads under active consideration? He refuses to answer.

Mr. Clarke

Will the right hon. Gentleman explain what he means by the privatisation of the roads programme?

Mr. Brown

The document says: A further proposal under active consideration is the privatisation of the roads. [Interruption.] I am reading from the document, and this is only the first question that I have for the Chancellor. It continues: It would be to treat roads as a utility rather than a public service. Ownership would be transferred to regulated private companies who would receive their income from road users. Does the Chancellor deny that the proposal is under active consideration?

Mr. Clarke

It is not the policy.

Mr. Brown

Is this proposal under active consideration? He will not answer that question.

Mr. Clarke

For heaven's sake. The right hon. Gentleman is meant to shadow me. He should be shadowing the policies I propound, with, I think, considerable clarity and consistency. He is quite incapable of entering into any serious discussion of economic policy. He scratches about using management documents in my Department to try to goad me on to ground that he knows is not the policy of me or the Government.

Mr. Brown

Either the statement is factually wrong and the Chancellor should deny its authenticity altogether, or the right hon. and learned Gentleman is not prepared to answer the question directly.

Let us move on to the second question. The document says: Consideration is currently being given to reducing state support for post-16 education on the grounds that rising demand is unaffordable and that private returns to individuals and their employers exceed social returns. Is this under active consideration?

Mr. Clarke

It is by the Labour party. I am being advised by people who have obviously penetrated the mysteries of Labour policy documents rather better than I have. It is not the policy of the Government. That document is not policy advice. The right hon. Gentleman should be engaging in a debate about the summer economic forecasts.

Mr. Brown

But once again this is why the public have no trust in politicians. [Interruption.]

Mr. Deputy Speaker (Sir Geoffrey Lofthouse)

Order. The House must now settle down. The Chancellor was given a reasonable hearing, and the shadow Chancellor must have the same.

Mr. Brown

I ask the Chancellor: is a proposal to reduce state support for post-16 education under consideration? The document says: Consideration is currently being given to reducing state support. Can he give me a straight answer?

The Chancellor is now asking the Chief Secretary. He cannot tell me that that proposal is not under consideration, and I have to assume that, despite all that is said about the Labour party having an open review, in private the Conservatives, in the most hypocritical way, have been discussing reducing support for over-16s. [Interruption.] The Chancellor cannot correct it, can he?

Mr. Clarke

I have not asked the grade 7 who wrote this what it is based on. I can only answer for the Government's policy. I did not know that the document was being prepared in the Department, so I do not know who is considering what. All I can say is that it has nothing to do with the Government. It has nothing to do with the debate.

As the right hon. Gentleman knows, it is not the Government's policy to contemplate these things. My hon. Friend the Chief Secretary says that part of the document contemplates the consequences to the Treasury of higher public spending under a Labour Government. Is that the right hon. Gentleman's policy? That might be slightly more relevant to where we are.

Mr. Brown

The document says that consideration is currently being given to that. Again, I am not satisfied, and I do not think that the country will be.

Let us move on to the third proposition. The whole gist of the document is that, because—[Interruption.]

Mr. Deputy Speaker

Order. I have just told the House that it must settle down and give the shadow Chancellor a fair hearing.

Mr. Rod Richards (Clwyd, North-West)

rose—

Mr. Douglas French (Gloucester)

rose—

Mr. Brown

I am not giving way at the moment. I have given way about 10 times to the Chancellor to allow him to clarify a point, which he has not been able to do after 10 interventions.

The document's third point is: Britain will move down the league ranking of world nations. It says: There will be a major shift in economic power away from Britain. It suggests that Britain will fall behind Mexico, Brazil and Thailand, and that, in 2015, national income per head in Thailand and other countries will be higher than ours, despite the fact that income in Thailand is a third of ours at the moment.

The problem is that, far from the Treasury contemplating that and asking what it can do to improve our status in the world league, the document says that the issue is how we can manage decline. It says: Greater economic power is likely to be followed by greater demands for political power. Our role in the international organisations will change as we move down the ranking. The issue is how we retain any influence. The Opposition will not accept the pessimism and defeatism implied in that document. We will take the measures that will reverse the decline. After 17 years of Conservative government, the Treasury says that there is no head of department in the Treasury who has any responsibility for dealing with the problems of the real economy. That is a sad indictment of 17 years of Conservative rule.

The main point that the document comes to is that, as a result of the economic decline that Britain will experience, and as a result of our falling down the world league—what it calls expected change in the UK's relevant position in the world economy"— we shall not be able to afford the welfare state.

What proposals are being put forward? The House should be clear that, despite the Chancellor's bluster, these are real proposals. First, the document says that it will examine key elements—

Mr. Quentin Davies (Stamford and Spalding)

Will the right hon. Gentleman give way?

Mr. Brown

I will not. I shall explain to the House what is in the document, so that it can judge whether the Chancellor is being accurate with it about the Treasury's intentions in the matter.

Mr. David Shaw (Dover)

The right hon. Gentleman is out of order.

Mr. Deputy Speaker

Order. The Chair will decide what is in order.

Mr. Tim Yeo (South Suffolk)

On a point of order, Mr. Deputy Speaker. Is it in order for the House to have to listen to extensive quotations from a document that has not been made available to hon. Members?

Mr. Deputy Speaker

It must be in order, or the Chair would have ruled it out of order.

Mr. Brown

I do not know why Conservative Members are getting so upset.

Earlier this morning, the right hon. Member for Wokingham (Mr. Redwood) said: I am glad that the Treasury is looking through these ideas". The chairman of the Back-Bench Conservative finance committee, the hon. Member for Bridlington (Mr. Townend), said that he welcomed many of the ideas. Five Conservative Members produced the No Turning Back group pamphlet, "Three Phases of Changes in the Welfare State". The third phase would Give people the opportunity to contract out of unemployment and invalidity insurance. Give people the opportunity to contract out of the basic state pension. Make employers insure employees against industrial injuries. [Laughter.] How can the Chancellor and Conservative Members laugh at proposals as if they had never heard of them before, when they are being actively advocated by senior members of the Conservative party, many of whom are sitting here today?

Far from Treasury civil servants dreaming up ideas from nowhere, they are examining ideas that are being floated by Back-Bench Members—and, in some cases, members of the Cabinet—including the Secretary of State for Social Security. That is the issue we should face. Let us consider what is being proposed.

Mr. Quentin Davies

Will the right hon. Gentleman finally come out from the smokescreen behind which he has been hiding for the whole of his speech so far, and answer some of the fundamental questions put to him by my right hon. and learned Friend the Chancellor? For example, what would be his target for the public sector borrowing rate?

Mr. Brown

The hon. Gentleman has on one occasion at least voted with us recently because of his concern about what is happening, and I am glad that he has intervened. He went to the electorate saying that he wanted to pay for continuing improvements in health, education and other services, unlike the chairman of the Conservative Back-Bench finance committee, who said this morning that he was looking for big cuts in education and other social services as a result of this document, or the right hon. Member for Wokingham, who also wants major cuts.

Far from the proposals that I am outlining being isolated fringe elements—

Mr. John Redwood (Wokingham)

Will the right hon. Gentleman put the record straight and make it clear that I have always said that education, health, defence and law and order should be protected? I made it clear this morning that there were ideas in the paper that could never be adopted by a Conservative Government, but were attractive to the Labour party.

Mr. Brown

Yes, but the right hon. Member for Wokingham and the Chancellor do not see eye to eye on this. The right hon. Member for Wokingham this morning said: A lot of these ideas are being discussed. Some are being rejected. Some are being welcomed or pushed. Later, on the "One O'clock News", he said: Some of it is Government policy. Some it may become Government policy. Far from suggesting that the document should be thrown aside and regarded as the work of cranks, as the Chancellor said this morning, the right hon. Member for Wokingham supports many of the document's proposals.

Mr. Iain Duncan Smith (Chingford)

Given the logic of the right hon. Gentleman's argument, can we assume that, because the hon. Members for Newham, North-West (Mr. Banks), for Bolsover (Mr. Skinner) and others advocate much higher public expenditure and higher taxation, the right hon. Gentleman will tell us that that is Labour policy?

Mr. Brown

Once again, I am extremely glad that the hon. Gentleman has intervened, because he can confirm that he was the author of the pamphlet that suggested privatising pensions, unemployment insurance and sickness insurance. Far from Conservatives rushing to tell us in the debate that they support the Chancellor on all those issues, the truth is that, by self-selection to intervene, the No Turning Back group is dominating the agenda in the Conservative party all the time.

Let us look at what those proposals involve.

Mr. Richards

Will the right hon. Gentleman give way?

Mr. Brown

I will give way once more.

Mr. Richards

I am grateful to the right hon. Gentleman for giving way before he gets to the substance of his speech. Will he answer a quite simple question? Is the proportion of gross domestic product spent by the Government too high or too low?

Mr. Brown

I tell the hon. Gentleman that the proportion of borrowing by the Government is too high. What I would say to him is that his question should have been addressed to the Chancellor. Why is it—

Mr. David Shaw

Answer the question.

Mr. Brown

Why is it that borrowing was raised from £22 billion to £27 billion—something that would not excite the chairman of the Conservative Back Bench finance committee? Why is it—

Mr. Shaw

Answer the question.

Mr. Deputy Speaker

Order.

Mr. Brown

Why is it that, at the last election, the Conservatives told us that borrowing in the next five years would be about £100 billion, and it has turned out to be about £150 billion or more? Why have they been 50 per cent. out on the borrowing figures? Why cannot we trust the Tories with the public finances? That is the truth of the matter.

Mr. Anthony Coombs (Wyre Forest)

Will the right hon. Gentleman give way?

Mr. Brown

Once more.

Mr. Coombs

If the right hon. Gentleman is saying that borrowing is too high, can he explain to the House how the ratio of the public sector borrowing requirement to GDP in the past 16 years of Conservative government is under half what it was during the last Labour Government?

Mr. Brown

The hon. Gentleman knows that his Government have had massive oil revenues and privatisation proceeds, which have gone on current consumption. He also knows that the share of public spending taken by the Government in the past 17 years is, on average, exactly what it was when Labour left office.

So, far from the Conservatives having a great record of coming into office and cutting the proportion of public spending in the national income, it is exactly the same as it was. I will tell the hon. Gentleman why: we are spending money to pay the bills of failure. We are spending money on unemployment, crime and social decay as a result of the Conservatives' failure to run an economy that is sufficiently successful to ensure that we do not have to finance the bills of unemployment.

When it comes to the next general election, I have some sympathy for many of the Conservative Members in the No Turning Back group. They said at the last election that they would cut public spending as a share of the national income, but in fact, when we get to that election, it will not be less than 40 per cent. as the Chancellor predicted it would be two years ago. As he rightly says, it will be more than 40 per cent. [Interruption.] That is the record—

Mr. Michael Brown (Brigg and Cleethorpes)

What would you spend?

Mr. Gordon Brown

There is no use the hon. Gentleman shouting from a sedentary position.

Mr. Michael Brown

rose—

Mr. Gordon Brown

He shouts about spending, but he should have asked that question of the Chancellor long ago.

Why are we spending so much on unemployment? Why are we spending on the bills of failure? Why have the Conservatives failed to create an economy that can provide sufficiently high sustainable growth to solve the problems of unemployment in our midst?

The Chancellor raised the question of the windfall tax. I make no apologies for saying that it will be an election issue, because we will tackle the problems of youth and long-term unemployment and give a fair deal to unemployed people by tackling the excess and unfair profits of the privatised utilities—profits that I believe even most members of the Conservative party cannot, in their more enlightened moments, ever defend.

Mr. Quentin Davies

On a point of order, Mr. Deputy Speaker. I wonder whether you would be kind enough to ask the Serjeant at Arms to check the sound amplification system in the Chamber. A few minutes ago, I asked the right hon. Gentleman an extremely clear question: what—

Mr. Deputy Speaker

Order. That is a total abuse of the House. It is not a point of order for me. It is nothing but gimmickry.

Mr. Brown

The House will agree that I have given way on numerous occasions—[HON. MEMBERS: "Answer the question."]—including, if I count correctly, about 10 times to the Chancellor to allow him to deny that the proposals in the document are under active consideration by the Conservative Government. He failed to answer my questions, and the press will understand that he did so.

Let me conclude by saying a number of things about—

Dr. Lynne Jones

It is time that Opposition Members had a bite at the cherry.

Do not Conservative Members' comments show that they plan to reduce the share of gross domestic product spent on government by further eroding the welfare state—a process which they have already begun, by removing mortgage protection from people who become unemployed and by going down the road of forcing people to take out private insurance for long-term care? It is not really credible, is it, for them to argue about reducing Government spending as a share of GDP by forcing people to spend more of their own money on taking out private insurance, which costs them far more?

Mr. Brown

I am grateful to my hon. Friend for her intervention. [HON. MEMBERS: "More spending."] I have made no secret of the fact that we will use the privatised utilities' resources to take action against the problems of unemployment. That will be a central issue of the next general election. Conservative Members will regret defending the utilities, and becoming the political voice of the utilities in this Chamber and in the country.

Let us conclude by examining—[Interruption.] Hon. Members should listen to what is being said about the condition of the economy, because they will have to answer in their marginal seats for what is happening.

After 17 years of Conservative government, what has happened to the country? First, there is more poverty than there was in 1979. The Chancellor makes speeches saying that the poor are getting richer. He makes speeches with his Social Security Minister, saying that the poor can now buy videos and freezers, and that there is no real problem of poverty in our midst.

But the report issued this morning reveals the truth. It refers to "widening inequality" of income and earnings, and says that, over the last 20 years, the UK has seen an 18 per cent. fall in income among its poorer groups. So far from the poor getting richer, the poor—according to the official in the Treasury, who has studied those matters in that section of the report—have got poorer. The Chancellor cannot deny it.

What about inequality since 1979? The Government suggest that all have benefited from their policies. The report says that, between 1979 and 1993, incomes for the poor fell by 10 per cent., and that, whereas weekly earnings for males in the highest deciles were 2.5 times higher than for the bottom decile, they were 3.3 times higher by April 1995—a massive widening of inequality, which has taken place under Conservative Governments. That is the second fact of life under the present Government.

What is the third fact of life under the present Government? In 1979, the then Chancellor, in his first Budget, said that the job of the Conservative Government was to reverse national economic decline. What has happened since 1979, as the Treasury report confirms today? Not only are we ninth out of 15th in Europe, and not only does the Treasury predict that we shall fall to the levels of Thailand, Mexico and Brazil, but it confirms, as we already know, that Britain has slumped from 13th to 18th in the world prosperity league.

Try as the Chancellor does to wriggle out of it, all he need do is read the competitiveness review published only a few days ago to find that the figures showing that we have fallen behind in the world prosperity league have been confirmed.

It must be an acute embarrassment to the Chancellor today that, despite all his claims about the economy, the Treasury knows that we are slipping behind. It is an acute embarrassment that, despite all that he says about poverty, the Treasury in its document says that poverty has worsened. It is an acute embarrassment for the Government that, despite all they say about narrowing inequality, the Treasury talks about widening inequality.

Our argument is that, when the Government should be fighting economic decline, they are only managing it. Our argument is that, when they should be modernising and rebuilding our welfare state, they are serious only about proposals in the Treasury to reduce and privatise it. Our argument is that, when they should be studying countries that have rebuilt their welfare state, they are looking instead to America, and the Republicans who want to dismantle it.

The Government are not fit to govern the country. The Chancellor is not fit to rule a Treasury when he does not even know what goes on in it. Substantial sections of the Conservative party now support the privatisation of the welfare state. The Government have failed on the economy and failed on the welfare state, and they should be out of office as soon as possible.

5.4 pm

Mr. John Redwood (Wokingham)

I wish to praise the kids in the Treasury. I believe that they have done us a great service today. They have certainly done no service to the shadow Chancellor. He obviously dropped his speech on the Floor. We shall never know whether the one that he dropped would have been any better than the one that we heard.

The kids in the Treasury have sprung a trap for the shadow Chancellor. I hope that their friends, the teenage scribblers, have been watching and listening, because they will be able to write a great deal of fun tomorrow about that dreadful performance by the Opposition spokesman.

I see quite a lot of the comment in the leaked paper as being in that honourable British civil service tradition of preparing for the unlikely or the implausible. I remember that the British civil service spent much time and energy preparing for a Liberal-led coalition in 1986. The Liberals were preparing for Government at the time and, in the civil service, Liberal options were being run through the computer to discover what things would look like, were they to appear as the Government.

Then, in 1991, the British civil service prepared actively for the potential success of that other lost cause—a Labour Government in 1992, led by Neil Kinnock. In that spirit, the kids in the Treasury have been studying Opposition policies again in part in the leaked document. Today the House should consider two of those, which have been partially highlighted, very charmingly, by the shadow Chancellor.

The first policy is that of charging motorists more so that the roads may be privatised. The Opposition look stunned, but of course Labour and Liberal politicians say that motorists should pay more. They say that they want congestion taxes and road pricing. They say that they want to push people off the roads into the trains, or on to the buses on some of the roads that they do not want to build. That is their avowed policy. The document shows that the civil service is preparing, and considering whether there is any money in that idea.

Conservative Members prefer active policies to promote competition and choice in public transport, so that more people will want to go by public transport. I trust that the Government will make it clear, in the reply to the debate, that they are still saying no to motorway tolls and tariffs on existing roads, because we have already bought those roads. We should not have to pay twice for them.

The second policy that the civil service is rightly examining is a policy that the Labour party must be studying today, in its 16 to 18-year-old review. We know that the shadow Chancellor wants to take child benefit away from 16 to 18-year-olds. If that is the comprehensive review that Labour Members have promised the public that it is, presumably they are also considering taking away the free sixth form place. I trust that our Government will make it crystal clear that we are in favour of the free sixth form place.

The Labour party is deeply worried about that, because it says that the elite, who get the sixth form place at school for the A-level course, may be exploiting those who do not stay on at school and take the A-level course, and they are considering the idea of training taxes and student: loans and other ways of financing those who will not stay on at school. Perhaps they are considering taking away the free place as well.

Towards the end of 1992, things were not good in the British economy. We had 3 million people out of work. There had been massive job losses and factory closures. The Chancellor of the Exchequer had to say to the nation that, if we stayed in the exchange rate mechanism, interest rates might have to be lifted to 15 per cent. That was a sad time. I am delighted that we came out of the exchange rate mechanism, and I am delighted that it is the Government's policy not to go back in. But I remember the Opposition in those days fully supporting that policy. They were at one with us on being in the exchange rate mechanism. I do not remember them praising our exit or praising the policies that we adopted after we came out of the ERM. Indeed, the Opposition have never supported the policies of the past four years which have created this excellent economic recovery.

I therefore hope that shadow spokesmen will take the opportunity to say that they were wrong to back the policy, and that they do not want our country to go back into the ERM and suffer the consequences.

Mr. MacShane

I believe the right hon. Gentleman was a member of the Government at the time. Why did he not have the courage of his convictions then, instead of waiting until he could stab his leader in the back last year?

Mr. Redwood

It is the leader of the Conservative party who has clearly stated that we are not going back into the ERM. If the hon. Gentleman looks at the record, he will clearly see that I described why I thought the exchange rate mechanism was wrong before we entered it—I put that on the public record. As a loyal member of the Government, I kept my reservations for private debate inside Government; but I can assure the hon. Gentleman that I was not shy there of saying why I thought we needed lower interest rates and why I welcomed our departure from the ERM.

Mr. Bruce Grocott (The Wrekin)

The right hon. Gentleman will recall saying eloquently during his leadership bid of just over a year ago, "No change, no chance," in respect of Government economic policy. Does he now think the policy has changed, or is it still his view that the Government have no chance?

Mr. Redwood

The Opposition have to ask questions like that because they are so ashamed of their policies. I can assure the hon. Gentleman that I did say, "No change, no chance." I thought that right then and I think it right today. There have been some welcome changes. I welcomed the Chancellor's Budget of last year, which produced tax cuts and some spending cuts. I shall be going on to urge him to do a little more in that direction—just so that the Opposition feel really unhappy about the prospects of a tax-cutting Government fuelling a decent economic recovery based on Conservative policies.

Mr. Michael Connarty (Falkirk, East)

rose—

Mr. Redwood

I know that the hon. Gentleman is eager, but I have been enjoying answering the previous question.

Mr. Connarty

Before the right hon. Gentleman's mind strays from his statement about the ERM, will he say whether he thinks that the Government should never go back into it?

Mr. Redwood

No, I do not think it would ever be right to go back into the exchange rate mechanism. My right hon. Friend the Prime Minister has clearly ruled it out. I just wish that the Opposition, four years on, would learn from our experience of the ERM and would come out against it too. But we are not particularly worried about what the Opposition think. We have work to get on with in the Conservative Administration in support of the Conservative Government.

The summer forecast says that next year general Government expenditure will rise by £13.5 billion, or 4.4 per cent. It says that there will be an additional £2 billion of spending compared with the Red Book forecast at the time of the last Budget. I urge the Cabinet and my right hon. and learned Friend the Chancellor to think again about these very large increases. It is possible to have a first-class education service, defence, law and order policies and a health service, and to ensure that they get reasonable increases next year while lowering these forecast increases. Before the summer forecast, I proposed £6 billion less increased expenditure; having seen the forecast, I now think that £7 billion less is necessary, given the extra increase in general expenditure proposed in that forecast. [Interruption.] Opposition Members seem to be keen to know where the money should come from, in general and specifically—so I shall tell them.

In general terms, the contingency fund could be halved from £5 billion to £2.5 billion, just as it has been this year. I believe that the inflation forecast that the Government are using is too high, so they could reduce the forecast requirement to meet increases in prices and wages by £2.5 billion. That is what can be done with a low inflation policy—lots of benefits flow from it. We do not need a 4.4 per cent. increase in expenditure if inflation is about 2 per cent. and if wages rise by only 3 per cent.

I should like more money to be switched from grant to private finance in areas such as housing and urban regeneration. The Department of the Environment is a reasonably sized Department with a big budget. I think it would be quite possible to switch £500 million out of grant and into private finance for the housing associations and the Housing Corporation. The cost of halving the rate of grant could easily be recouped by raising the money in the City of London. Furthermore, I should like £200 million to be shifted in a similar way within the single regeneration budget; and I would like the urban development corporations, now under starter's orders to wind up their business, to accelerate the disposal of their assets. I should like the regional government offices in England to be scrapped, with a saving of about 1,000 officials and a great deal of real estate. I should like much of the 10 million sq ft of empty office space around the country—especially in London—in Government ownership or leased by the Government to be returned to more productive use so that the money could be received by the Treasury or a rental income could be enjoyed.

I see the right hon. Member for Dunfermline, East (Mr. Brown) looking worried. He knows that these are good ideas which could really cut expenditure and lower taxation. I see him in active discussions with his hon. Friend the Member for Oxford, East (Mr. Smith), who is supposed to know something about public spending. I hear that there is one spending pledge that the shadow Chancellor must make—for a better telephone service in House of Commons offices. I hear that he is reluctant to receive calls from the hon. Member for Hartlepool (Mr. Mandelson), and that he is desperate for one of those telephone systems that will warn him when his hon. Friend has rung him up.

The Labour party is after a deeply over-governed Britain. It wants more government from Brussels, more regional government, more government from Whitehall, many more quangos and more government from shire hall and town hall. The Labour party occasionally says that it thinks we have too many quangos. Why then do Labour Members propose a massive expansion of quango-land? Why do they want regional development agencies? Why are they after a new quango to settle a minimum wage? Why are they after a whole rash of bodies to intervene and to invest around the country—when we are at last putting together a series of policies that make this country the fastest growing economy in western Europe and one of the big international challengers in the emerging global market?

Of course, every extra bit of government brings with it the need for extra taxation. We already have on the record the Labour party's requirement for a tartan tax, a training tax, a utilities tax and a London tax—four new taxes which the Labour party suggests on top of those that we already have. I agree that we have too many taxes already and that they are still too high, which is why I urge my right hon. and learned Friend to bring in another good Conservative Budget that cuts those taxes and even removes some of them altogether.

I welcomed the Prime Minister's statement last summer that he wanted capital gains tax and inheritance tax removed as soon as possible. I urge the Chancellor to look particularly at capital gains tax, which brings in only about £900 million these days. Surely it is possible to capture quite a lot of that revenue by taxing short-term gains and very large gains made by companies while exempting many more people from CGT. I see that the Chancellor smiles at that, but with a budget of £320 billion, and with revenue having slipped by £4.4 billion in the past few months, £900 million is not a large sum, although it is an important sum. In any case, not all of it would be lost. Some of the revenue would be retained in the way that I have outlined, and the Treasury would receive more in the end because there would be many more transactions in the economy that would fall prey to various taxes already in position. I am sure that the Chancellor would wish to help the Prime Minister fulfil his excellent pledge.

In the 1980s, the Conservatives showed that cutting tax rates brings in more revenue.

Dr. Lynne Jones

The right hon. Gentleman has been advising the Chancellor on tax cuts. In doing so, either he is making arbitrary selections that have no credibility, or he is proposing tax cuts at the expense of the very poor. For instance, if he cuts grant to housing associations, he presumably realises that there would be a consequential increase in rents, thereby increasing housing benefits costs. Or is he also proposing cuts in housing benefit, which would also affect the poorest people—just as all his other suggestions would?

Mr. Redwood

I have made no such requirement: my figures are net of any consequences for rents and housing benefit. As the hon. Lady points out, people on the lowest incomes are protected from any impact of changes in grant rate to housing associations because they receive housing benefit. She might like to reflect on the fact that the Labour party has not put a single figure on any change that it would like in public spending, borrowing or taxation. The Opposition cannot tell us how they would get borrowing down or whether they would impose the extra taxes already in their policy documents. They certainly do not have a clue how to re-jig the £320 billion budget proposed for next year by the Government. But I am not surprised by that.

Only the Conservative party can deliver lower tax rates, lower spending and lower borrowing. I urge the Government to look again at our success in the 1980s, when we had the courage to cut rates and more money came in. Moreover, we obtained more money by cutting tax rates for the richest people because more of them stayed here, fewer employed clever lawyers and tax advisers, and more paid their dues. That was reflected in a big surge in revenues from those more successful members of our community.

We need lower taxes, lower borrowing and lower spending. That is how to win the election—and how to strike terror in the heart of the right hon. Member for Dunfermline, East. I say again: three cheers for the boys in the Treasury who have, yet again, shown how the right hon. Gentleman has nothing to say for a better or more prosperous Britain, and everything to say about shady leaked documents.

5.20 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

I agree with the right hon. Member for Wokingham (Mr. Redwood) that the civil service rightly examines all possibilities, but I had not realised that it was examining the possibilities of the Redwood agenda. It is now clear that civil servants were taking into account the possibility that the right hon. Gentleman would exert more influence on the next Government than on the present one. There was always a group within the Treasury who believed that our economic performance would decline in the years ahead and thought that, rather than reverse that economic decline, they should manage it. That body of opinion received considerable support from the actions of the right hon. Member for Wokingham, because it could find no way to deal with the problems that he mentioned and the solutions that he proposed.

Once again, we have had a long gap between the Budget and this economic debate. The House has too few economic debates and it is clear that the economic timetable needs urgent revision. There is now a serious proposition to alter the parliamentary year. Whatever is decided, it must allow the Chancellor of the Exchequer to submit to debate in the Chamber more frequently.

I acknowledge the valuable role played by the Treasury Select Committee in taking its evidence. The trouble is that that should be in addition to, rather than instead of, debate in the House. I read the Chancellor's evidence and found it informative, but his evidence would have been better put forward in the Chamber. Questioning can take place in the Treasury Select Committee. I am worried that the minutes of evidence, which are so important, are not published until long afterwards, so they do not become part of our economic discussions. Exceptionally, the minutes were produced quickly and those were valuable, but unless we can have a kind of Hansard reporting of Select Committees, the proceedings cannot form part of our discussions as I would like.

Every time I raise those matters, I am told about the difficulties and costs. I do not accept those arguments. When I gave evidence to the Nolan committee, the previous day's verbatim report was handed to me and I found it valuable in understanding the evidence that previous witnesses had given. It is at least as important to have the evidence given by senior Ministers, particularly the Chancellor of the Exchequer, so that it can be incorporated in our economic discussions on those important matters. I shall continue my efforts to bring that about.

The economic position facing us today comes after 17 years of one-party rule. It is extremely rare for a Government to stay in office long enough for such a full appraisal of their long-term performance to be undertaken. Indeed, it is unique in this century. It is unique also because, since the war, Governments have laid claim to controlling the Government's economy for the good of their people. This Government have had 17 years, so there can be no excuse for such a dismal performance. If a Government who claim economic competence cannot show it within 17 years, they can hardly claim that a fresh beginning lies in wait just around the corner.

The Government have had an undistinguished 17 years. They commenced it with the most foolish nonsense that any Government have introduced—their belief that monetarism could foretell the future. They believed that, if they controlled sterling M3, they could double the rate of VAT and that that would not cause inflation because monetarism was under control. That nonsense produced an inflation rate of 23 per cent. without the problems of the world oil price rise, which caused inflation under a Labour Government five years previously.

The Government's monetarist philosophy was in ruin, but not before they caused disastrous consequences to industry between 1979 and 1981. During that period, with the pound at$2.40 and DM5, and interest rates of 17.5 per cent., industrial production fell by 12 per cent. A third of the manufacturing companies in my constituency closed their doors. They were not old, out-of-date industries but ordinary, standard industries which exist in Germany, Japan and every other country. They should have survived, but, once they closed, they never reopened. We bear the scars of that disaster to this day.

In 1985, following the North sea oil bonanza, the brakes were taken off and the Prime Minister announced that Britain's economic miracle was about to come. That led to the second disaster of the house price boom, coupled with the introduction of the poll tax.

The third major economic disaster in that 17-year period came on black Wednesday, when billions of pounds were spent trying to rescue sterling, which had to yield to the very market forces that the Government had so loudly trumpeted. The Government were crushed by their own economic theories of market forces. Seldom has nemesis triumphed as it did on that occasion.

This nation has the great advantage of being good at selling financial services. If we had a population of 5 million or possibly even 10 million, we would be a very prosperous country. However good the City of London is, it cannot supplant the failure to achieve anything like an equivalent success in our manufacturing industry. Indeed, the success of our financial services industry makes it more likely that many of our brightest people will not consider a future in industry. The Government must intervene to support that vital part of our economy.

In the Financial Times of 1 February 1996, the Secretary of State for Trade and Industry accepted that too much emphasis had been placed on promoting service industries and that manufacturing had entered a difficult time. I welcome that repentance, but I would be more impressed if it were a prelude to direct action to solve the problem. I see no evidence of that.

Page 17 of the 1996 "Summer Economic Forecast" says: The prospect is … for a rise in business investment over the next two years". But page 15 of the 1994 "Summer Economic Forecast" said: As the momentum of recovery … strengthens business investment is forecast to rise by 7 per cent. in 1995. In the event, it grew by 1.5 per cent. The "Summer Economic Forecast" of the following year said: Business investment is forecast to grow by nearly 5 per cent. in 1995. In the event, it grew by 1.5 per cent. This year's "Summer Economic Forecast" also says: Business investment … is forecast to grow by 7¾ per cent. in 1996 as a whole". All that the Government can give us is optimism that is wholly out of line with their previous experience. Year after year, they overstate the expansion that will come, and year after year they are proved wrong. I understand the difficulties of forecasting.

Mr. Allan Rogers (Rhondda)

Does my right hon. Friend accept that it was not just the Government's incompetence that led to such a rapid decline in our manufacturing capacity during the 1980s but the policies of the European Economic Community in the early 1980s? As the result of the Davignon plan for the steel industry, for example, this country's production was cut from 21 million tonnes to some 11 million tonnes. At the same time, however, our German and French competitors—they were not partners, whatever they said—increased production. Within the straitjacket of some European policies, we shall face the same problems again.

Mr. Sheldon

That may have been an additional factor but, apart from what happens in Europe, the Government have responsibility for what happens here. Their optimism is wholly out of line with previous experience.

Mr. Ray Whitney (Wycombe)

The hon. Member for Rhondda (Mr. Rogers) mentioned the steel industry. Will the right hon. Gentleman confirm that British Steel is by far the most profitable steel industry in the developed world? Last year, it made a profit of £1.1 billion.

Mr. Sheldon

One can always point to one, two, three or four industries that are doing very well, but it is important to consider manufacturing industry as a whole. We lost one third of the companies in my constituency. We do not have now the level of investment that we had in 1979, and that is the problem today. Unless we face up to that problem, we will not be able to remedy the great errors of the past.

I understand the difficulties of forecasting, but the Government's forecasting failures are especially serious because of their inability to distinguish between their dreams and their experience. If they considered the reality and could see that their optimism was unjustified, they might take some action. Far from being satisfied by their expectations for the future, the Government should face up to their major failure. The Government have not provided the crucial investment without which we shall not be able to compete with second and even third-tier European economies, let alone the rapidly expanding economies of the far east.

The danger is that our standing in the industrial world has fallen. When our economic performance is compared with that of other countries, our privileged international status is seriously threatened, even though we are a member of the Group of Seven. Since 1979, our share of world trade in manufactured goods has fallen from 7 to 5.2 per cent., and that is less than in Italy, France, Germany, Japan or the United States. Investment in manufacturing is 6 per cent. lower than in 1979.

In the light of lower than expected investment, it is essential that investment incentives are reconsidered. In particular, I never tire of repeating that the 25 per cent. capital allowance on investment is no incentive at all. It is a disincentive when the true depreciation of the asset is taken into account. Few assets depreciate by less than 25 per cent. in the first year, and I know of some industries in which the commission given to the salesman is 25 per cent. The allowance is an disincentive to investment. This is no time for dogma and the Labour party's views on the allowance are most commendable. My right hon. Friend the Member for Dunfermline, East (Mr. Brown) should be congratulated on pressing the issue time and again. The initial allowances should be increased to at least 50 per cent. or higher. The only loss to the Revenue is that corporation tax comes in later. That is a cost, but it is a lower cost than the failure to deal properly with the manufacturing sector.

Most Governments in the post-war years have been guilty of tunnel vision when assessing economic priorities. One economic indicator always seems to be dominant at any one time. In turn, the dominant indicator has been the preservation of the sterling exchange rate, sterling M3 and the mantra of monetarism. Now the inflation rate usurps all other indicators of the economy. That is not to say that those indicators are not important, but they should not usurp all the others in turn. No one should run an economy in that way. The Chancellor of the Exchequer would have an easy time if he had to consider only one economic indicator. I am not against the use of indicators, but I object to the primacy accorded to one that usurps the role of all the others when economic goals are determined.

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

The right hon. Gentleman has said that he does not believe in running the economy according to one economic rule. What does he think about the assertion by the right hon. Member for Dunfermline, East (Mr. Brown) that the public sector deficit should be governed by what he calls the golden rule?

Mr. Sheldon

That is one element among others in the context of the whole. The Government have to consider unemployment, inflation, the balance of payments and the public sector borrowing requirement. The task of running the economy is to pay true regard to all those factors. If investment had been accorded the same privileged position as some indicators have in the past, I might not have needed to be so critical of the Government's tunnel vision. Investment, especially manufacturing investment, has always been one of the residuals in the construction of our economic future, and it is time to move it much higher up the agenda.

The Chancellor of the Exchequer is rightly concerned about the fall in receipts from VAT. When VAT was introduced at the rate of 10 per cent., there was little avoidance. At 15 per cent., it became a greater burden; but the present rate of 17.5 per cent. encourages considerable ingenuity to minimise payment. The Chancellor of the Exchequer, in his evidence to the Treasury Committee, seemed to accept that point.

The way in which the Government have increased indirect taxes has resulted in great unfairness. The only progressive tax that we now possess is income tax. It used to be claimed that VAT was broadly neutral, but the changes introduced by the Government have made it more regressive. The principle of a progressive tax system, whereby taxes are borne more by those with broad shoulders, was not only a Labour conviction; it was shared by most Conservatives, but that was in the day of one-nation Tories. I can hope only that—following long years of Labour Government—the Conservative party will rediscover its roots.

5.36 pm

Mr. John Townend (Bridlington)

Since we came out of the exchange rate mechanism—the Labour party was keen for us to be members and wants us to rejoin— in most respects the economy has been run very well by the Government. The United Kingdom has had the benefit of a competitive pound and lower interest rates without the jump in inflation that normally follows a decline in the currency. The Government deserve credit for that. We have had the longest maintained level of low inflation for decades, the economy has recovered and we have had four to five years of consistent growth.

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) mentioned investment. Growth has been helped by our good record on inward investment. Today, we have learnt that unemployment is now lower than it was five years ago. Unemployment has fallen faster here than anywhere else in Europe and we now have one of the lowest levels in Europe. The Chancellor's handling of monetary policy cannot be faulted. The differences between my right hon. and learned Friend and the Governor of the Bank of England, which receive so much publicity, are small, but in fairness to my right hon. and learned Friend he has been proved correct about the appropriate level of interest rates for the British economy.

I agree with my right hon. Friend the Member for Wokingham (Mr. Redwood) that the Government, as Conservatives, still face one great challenge. We are spending too much, borrowing too much and taxing too much. We could be accused by a man visiting from. Mars of being too socialist. Whatever the sweet words of the Leader of the Opposition, nobody doubts that the Labour party will always be the party that taxes most, borrows most and spends most.

The Chancellor said earlier that public expenditure was 42.25 per cent. of gross domestic product. It is significant and disappointing that public expenditure as a percentage of GDP was 42.25 per cent. when we came to power in 1979. Although we aim to bring the percentage down to under 40 per cent., we have a long way to go to reach the 35 per cent. level that spending reached in 1964–65 or even the 38 per cent. level of 1988–89.

The Labour party criticises the Conservative party for being the party of cuts. Since the last election, public expenditure has increased by approximately 18 per cent. in real terms, after allowing for inflation. So much for the talk of cutting public expenditure and of slash and burn. In the past, the Treasury has used mirrors when it has talked about cutting public expenditure. The Treasury has cut the aspirations of Ministers who like to increase spending—it has cut the rate of the increase, rather than the rate of spending.

The Government have set a target: to bring spending below 40 per cent. of gross domestic product—and I hope that that will accelerate. It is significant that, despite all the talk from the Labour party—that it has reformed, that it will not spend big and that it will not have big taxes—it has not made a commitment about a target of spending as a percentage of GDP.

The largest departmental budget is social services. Its spending has increased from £16 billion in 1979 to £93 billion today. Even allowing for inflation, that is an increase of almost 2.75 times in real terms, which is a record that any socialist party could be proud of. We have given in far too often to the demands of special interest lobbies. In the process, we have helped to create benefit dependency among a significant section of the population. The taxpayer has become a soft touch.

For example, I understand that most of the IRA activists are on social security benefits, that most of the new-age travellers are on social security benefits and that, until this week, we were spending £200 million a year paying social security benefits to illegal asylum seekers. My right hon. Friend the Secretary of State for Social Security has done an excellent job of starting to deal with the problem, but despite what he has done, he has not reduced spending or even stopped it from rising. It is particularly worrying that social security spending has continued to rise over the past four or five years, when unemployment has fallen and we have had economic growth. I would have expected social security spending to fall in such circumstances.

We are no different from any other country in Europe, and we must now set about cutting this albatross of our financial system. I shall give hon. Members a few of my ideas. We need a much more radical approach to the black economy. It hits the Government's finances in two ways: because of the loss of tax and insurance contributions on the earnings of people working in the black economy and because most people in the black economy are also claiming social security benefits. Beveridge's aim—which we all support—was to aid people who could not get a job; it was not to give people an alternative to working.

We have to promote some revolutionary solutions. We cannot get an identity card too quickly, particularly for those drawing benefits. We have to do something about the scandal of national health insurance numbers—I understand that there are at least 2 million more numbers than there are people who should have them. Recently, I saw an interesting and well-researched programme on television which showed that some people have five or six different identities, claim five or six different benefits, in different towns, and are working. We have to contemplate introducing workfare, so that if people do not do some sort of work for the community, they do not get benefits.

I also believe that we will have to limit the number of children for whom benefit can be paid. Many people are quite capable of working but, because they have children, they cannot work. I presume that all hon. Members have come across examples of that in their constituencies.

Mr. Rogers

Say that again.

Mr. Townend

It is not my fault if the hon. Gentleman was not listening. One of the great growth areas of social security spending is on one-parent families—almost one in three children now lives in a one-parent family. We should do everything possible to keep families together and to reduce the soaring divorce rate. While I have every sympathy with widows and deserted wives, I believe that we have been far too generous to single, teenage, unmarried girls. We should remove benefit as an option for them. With today's education, young girls should know the options: contraception, adoption, abortion—although some people are opposed to it—and staying home with mum.

Some Labour Members will say that this is a callous approach, but I recall that, when we said that we would stop paying social security benefits to the wives and families of strikers, we faced the same accusation. We had the courage to take that action and, within two years, the number of days lost as a result of strikes plummeted. If we did what I suggest, within a couple of years the number of pregnancies among single girls would drop.

We are spending millions of pounds on fostering, but adoption costs the state virtually nothing. Because of social workers' prejudice against adoption, the number of adoptions is minuscule and many couples who want to adopt and provide wonderful homes are denied the opportunity. For some reason, social workers dislike adoption, and they make it difficult for people to adopt. I think the reason is that, when children are adopted, they leave the control of social workers, whereas if children are in foster homes, we need more social workers. The number of social workers has soared in recent decades and, by and large, society is no better off than it was 30 years ago. We are now facing the same problem with a new fashion: counselling. If we do not hit it on the head, there will be an explosion in jobs and expenditure just as there was with social workers. The cost to the taxpayer will be enormous.

Mr. Richard Spring (Bury St. Edmunds)

The right hon. Member for Dunfermline, East (Mr. Brown) made a truly appalling speech. Does my hon. Friend think that he is having a conversation with a stress counsellor? I think he probably needs one.

Mr. Townend

The right hon. Gentleman does not need to talk to a counsellor—he needs to learn some common sense and how the economy works. It is a pity that he has not been running a real business.

There could be savings everywhere. We all think health should be a priority. We have allocated far too much money to the AIDS campaign because of the pressure from the homosexual lobby. It has turned out not to be a heterosexual disease. I spoke to a consultant at the weekend who said that the amount of money that has been allocated to AIDS is out of proportion to the danger when compared with other health issues. This week, I read in the newspaper that we have spent £15,000 on a sex-change operation for a 70-year-old.

Education is important. Last week, I received a letter from my local council—it is not a Conservative-controlled local authority—saying how easy it is for students to commit grant fraud. Law and order is quite rightly a Conservative priority. We are sending more people to gaol, which is costing us more. If a lifer goes to gaol at an early age, it can cost the taxpayer £1 million. There are too many lifers in gaol because of our obsession against physical punishment. Capital punishment should be restored for the worst murders, such as the person who murdered Mrs. Russell and her children. Capital punishment would be a deterrent and it would save the taxpayer an enormous amount of money. Too many thugs are gaoled too young. If we brought back corporal punishment for the first or second offence, we would probably prevent many young offenders from embarking on a life of crime and save a lot of money.

Mr. Rogers

The hon. Gentleman has had a go at young mothers, the prison population and all sorts of other people in society. When will he get around to gipsies and Jewish people?

Mr. Townend

That comment is unworthy of the hon. Gentleman. With respect, it is a very racist remark from a member of a party that I thought had set its face against racism. There is nothing wrong with suggesting saving public money by sending fewer people to gaol.

I have said for many years that charity begins at home. Hon. Members are very good at producing league tables, and I can report that the United Kingdom is the world's fifth highest spender on overseas aid. The aid budget has been virtually ring-fenced—my spies tell me that that was due to the powerful influence of the previous Foreign Secretary. I suggest that there is no case for special treatment when we have a high borrowing requirement. The overseas aid budget should be cut.

The arts always receive special consideration at Budget time. The national lottery now pours tens of millions of pounds into arts, and that budget should no longer be protected.

I agree entirely with my right hon. Friend the Member for Wokingham who said that the difference between what was allowed for inflation and the actual, lower, inflation rate should be clawed back from Government Departments. We should aim to reduce the control total by some £6 billion to £8 billion. Most of that money should be devoted to reducing the taxation burden so that we can re-establish ourselves as the low spending, low tax party. Some of the money could go to speeding up the reduction of the public sector borrowing requirement. Tax cuts matched by spending cuts are economically sound and economically beneficial.

We must maintain the PSBR on a downward trend. As we have heard, the reductions in the past year were due to a shortfall in revenue. Several factors are involved, including the loss of excise duty on tobacco and alcoholic drinks—I have personal knowledge of that subject as I have been involved with the industry for years—due to large-scale smuggling controlled by the criminal element, and imports for personal consumption. That is costing the Treasury hundreds of millions—if not billions—of pounds. I think that people forget that value added tax is lost along with excise duty.

I have mentioned the black economy. VAT continues to be lost in the black economy, and in the secondary economy from those people who have jobs and pay tax but moonlight. The skilful practices of accountants employed by multinational companies have led to reduced corporation tax revenue. We must deal with those problems.

We are at a critical stage: the Chancellor holds in his hands our chance of victory at the next election. If I had time, I would address the question of the single currency. If we get off the fence and announce our opposition in principle, and if we reduce spending, taxes and borrowing, there will be clear blue water between the Government and the Labour party in the economic sphere. I am sure that, when the time comes, the British people will choose our alternative.

5.52 pm

Mr. Malcolm Bruce (Gordon)

I shall not respond to that rather nasty speech from the hon. Member for Bridlington (Mr. Townend): it seemed to comprise a caricature collection of the most odious right-wing prejudices that one could assemble—if that is an economic policy, I sincerely hope that the British people will not vote for it.

I enjoyed the speech of the right hon. Member for Wokingham (Mr. Redwood). I thought it good rumbustious politics, but bad economics. I am wrestling with costing a spending programme, but the right hon.

Gentleman did not convince me that he has found the basis for real spending cuts or the machinery for delivering significant tax cuts.

Mr. Redwood

Will the hon. Gentleman explain to the House why Liberal Democrats in the county of Berkshire spent a lot of money on a campaign to save the county council, yet when the matter came before the House no Liberal Democrats spoke or voted to protect that council? Was that money well spent? Would it not have been better spent on education?

Mr. Bruce

I thought that the right hon. Gentleman intended to give further elucidation of economic policy. As to local politics in Berkshire, the Conservatives have the votes to deliver the campaign's objectives and, regrettably, the Liberal Democrats do not. We would deliver them if we could.

Reference has been made to a leaked Treasury document. I think that its fundamental substance was over-promoted, but no doubt it has been the source of some entertainment and information. I do not know whether it was a training exercise by kids or an indication that things are so bad in the Government that the kids have taken over the kindergarten, but it was clearly an exploration of a range of policy options—if only to see what one could come up with in a brainstorming session.

The right hon. Member for Wokingham and others in his party who follow the right-wing agenda tend to talk rather glibly about cutting public spending and about lower taxation at 35 per cent. or 30 per cent. They suggest that people will pay less tax and nothing terrible will happen to public services. The reality is that service provision, particularly for the poor and the disadvantaged, would inevitably be squeezed, and there is no guarantee that those on middle incomes would be better off. There is no guarantee that national insurance benefits and premiums will be cheaper if privatised.

It is a deception to suggest that we can cut taxes without pain and without corresponding losses. We should thank the kids because they have flushed out the real substance of the debate. In that sense, I am grateful for the opportunity to see what the tax cutting agenda is all about.

Mr. Tim Smith (Beaconsfield)

Does the hon. Gentleman accept that there is a clear correlation between the level of public spending—the proportion of gross domestic product spent by the Government—and economic growth? We support the policy not for ideological reasons, but because we believe that it will lead to higher growth from which everyone will benefit.

Mr. Bruce

That is not necessarily true as an economic thesis—it depends on how the money is spent, not on who spends it. Countries with high levels of Government spending as a proportion of GDP have sustained consistently higher growth rates than the United Kingdom. While it may be a good discipline and a perfectly legitimate objective, I do not think that the hon. Gentleman describes a fundamental law of economics.

My party and I welcome several aspects of the report. It said that, whatever course of action this country takes in relation to monetary policy and monetary union, we should have—and would need—an independent central bank sooner rather than later. The report argues that if we join the single currency we shall, by definition, sign up to the European central bank. If we stay out, having qualified, we must have our own independent central bank so as to reassure the markets that we will behave in a responsible fashion.

That view was also articulated clearly by the Governor of the Bank of England. As an independent central banker, he would be bound to say that. However, he made two further points. First, referring to sustainable low inflation and to our achievements in the past four or five years, he pointed out that Britain has a long way to go before it has a track record of real confidence and competence in those areas compared with our competitors. Therefore, we must reassure the markets that we shall not politicise decisions. Secondly, he pointed out that when political decisions are separated from those of the central bankers there is a premium on long-term interest rates of between 0.5 per cent. and 1 per cent. That would save the Government £300 million over five years on current debt levels. It is a significant benefit for the Government and for those in the economy for whom the rate of interest is an important factor. There are strong, sound economic arguments and benefits.

It is interesting to note that the most resistance to the idea of an independent central bank comes from the right of the Conservative party and the left of the Labour party. That is because they want to interfere in the economy on a day-to-day basis for political reasons. We have suffered stop-go economics over the years for that very reason. It does not, of course, deny that the Government set the policy within which the bank operates, but it means that from day to day people can have confidence that economic factors are uppermost in the minds of central bankers.

In reply to a question from me, the Governor of the Bank of England reaffirmed his conviction that its forecasts and concerns about inflation are real and legitimate. He did not accept the Chancellor's argument that the Bank of England's inflation forecasts are always wrong, because they have not been. Indeed, he agreed with me—although he was more polite about it—that the Chancellor had some nerve to attack the Bank of England for its inflation forecast in the very week when he announced that his borrowing forecasts were £4.5 billion out and his growth forecasts were ½ per cent. out.

Mr. Livingstone

Why do Liberal Democrats, who are so committed to extending democracy in every other sphere, want to remove from democratic accountability key elements of the economy which affect the lives of every voter? If he examines the track record for the past 100 years of advice from the Bank of England, to which he wants to give this power—whether it was telling Churchill to go back on the gold standard or telling the current Government to join the exchange rate mechanism at an over-inflated rate—he will see that it has been irredeemably wrong decade after decade.

Mr. Bruce

The hon. Gentleman completely misunderstands what an independent central bank is about. The decisions that he mentioned are policy decisions, which would continue to be determined by the Government and by Parliament. An independent central bank is about the day-to-day administration of a policy set by Parliament and by the Government. Out of 15 member states in the European Union, we are the only one that operates in this way, and the only one that has not had consistently low inflation or consistent patterns of growth. Other countries have, and the hon. Gentleman should recognise that there may be some reason for that.

Mr. Barry Field (Isle of Wight)

If the Liberal Democrats are so in favour of a European central bank, why does the Liberal Democrat-controlled Isle of Wight council want to come out of Europe altogether and have devolution?

Mr. Bruce

I am not aware that the campaign was for the council to come out of Europe altogether; it was to have autonomy within the United Kingdom. Indeed, as a Scottish Member of Parliament, I sincerely hope that Scotland will soon have its own Parliament within the United Kingdom and the European Union.

Mr. Spring

Will the hon. Gentleman give way?

Mr. Bruce

No, I shall not give way again—I have a speech to make.

The issue in the debate today has been the summer economic statement, and the Government have had to acknowledge that what the Chancellor told the House in his Budget was fundamentally incorrect. The forecast was wrong. It was interesting that, when pressed in the Select Committee on Monday, his reaction to forecasting was to say, "Who believes forecasts anyway?" Then, when asked why he bothered to make them, he made rather a slip: he said that he had to do so by law because there was some socialist measure that the Government had forgotten to repeal, but he did not really pay much attention to these things.

At the time of the Budget, the Chancellor led us to believe that the forecasts were serious, accurate, and his best guess as to what was going to happen. They were, of course, his justification for recommending a cut in income tax—a cut that the figures now clearly show was not justified at the time. I submit that he knew that perfectly well, but he needed to put phoney figures into his Budget, at the wrong end of any forecast that he could have got from his independent advisers. The only way in which he could meet the demands of the baying hordes on his Back Benches was by cooking the forecasts and then saying afterwards, "Well, who believes forecasts anyway?" That is exactly what he is now trying to with the forthcoming Budget, and, I presume, the general election campaign, which he is to fight not on the Tory record but on the forecast: optimistic forecast—poor record.

It is worth putting it on record that the borrowing deficit forecast is higher than that for the same time last year. All the confident assertions that borrowing is coming down may well turn out to be over-optimistic. There is an indication that the borrowing outturn for this year could be as high as or even higher than it was last year. The Chancellor of the Exchequer is on record as saying that there would be no justification for cutting taxes if public sector borrowing was at £30 billion or above. He cut taxes when it was £30 billion. He is, apparently, considering cutting taxes further when, potentially, it will continue to be above £30 billion, which demonstrates quite clearly that he is an irresponsible Chancellor who is determined to pursue political policies rather than the economic interests of the country, and is doing so in circumstances that will damage the country's long-term prospects. Perhaps he is doing that because he does not expect to be in charge of them for very much longer. That can be the only conclusion.

Some aspects of our economic performance are welcome. We are, of course, experiencing growth and low inflation, which is welcome. There has been a fall in unemployment, but from very high levels. I shall briefly go through some of the claims and qualify what the Government suggest, and the enthusiasm and euphoria with which they sometimes promotes their claims.

At times, we are told that inflation is down and out. I submit that it must be under control for a significantly longer period before we can say for certain that it is back in the box. Inflation is low right across the world. In fact, ours is the fourth highest in the European Union. We have not yet demonstrated that in terms of inflationary pressures we have the mechanism in place that could keep it under control. That is one of the reasons why the Liberal Democrats believe that allowing the central bank to take the key decisions on inflation on a day-to-day basis would keep inflation down, as well as having a clearer target.

Unemployment is falling, but it is still above 2 million, even using the official figures. In fact, although this month's figures show that unemployment has fallen by 14,000, employment has fallen by 34,000, which is a sign of people dropping off the register rather than finding work, and that is rather different. When the Conservative Government came to power using the slogan, "Labour isn't working," unemployment was 1.29 million. There are now 2 million unemployed. Indeed, the figure was 1.66 million when the present Prime Minister came into office. In all the circumstances, unemployment is far too high, and it is one of the main reasons why the social services budget, about which the hon. Member for Bridlington complained, is high and is failing to come under control.

The next claim that the Government make is that Britain's growth is the highest in Europe, but that is only because Britain went into recession first and so came out first. Between 1989, when Britain went into recession, and the end of 1995, the British economy grew by 7.2 per cent. compared with the German economy at 16.5 per cent., the French economy at 8.5 per cent., the Italian economy at 10.3 per cent., the American economy at 15.4 per cent. and the Japanese economy at 13.4 per cent. Our performance across that period is modest in the extreme, and it is a short window of comparison on a very low base.

The Government say that taxes are coming down, but even the hon. Member for Bridlington acknowledged that the total Government tax take as a proportion of GDP is exactly the same as it was under the last Labour Government. In the meantime, more than half the accumulated national debt has been incurred since the present Prime Minister took office. That is hardly the record of a Government of sound financial management who have public finances under control.

The recovery in consumption has almost nothing whatever to do with the Government; it has much more to do with the changing character of our building societies and the windfalls that they inject into the economy.

It is my contention that a number of fundamental changes in policy are necessary if the Government are to ensure that the benefits which have genuinely been achieved continue into the long term. It is the contention of my party that sustainable low inflation and permanently low interest rates will help to create the climate for long-term investment, confidence and stability. That is desirable. To achieve that, we maintain that Britain must reassure people in the markets at home and abroad that what we are doing in public finance is consistent, long term and responsible and will not be knocked off course for short-term political considerations.

I regret to say that, with survival at stake, the Government demonstrate that short-term political considerations could well compromise our long-term benefits. If that is so, they will pay a heavy penalty in the long term. This country needs continuity and stability in those areas. If the Government go for broke on a tax cut that they cannot justify, and if they fail to recognise the need to keep inflation under control and to listen to the advice of independent commentators and forecasters, they could blow away our chance—a chance that we cannot afford to miss—to become genuinely competitive in Europe and in the world.

6.9 pm

Mr. Richard Spring (Bury St. Edmunds)

I am grateful for the opportunity to speak.

I must say to the hon. Member for Gordon (Mr. Bruce) that I am rather concerned about his apparent fixation with an independent central bank. It strikes me as irrelevant for Liberal Democrats to alight on such a policy when they are entirely committed to a politically and economically integrated Europe. That would effectively mean our losing sovereignty in terms of our economy, given that we would have a single currency and, by definition, a single European bank. Notwithstanding the interest with which the hon. Gentleman spoke of the establishment of an independent central bank, it would prove irrelevant if his party's policies were ever carried out.

Last week, something of seminal importance happened in this country. There was a massive investment in Britain, the largest ever investment in Europe from abroad. I refer, of course, to the £1.7 billion investment in Wales by LG of South Korea. It will create 6,100 jobs, and the spillover effect will create some 20,000 jobs in south Wales in toto.

In the same week—I believe that it was the very same day—300 new jobs were created in a joint venture between Unipart and Honda. Honda has come to this country, and has been part of the great revitalisation of the motor industry. I mention that because economics is not some high-flown theory; it is about people's lives, livelihoods, hopes, dreams and aspirations. If those aspirations are to be fulfilled, we in this country must produce the goods and services that the world wants and we want in our home market; there is no escape from that.

We do not need a plethora of economic statistics to know—especially after last week's massive investment—that something profoundly positive must have happened in this country in the last few years to persuade the South Koreans, and many others, to participate in our dynamic economy.

In the last three years, foreign investment has created 114,000 new jobs, and 285,000 jobs have been safeguarded. Last year alone, 477 new deals were announced, and 60 per cent. of the companies that located or expanded in the United Kingdom were already established here. Over the past decade, an enormous amount—£100 billion—has been invested directly here in manufacturing and other industries by companies located abroad.

Is that because we provide a single point of entry to the European Union? There is undoubtedly some truth in that: this is an enormous single market, which is available to any investor. There is another truth, however. A third of all the new deals are already European. A total of 1,500 German companies operate here. More German companies are now coming into the United Kingdom than are going into the United States, whose population is nearly five times the size of ours.

What is so significant and exciting about that huge endorsement of our economic success and progress—we have heard nothing of this from Labour Members—is the effect on the gap between the richest and the poorest parts of the United Kingdom, which is now narrower than it has been for 20 years. Fifteen or 20 years ago, there was undoubtedly a discrepancy between the economic performance of different parts of the country. The narrowing of that gap is in large measure due to the vote of confidence given to us by the massive inflow of foreign investment.

Mr. MacShane

Does the German investment to which the hon. Gentleman referred consist simply of new investment and new jobs, or does it include the purchase of Rover and a large number of banks because of the devaluation of the pound? What part of that investment consists of new jobs, new factories and new investment, and what part involves deutschmarks buying British companies because the pound makes them so cheap?

Mr. Spring

As I have said, a third of the new deals are European, and a substantial number of those are German. The United Kingdom is now preferable even to the United States in investment terms. That is a huge endorsement of what we are doing. We have the most benign economic environment that we have had since the war.

There is a world shortage of capital, which has begun to increase in the past 18 months, but there is enormous competition for capital investment. Last week, we heard President Mandela speak. One of his most important purposes in coming here was to try to attract scarce foreign investment into South Africa. That is clearly happening all over the world, but—despite the competition to attract capital, and although Europe is, on the whole, not a preferred centre for investment compared with many other parts of the world—we in Britain have been extremely successful, attracting some 40 per cent. of US investment and some 40 per cent. of Japanese investment.

That has happened because, almost uniquely in Europe, we have provided low corporate taxation, low inflation and a business-friendly environment. The creation of jobs has meant a rise in the standard of living for our entire population.

Mr. Rogers

The hon. Gentleman has described the way in which investment is coming into this country. Does he accept that, on occasion, we have paid a high price by buying in jobs? I am not saying that that is wrong in policy terms; we welcome all jobs, particularly in areas such as the one that I represent. Nevertheless, I find it strange that many indigenous companies are closing.

As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) pointed out, under the Government supported by the hon. Gentleman, our manufacturing capacity has almost collapsed. That applies particularly to indigenous companies that do not seem to receive the same support as companies that are bought in.

Mr. Spring

Following the flow of foreign capital into this country, we have seen improved management methods and employer-employee relations. We have also seen a raising of standards among domestic suppliers, particularly in the automotive industry. Automotive suppliers have been able to supply high-quality goods—the sort of goods that Japanese car manufacturers have wanted. That has had a beneficial effect on the local economy.

What does this mean at the micro level? As I have said, we should remember that we are talking about jobs, livelihoods and aspirations. In my constituency, unemployment is now down to 4.1 per cent., and in Bury St. Edmunds, the main town in my constituency, it has fallen to below 3.7 per cent. The expansion of East Anglia's economy has meant that my constituency now has one of the lowest unemployment levels since the war. The important thing is that we are not getting some soufflé-type economic recovery. It has been slow and steady, without the inflationary excesses that have dogged our economic performance so often since the war.

When we think about economics, its application and its job-creation possibilities, we must remember that other industrialised countries throughout Europe are suffering the tragedy of youth unemployment. In countries such as France, the youth unemployment level is about twice the UK level. The European Union average is substantially above our own. In Spain, which has a minimum wage set-up similar to the one advocated by the Labour party, youth unemployment is 41.2 per cent. What a tragedy of blighted human lives. The artificiality of the minimum wage is destroying the prospect of economic growth and employment.

The other side of the coin is that, as unemployment comes down, vacancies grow. In June, they were up another 13,000, to 218,000. We should remind ourselves that we have the highest employment level of people of working age of any large European country.

Until the past 10 or 15 years, East Anglia had not enjoyed the economic prosperity of some other parts of the UK, but, in the first half of 1996, there were improvements in order books, profits, investment spending and jobs.

A survey undertaken by the Lloyd's bank commercial service showed that 40 per cent. of companies were increasing their investment spending. Amid a welter of good statistics, cash flow has improved demonstrably. That is crucial, because about 90 per cent. of the work force in East Anglia, which does not have the industrial tradition of other parts of the UK, work in firms and enterprises of 25 employees or less. Therefore, what happens to small businesses and their cash flow is crucial.

This week, the Organisation for Economic Co-operation and Development annual employment report contrasted the continuing fall in UK unemployment with the rising unemployment in France and Germany. We can contrast our present position only with the shambles of strikes, inflation and balance of payment crises that became indelibly associated with the UK during the 1970s, and no wonder. We had 98 per cent. taxation and a terrifying brain drain, which deprived the UK of a generation of dynamic entrepreneurs, with adverse long-term consequences.

That is one of the main reasons why I felt compelled to get involved in a political career. Travelling the world as a British business man, I felt ashamed to have to apologise for the shambles and anarchy that obtained in the UK in the 1970s. What a total contrast we have today. The huge success in the UK is clear. Our work force is flexible and adaptable. Our employers are not burdened with job-destroying social on-costs, and the trade unions no longer hold our country to ransom.

Manufacturing industry, however, is not the only beneficiary of the economy's improvement in terms of attracting overseas investment. The latest Confederation of British Industry quarterly survey, conducted with Coopers and Lybrand, shows that there is considerably more business optimism in the financial services industries, which are growing at their fastest rate since March 1993, with banks, building societies and life insurers reporting the strongest rises in confidence.

We hear about the elusive feel-good factor, but house prices are undoubtedly beginning to rise—not, as they have in the past, led by inflation, but because the affordability index is so good, and it is attractive for people to buy. They are not spurred to do so by inflation or a desire to beat the price index, but because of increasing confidence, of growing employment opportunities, of low interest rates, of the cash flows that they create in people's budgets, and of the solidity and stability that low inflation brings to the UK.

It is significant that people are reflecting that confidence in taking out new mortgage loans. In the three months to May, new approved mortgage loans were up to £18.1 billion. That compares with £15.1 billion for the same period in 1995. As my right hon. and learned Friend the Chancellor of the Exchequer has forecast, in the second half of 1996, the consumer will increasingly play an important part in the economic recovery.

In June, for example, sales volumes increased for the ninth time in as many months. Consumer spending was at its highest level since January 1990. All that will contribute to a greater sense of well-being and solidity in the months and years to come. Since its peak in 1992, unemployment has fallen by 800,000—we have the lowest unemployment level of any major European country. We are a glorious exception in a sea of rising unemployment throughout Europe.

It is instructive to note—this is significant—that, if we consider the pattern of job creation since 1973, we see that, in the 12 countries in the EU, before the other three joined, there was a net expansion in jobs of only 5 million. Appallingly, 90 per cent. of them were in the public sector. By contrast, the United States of America, whose population size and labour force of 142 million are similar to those of the EU, has created 36 million jobs in the private sector, and only 5 million in the public sector. That is because it has a flexible labour market and an entrepreneurial culture that is increasingly becoming the hallmark of the UK.

Mr. MacShane

And a minimum wage.

Mr. Spring

The United States has a minimum wage that is far below the level remotely mooted by Labour Members and their trade union friends.

Given our export propensities, there has been a slowdown in France and in Germany. That has had some impact on our export performance. Nevertheless, much of our recovery has been led by an excellent export effort throughout the world.

Is it not significant that the United States economy and culture are marked by this labour flexibility, and that it has enjoyed above-average growth and job creation? Is it not significant that, in the past few years, it has been able to dominate the capital-intensive, high-technology growth sector with remarkable success, beating Japan in the process? The two are inextricably linked.

We have heard a great deal about debt. Since 1993, the UK Government's borrowing has fallen faster than that of any other EU country except Sweden. The UK is the only major industrial country in which the ratio of gross public debt to gross domestic product has fallen since 1979. No other European country but France has a comparable debt-GDP ratio. With the exception of Luxembourg, the ratios in all the other European countries are substantially higher. Some are very high: for example, Belgium's ratio is well over 100 per cent., as are those of Italy and Greece.

We have heard much about debt this afternoon. The reality is that it has certainly become a problem throughout the industrialised world. We are grappling with it with much greater success than our European neighbours.

Dr. Jeremy Bray (Motherwell, South)

The hon. Gentleman is being careful in selecting his initial data for his comparisons. Can he tell us what has been happening to the national debt-to-GDP ratio for the past couple of years? It is creeping up dangerously near to the 60 per cent. level required for avoiding the excessive debt and deficit procedures within the European Union.

Mr. Spring

The latest information that I have obtained from the European Commission suggests that the debt-to-GDP ratio in the United Kingdom is 52.5 per cent., which, as I said, is among the lowest in Europe, and well below the European average.

We have heard a speech by the right hon. Member for Dunfermline, East (Mr. Brown), but we have had no indications of interest rate policy, inflation targets or exchange rate policy. We do not seem to have heard any more about that famous 10p tax rate. It was never raised during debates on the Finance Bill, and seems also to have been forgotten. We have heard nothing about how post-neo-classical endogenous growth theory could be relevant in 1996 or to the present state of our economy.

From listening to the right hon. Member for Dunfermline, East and hearing the sentiments of Opposition Members, one gathers that all their impulses are towards higher taxation, involvement in industry, which will mean poorer industrial relations, and, through that, higher unemployment. That means the social chapter and the job-destroying minimum wage.

In contrast to the painful experience that anyone who has sold for Britain in the past has had to endure either here or abroad, the situation now is entirely different. We have the most benign economic scenario we have had since the war. That means jobs and opportunities for the people of Britain. We have not heard one word of constructive suggestion from the Opposition. That is why, when it comes to it, the people of Britain will be trusting us at the next general election.

6.31 pm

Mr. Denzil Davies (Llanelli)

The right hon. Member for Wokingham (Mr. Redwood) is not in the Chamber at present, and I do not criticise him for that. He mentioned the boys at the Treasury. The Chancellor confirmed earlier that they were boys. Having only read reports in the newspapers, what I found depressing about their thinking the unthinkable was how fashionable it was. I suppose that boys will be boys—they will wear the latest fashionable clothes, drive the latest fashionable cars and acquire the latest fashionable goods.

How very fashionable to say that we should privatise the welfare state. There is nothing new or imaginative about that. That is the fashion. It may have started in the United States. It is certainly rife in this country, perhaps even across the political divide in certain sectors. It was profoundly depressing to hear that suggested as one of the solutions to the decline—there may well be a decline, as western economies, including Britain, have perhaps to decline relatively as other economies get stronger. If we are going to decline relatively, I hope that we will not try to heap all the burdens of decline on the welfare state and believe that, by privatising it, we can protect everyone from the decline that might result from a global economy, and from other countries catching up with what we have done in the past 100 years.

I was pleased to hear my right hon. Friend the Member for Dunfermline, East (Mr. Brown) condemn the policy of privatising the welfare state. If we are going to think the unthinkable, I hope that the unthinkable does not include privatising the welfare state.

The Chancellor told us that we must concentrate on the document, and I will concentrate on the public sector borrowing requirement. My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) and I know all about the PSBR. We spent a lot of time on it in the 1970s, and it is back again.

The hon. Member for Gordon (Mr. Bruce), who spoke for the Liberal party, suggested that the Chancellor was cooking the books. If he can cook the PSBR, he is doing very well. It looks to me as though he has not yet been very successful at cooking the books. So far, he has failed to the tune of £4.5 billion, and there have only been three months of this financial year. In the Budget, he told us that the PSBR would be £22.4 billion. Now he tells us that it will be £26.9 billion, and only three months has gone by—he still has three quarters of the year to go.

I like the £0.9 billion figure—it is a splendid figure. Night after night, the boys at the Treasury with their slide rules—I suppose they do not have those any more—their calculators or whatever, are fine-tuning the £0.9 billion to try somehow to give an air of sophistication and certainty to an unsophisticated and uncertain exercise.

I think that the Budget will be on 26 November. I do not know whether the date has been announced, but it will certainly be towards the end of the November. We will probably have another PSBR forecast in the Budget. I have no idea what it will be, and nor does the Chancellor, probably. It could be a little less—£26.9 billion or £26.7 billion—or it could be a little more than £27.1 billion. No one knows. I know one thing—it will be a forecast that shows a figure lower than the outturn for last year.

"Outturn" is a good Treasury word. It really means the bill, cheque or tally that we have to pay at the end of the year. For last year, the outturn was £32.2 billion, so the November forecast will certainly be less than that, because there must be a declining trend. There is always a declining trend next year, and next year will be the year of the declining trend, so we can be sure that the forecast at least will be less than £32.2 billion. I think that the outturn will probably be £30 billion next year. I understand that the Bank of England is seeking to fund the deficit on that basis. Who knows? At least there will be a declining trend next year.

The Chancellor is not very worried about the PSBR at the moment—probably because he will not be around to pick up the tab. He will no doubt be performing his last function as Chancellor in November, during the Budget.

It is not difficult to predict how that Budget will go. The Treasury spin doctors will put out the warm words early, before the Budget. It will be a tough public spending round. There will be squeals and blood on the walls—or lots of tomato ketchup—and blood on the carpets. Next year will be a tough year for public expenditure, but by then there will have been a change of Government. The Chancellor may be Chancellor after the election, who knows? He probably will not. But next year will be a tough time for public expenditure, so we can be certain of a tough spending round.

Not only will we be told that next year is going to be a tough year for public expenditure, but, because of that, there will be room for tax cuts—not the politically motivated tax cuts that some people suggest. Not at all: because of the tough spending round next year, we shall have prudent tax cuts, which the country can afford and which have been earned. But there will be tax cuts, based on the reality of a public expenditure total for next year. Whether that total will be achieved I know not, but if it is not, I suspect that the public expenditure borrowing requirement for the following year will approach £50 billion.

The Chancellor's life is made even better by the fact that tax cuts will start on 1 April—I see the hon. Member for Milton Keynes, South-West (Mr. Legg) smiling in anticipation—and the election campaign will be held in early May. From 1 April, each pay packet or salary cheque will benefit from this "tough Budget" and the "prudent" tax cuts.

Chancellors these days, unlike the period when my right hon. Friend the Member for Ashton-under-Lyne and I were in government, have to worry not only about the public sector borrowing requirement but about something else, by which the Liberal party is no doubt delighted. They must worry about—dare I say it?—a new danger that comes from Europe, and apparently is called the general Government financial deficit.

The Chancellor is a good European, but he is not doing very well on the general Government financial deficit. He went to Brussels the other day to see his political masters, and Jacques Santer had him in that little room with only one desk, a table and a white wall, and told him off. He said, "Chancellor, you are not doing very well on the general Government financial deficit."

Because it is European, the figures for the general Government financial deficit are different; indeed, its make-up is different. Governments cannot spend their privatisation money—it sounds like a good idea in many ways. Because the Europeans are so eccentric, the calendar year and fiscal year are the same for the general Government financial deficit.

We now have two Governments in Britain—one at Westminster and one in Brussels—which makes this necessary. The Central Statistical Office states that borrowing on the general Government financial deficit for the 1995 calendar year was 6 per cent. of GDP. The Maastricht treaty, if I dare mention it, requires a target of 3 per cent. Therefore, between now and 1999 the deficit will have to be halved.

The hon. Member for Bury St. Edmunds (Mr. Spring) mentioned public debt, but that too is creeping up to 55 or 56 per cent. and by 1999, it may be 60 per cent.

Mr. Spring

indicated dissent.

Mr. Davies

The hon. Gentleman shakes his head. I do not know how he knows these things; perhaps he can cook the books. Public debt is on an increasing trend.

In its forecasts, the Treasury has managed to reduce the 6 per cent. figure to 5 per cent. for the fiscal year 1995‴96. I do not know what the general Government financial deficit for the 1996 calendar year will be, but I am fairly sure that it will be between 5 and 6 per cent.

A reduction from 6 per cent. to 3 per cent. will require reductions in public expenditure of about £18 billion. A reduction from 5 per cent. will require reductions of about £12 billion. Ernst and Young, the Item Club of forecasters, basing its forecast on Treasury models, concluded that joining the single currency would cost 500,000 jobs. That is an optimistic assessment based on optimistic Treasury figures.

We are talking about enormous reductions in public expenditure or increases in taxation. Reducing the figure from 6 to 3 per cent. would require an increase in income tax of 7p in the pound, or an increase in VAT of 6 to 7 per cent. I accept that the figures may change, but they will not be much below 5 per cent. That is the price that Britain will pay if it signs up to a single currency.

Of one thing we can be sure: the price of signing up to a single currency will not be paid by tax increases. Throughout Europe, public expenditure is being cut, with consequential reductions in growth, to enable countries to sign up to a single currency.

The price of a single currency will be paid not by the chattering classes, by the Director General of the CBI, who almost every week makes a speech in its favour, or by Mr. John Monks, who apparently is General Secretary of the TUC and who also makes a speech in its favour every week and seemingly is quite happy to send his members in the vanguard and in the first wave over the top into the Passchendaele of a single currency—but by cuts in public expenditure.

Surprise surprise: it will be paid by cuts in the welfare state and in social security. It will be paid by the unemployed, the disabled and the poor people of Europe, not by the chattering classes—not by the European political and bureaucratic elite, among whom I include the British.

Whatever happens to the single currency, my right hon. Friends will inherit from the Government a legacy of profligate public finances and public debt. It will not be the first time that, sadly, a Labour Government will have to clear up the mess left by the party of sound money. I do not envy them their task.

6.46 pm

Mr. Ray Whitney (Wycombe)

It is a great pleasure to follow the right hon. Gentleman because he is one of the authentic voices of old Labour; the place would not be the same without him. His speech was a happy and interesting contrast to the rather less easy to define voice and visage of new Labour on its Front Bench.

The right hon. Gentleman, in his genial way, seems to have let the past 20 years of economic experience pass him by—the economic experience of not only this country but of virtually every country in the world that has come to understand the workings of the market economy and the benefits that it can bring. He is happily ensconced in his ferocious antipathy to any sensible co-operation with our European neighbours and in his own happy neo-Keynesian world, which he never wants to leave and in which he is comfortable.

That contrasts with the other function that the right hon. Gentleman serves—as a memento of the unhappy (lays of the last Labour Government, at which time I think I am right in saying that he graced an important office in the Treasury. In those days, the Chancellor did not go to Brussels to debate the general Government financial deficit—under which it will be decided whether our economy meets the severe Maastricht criteria, or, as I would put it, whether we are in the Premier league—but went cap in hand to the International Monetary Fund for a bail-out operation. The right hon. Gentleman's then boss, Lord Healey, turned around at the airport and rushed back to Great George street because of the chaos and mess in the British economy that had been identified by the IMF. For the right hon. Gentleman to suggest that Labour Governments have to clear up after Conservative Governments is, to put it at its mildest, standing truth on its head. But at least the right hon. Gentleman had a few facts and figures to offer, which was in extraordinarily marked contrast to his right hon. Friend the shadow Chancellor.

I came to today's debate filled with hope that at long last we would have a glimmer of Labour's economic policy. During recent years, we have grown accustomed to the shadow Chancellor being completely trounced, hit out of the ground, by my right hon. and learned Friend the Chancellor, because he has no figures to offer and no solutions to put forward. But for two reasons I thought that this afternoon there was a chance that that situation would change.

First, the general election gets ever nearer, and surely one of these fine days we must hear something from the shadow Chancellor about his own policies. Occasionally, something peeps out, such as the 10p income tax or the removal of child benefit from 16 to 18-year-olds, but then they are pushed back in the box again because they prove unpalatable and unsaleable not only to the general public but to his right hon. and hon. Friends in the constituency Labour party.

But I thought that this afternoon we would have something. I was also looking forward to the benefit of the gurus. We hear a lot these days about how, at long last, the Labour party has found some intellectual holy grail, and we have Mr. Kay, Mr. Gray and Mr. Hutton, and even the hon. Member for Hartlepool (Mr. Mandelson) who, allegedly, had had an intellectual input into the new Labour party.

But when one analyses it, it is an intellectual input dated circa 1965 which seems to have remained impervious to the experience that we have all had during the last 30 years. It has been rediscovered at the dinner parties of Islington and has seeped through to the Leader of the Opposition and, I had hoped at some remove, to the shadow Chancellor. But not a bit of it. We had no analysis from any of those gurus, and no reference to them at all.

The high falutin' economic theory which the shadow Chancellor discovered a few months ago was forgotten. Now, hurrah hurrah, we are back to a document produced by a grade 7 officer in the Treasury for a particular purpose which, as far as I understand, was something to do with Treasury staffing in the early years of the next century. We heard absolutely nothing at all about the Labour party's policies.

It has been a dangerous afternoon for the shadow Chancellor. He is fortunate that the debate has been so poorly attended, particularly by Opposition Members. Had they been here when the right hon. Gentleman was speaking, his chances in the shadow Cabinet elections would have been seriously dented. On the basis of his performance this afternoon, it would have been entirely merited that his career prospects should have suffered a severe setback. Time after time we asked questions about his figures for the PSBR, interest rates, public spending and all the rest, but answer came there none. Those questions were consistently evaded.

But the input of a Labour Government is becoming increasingly clear day by day. Everyone is now beginning to understand that the minimum wage, at whatever rate it is set, will cause serious trouble. It will either cause serious economic trouble because it will be set at a rate which will cause severe problems for employers and certainly increase unemployment by hundreds of thousands, if not a million more, or it will cause trouble because it is set so low that the Labour party's friends in the trade unions will make trouble.

Little bits are also leaking out about the reintroduction of the special "rights" of trade unions, such as the right of secondary picketing, and all those things, quite apart from the pledges on public spending. Those harsh commitments which Labour would try to realise if it ever took office would be disastrous for Britain's public finances. Of course, borrowing should be lower but any suggestion that the Labour party has any idea about how to improve the borrowing situation is sheer poppycock.

This has been an extraordinarily bad afternoon for the Labour party, but it has been a good afternoon for the country because it will have given the electors—if we still have a few ladies and gentlemen of the press here to report it—at least some idea of the Labour party's total bankruptcy, which seems starker as the days go by.

We had a complete denigration of the Government's economic achievements, about one or two of which I shall remind the House. We hear a lot about investment, certainly from the Labour party, again without any figures. Since we came to office, £100 billion of inward investment has come to Britain. Investment in British industry has risen at a rate six times faster than under Labour. Although we have only 1 per cent. of the world's population, we are the world's fifth largest trading nation. We have the lowest rate of inflation, the lowest basic rate of tax for 50 years and the lowest mortgage rates for 30 years.

To hear the catalogue of negativism that we have had from the Opposition Benches, including the Liberal Democrats, completely destroys not only their case but the value of debates in the House. We have only silence on their policies and a total misrepresentation of not just the Government's achievements but those of the country. There is a great deal to shout from the rafters about the success of Britain's workers and managers, yet none of that do we hear from the Labour party. Instead, we have thinly veiled threats about what will happen. That is the message that I hope will come from this debate.

The right hon. Member for Llanelli and my hon. Friend the Member for Bridlington (Mr. Townend) referred to the single currency and European monetary union. As we consider future economic decisions we need a calm national economic debate on that, removed from the hysteria which has clouded our debates on the European Union, of which the right hon. Gentleman's contribution gave us an example.

I believe that European monetary union and the single currency will happen in 1999. It may not be on 1 January, but it will be in the course of that year and it may involve six countries rather than more. But we should work on the assumption that it will happen whether we are in it or not. I believe, too, that we, as sensible good-housekeeping Conservatives, should recognise the criteria of low inflation and the limits on budget deficits and national debt. Whether we enter the single currency or not, we should welcome those criteria and pin our colours to their mast.

Thirdly, as and when the project is launched, we must consider carefully the consequences of staying out and of going in. The consequences if we stay out will be threatening, especially in respect of financial stability and interest rates in Britain. I do not say that we could, should or need to take a decision about joining it in the first wave—when the train leaves the station, to use the old cliché. Before we rule it out, and we must certainly not throw away the highly favourable negotiating position that the Prime Minister secured for us at Maastricht on monetary union, we must take careful stock of Britain's national interest. Of course we must consider sovereignty but we should also recognise that in today's world, no country—certainly not a medium-sized one—is, in the economic sense, truly sovereign. That word has to be handled with great care. No Chancellor of the Exchequer presenting his Budget stands as an island without regard to the international situation.

I am the first to recognise the importance of sovereignty across a range of aspects, but we should be careful of glibly throwing the single currency project out of the window on the basis of some emotive quotation about national sovereignty. Sovereignty is important, but it is by no means the only criterion that we should take into account. More important, for my money, are the stability of the economy, the financial climate in which we operate and the need to ensure that our industry is not crippled by high interest rates.

I have every confidence that under our Government, with my right hon. Friend the Prime Minister and my right hon. and learned Friend the Chancellor of the Exchequer leading our economic decisions, the impressive successes that we have achieved, sometimes against a difficult economic background and to some of which I have referred, will continue. We should meet the criteria for the single currency and we would then have the option to join it, should it make sense when we come to make that decision. That must be Britain's aspiration. The only danger is a change of Government that would bring into office Labour's Front-Bench spokesmen, who have not a single idea to offer.

Several hon. Members

rose—

Madam Deputy Speaker (Dame Janet Fookes)

Order. Before I call the next speaker, may I remind the House that the 10-minute limit on speeches is operational from 7 pm until 9 pm.

7.2 pm

Mr. Geoffrey Robinson (Coventry, North-West)

I will not follow the hon. Member for Wycombe (Mr. Whitney) in much of what he said, but I shall pick up his remarks on the contributions of the two Front-Bench spokesmen. For all that the Chancellor of the Exchequer—and the hon. Member for Wycombe took this up—protested that the leaked Treasury document was about management structure, by his own admission he had not examined what has already been printed today in The Times about it.

It is unbecoming for the Chancellor, or, indeed, a distinguished former diplomat such as the hon. Member for Wycombe, to harp on about a junior, grade 7 civil servant. They know that the tone of their remarks was supercilious, sarcastic and quite unnecessary. I hope that the Chancellor will take an early opportunity to correct the impression that he must have given to that unfortunate civil servant and say that it will not be held against him. Grade 7 civil servants do not get up one day and produce such documents by free association. He was clearly acting under instructions, we are led to believe, from the permanent secretary himself. The document clearly carries some weight in Treasury circles.

Mr. Whitney

When I was a grade 7 civil servant, I would have been horrified if my work had been bandied about in the House of Commons. It would have been very odd.

Mr. Robinson

That remark is now on record and I am sure that the grade 7 civil servant will feel all the better for it.

The document is not about management structure. If we need a report on management organisation, we need one on who is running the Treasury. If the Chancellor really does not know about important work such as this being commissioned by the permanent secretary, there is something wrong. We know that the Chancellor does not like to read and is not a detail man but he should be in charge of his Department. It is clear that he is not.

The document is about long-term policies. It has been prepared at the request of a senior civil servant and reflects the views of the right hon. Member for Wokingham (Mr. Redwood), as he made clear in his speech. It is about the wholesale privatisation of pensions and the welfare state. If it were not for the 10-minute rule, I would like to read all of it, but some of it will do. It talks about the privatisation of unemployment and amounted incapacity benefit and states: Privatising contributory benefits would be a further major step in the UK: in the main they cover insurable risks (retirement, incapacity and unemployment) and could therefore be replaced by private insurance either voluntary or compulsory. There is nothing about management there; that is policy.

The same is true of what the document says about privatisation of the roads: A further proposal under advice consideration would be to treat roads as a utility rather than a public service … Ownership would be transferred to regulated private companies who would receive their income from road users. It was remarkable that my right hon. Friend the Member for Dunfermline, East (Mr. Brown) three times gave way to the Chancellor so that he could say whether that was the case. My right hon. Friend was being unkind because I do not think that the Chancellor knows whether it is being considered. He said that it was not Government policy but did not say whether he was considering it. I am sure that he is not; he does not know what is happening in his Department. There is a series of major advance studies in the Treasury which involve privatisation the like of which we have not seen before. Either the Chancellor is being hypocritical and dishonest with the House and himself—he knows or he does not know—or he is just plain incompetent. I reckon that he would settle—and I think that he has—for the latter.

Another interesting part of the document that must be brought out is the issue of closed government: the dishonesty with which government is being conducted. It states: When advice was given the possibility that it might be published at a later date would have to be taken into account. We would not be able to re-write or edit papers or fillet files as now. No doubt the hon. Member for Wycombe has had great experience in such matters.

I understand that the Foreign Office tradition is that under the 30-year rule, files can be filleted so that sensitive and secret documents of national interest which concern the activities that we read about every week cannot be published as official Government papers. The leaked document is not talking about that but about what is happening now. Papers are being rewritten and edited and files filleted. That is not good enough and some explanation for that paragraph is urgently required.

It is clear that the Chancellor is unhappy with the summer forecast for the PSBR, with which my right hon. Friend the Member for Llanelli (Mr. Davies) dealt with humorously, although we both know the serious side of that problem. The Chancellor kindly gave way to me earlier and I asked him about the hole in the public finances. He looks forward to balancing the Budget by 1998–99. The first forecast that he gave—it may have been in 1994–95—proved to be about £15 billion out on the PSBR. As hon. Members have said, forecasting is difficult but the scale of the error in that forecast is enormous. I have studied the matter over the years and it is bigger than any previous error. That poses a problem for the Chancellor, because he cannot explain a £15 billion gap—or come near to explaining it—by the loss of tax revenues, whether from VAT or from the revenues that would have resulted from a higher rate of growth. That simply cannot come near to explaining the gap. The Chancellor must therefore answer the question to which we still await an answer: at this stage in the economic cycle and according to the Government's best estimate, what should the borrowing requirement be and how far out is it? That difference begins to represent a real structural problem that must be tackled.

The right hon. and learned Gentleman's cavalier attitude to that problem, and more general cavalier attitude throughout the debate, might suggest that he does not expect to be in office for much longer. In fact, he gave the game away when he said that he would not pick up his increased ministerial salary because it does not come into effect until next year. Any clearer giveaway from him would be difficult to imagine. It is clear that the Chancellor has given up the ghost and is letting us slide gently towards yet another Tory pre-election consumer boom. We have seen them all since 1964 and—

Madam Deputy Speaker

Order. May I remind the hon. Gentleman that he should be addressing me? I prefer not to look at his back.

Mr. Robinson

I apologise, Madam Deputy Speaker.

The Chancellor will not be with us much longer and he is setting up a pre-election consumer boom of some considerable proportion. It is clear from what the Governor of the Bank of England has said and written in the minutes that he is as concerned as we are about that prospect.

Because the public sector borrowing requirement has got out of control the national debt has doubled to £390 billion. It costs the average family £1,000 a year to service it.

Let us consider other economic indicators which, as we have learnt from the debate, reveal our progressive slippage down the performance league tables. One Conservative Member said that we had done well at creating new jobs, but we are 19th out of 24 in the OECD table. According to the table for investment we are 19th; in that for growth rates, we are 13th; and, as we all know, that for overall prosperity reveals that we have slipped from the 13th to the 18th position. It is difficult for the Opposition to mention those growth tables because it is often said that we are trying to run the country down. We are not. It is no betrayal of the country to concentrate on them; it would be a gross betrayal if we did not and failed to face the facts that they clearly imply to us. It would be a betrayal if we failed to realise that something urgent and serious must be done about them.

It is clear from the Treasury documents that the Government have accepted that we are in decline and should go on declining. To reverse that attitude it is clear that we need government by a new party, with new vision and new confidence to tackle the problems. The Government have lost that confidence. They do not believe that they can achieve anything, so they are living with youth unemployment and long-term unemployment. They do nothing about those problems except to try to distract attention from the sane, sound policy as the Labour party has developed to tackle our fundamental social and economic problems. It is only when the Government produce proposals to deal with those problems that we can even remotely take their summer forecast seriously.

In the meanwhile, the alternative for the country will come in the new year with the election and a new Government, which the Labour party will form.

7.12 pm

Mr. Nigel Forman (Carshalton and Wallington)

It is a pleasure to follow the hon. Member for Coventry, North-West (Mr. Robinson). I might almost call him my hon. Friend, because he will remember, if others do not, that we came into the House on the same day more than 20 years ago, together with my right hon. Friend the Member for Wirral, West (Mr. Hunt). I listened with respect to the hon. Gentleman, because he is a knowledgeable and thoughtful man whom I wish we could see more often in the House. I understand, however, that he has certain responsibilities outside, including a new magazine, about which you, Madam Deputy Speaker, may have heard.

The hon. Gentleman was right about forecasting. I took that up with the Chancellor and his advisers when I questioned them recently at a sitting of the Treasury Select Committee, because the degrees of error are staggering. Let me give the House a few examples. On fixed investment in the summary table, the forecast for 1997 is that it should increase by 5.5 per cent., but the average error in previous forecasts on that investment is 4.5 per cent. The forecast for manufacturing output in 1997 is 3 per cent., but the average error based on errors in previous forecasts is 2.5 per cent. The figure for the GDP deflator in 1997 is put at 2 per cent. for the financial year, but the average error in that forecast is 1.25 per cent.

Much has been said about the public sector borrowing requirement forecast. According to the summary table, the forecast for 1997 is £23 billion, but the average error of forecast on the basis of previous average errors is £12 billion. The House can clearly appreciate that the hon. Member for Coventry, North-West had a fair point. There are probably a variety of factors to explain those errors, including the facts that we do not collect statistics quite as meticulously and as comprehensively as we used to and that the current series of statistics are not quite as reliable as they used to be, again for a variety of reasons.

We are the most open economy in the world, certainly the most open of the OECD countries, and that has an effect on our national economic statistics as well. I do not have time to go into that, because of the 10-minute limit and judging from the pulsatingly crowded Benches around me, so I had better resume reading from my notes.

Earlier today, we listened to a characteristic speech from the right hon. Member for Dunfermline, East (Mr. Brown). I congratulate him on his elevation to the Privy Council. To begin with, his speech was characteristic because of its triviality. He seized on some non-event, which was caricatured on the front page of The Times, which itself has become a trivial newspaper, I regret to say. His speech was also characteristic because of a certain vacuity to which we have got used not only in Labour amendments but in Opposition Front-Bench spokesmen's speeches. The reason is not hard to find—for some time, those on the Opposition Front Bench have behaved as though they were a secret society. There is little sense of humour in what the right hon. Member for Dunfermline, East says, and certainly no sense of irony of the kind that I much enjoyed in the speech of the right hon. Member for Llanelli (Mr. Davies). I always enjoy listening to him.

There was one departure from the norm in the speech of the right hon. Member for Dunfermline, East, which took some of my right hon. and hon. Friends slightly by surprise, when he appeared to break the habit of a recent lifetime—first, by agreeing with my right hon. and learned Friend the Chancellor that he had been right to cut interest rates on the last occasion, which we have not heard him say before, and, secondly, by offering the House a definite view, and you could have knocked me over with a feather, when he said that he thought that the PSBR should be lower. He did not say why, how or how he would endeavour to bring that about were he to be sitting on the Treasury Bench. None the less, it was a view and we welcome it for that.

Mr. Whitney

A policy.

Mr. Forman

Well, I am not sure that it was a policy, but it was certainly a view. As my hon. Friend the Member for Wycombe (Mr. Whitney) has said, time is running out for the Labour party. The Opposition will soon have to face up to the British people and explain to them honestly and clearly what they would seek to do if they were to become the Government. So far, they have not done so, except on a tiny red credit card, which I keep in my pocket, along the lines of new Labour, new danger. Apart from that, there is no real substance to their policy.

Let us look at the Labour amendment on the Order Paper, which is lengthy and takes up a slab of that document. That amendment has 190 words, but hon. Members might be interested to know that just 34 apply to what the Labour party would seek to do and what might pass for a policy. It is worth reading that section out—certainly no one else has done so, and certainly the right hon. Member for Dunfermline, East did not draw attention to his own amendment. It calls for policies dedicated to higher levels of sustainable growth consistent with low inflation, higher levels of productive investment and a fairer Britain in which the welfare state helps people from benefits into jobs. Those are worthy, pious and admirable statements, but they do not constitute a policy. I hoped all the more fervently that the right hon. Gentleman would offer us a policy in his speech, but I regret that that did not happen. He spent too much time worrying about other things.

The truth is that this country is in an extremely strong economic position. I shall not weary the House by citing the obvious statistics which I have written down; I shall use them on another occasion, probably in my constituency. The truth is that the record is good. We have everything to be proud of; the important thing is that we do not fall into the temptation of talking this country down, because it is the people of our country whose efforts have created that success, within the sound and prudent framework set by the Government.

It is also important to be clear about the global context within which our economy must now operate. With the growing importance of global markets, global media and global companies making global products, the United Kingdom is especially well qualified to participate in the new world environment.

I remind the House of a figure that has not been given so far. In this country, we constitute 1 per cent. of world population and create 3 per cent. of world GDP and 5 per cent. of world trade. By that simple and rather impressive scale, one can see the weight that we carry in the world in spite of our relatively small size vis-a-vis other countries.

The reason is clear. Ours is the most open advanced economy. As several hon. Gentlemen have said, we are the fifth largest importer and exporter, exporting more per head than Japan. We have the highest ratio of both inward and outward investment to GDP of any country. That means that we, more than most, must recognise and incorporate the new realities in our policy. Those realities are, first, the fact that there are greater limits on the power of national Governments than some of us would like to acknowledge; secondly, the greater importance of attracting and retaining mobile capital, mobile people and mobile technology because, if we do not attract them, they will go elsewhere; and, thirdly, the greater importance of social and human capital in securing and retaining a comparative advantage in that very competitive world. On that third point, there is consensus between the Government and the Opposition. Both believe that investment in human and social capital must have priority for the coming period.

Against that background, I shall describe, in capsule summary, the best approach for any Government to take. I am glad that the Government whom I support are adopting that approach.

First, any Government should have a monetary policy that remains credible in the light of all the relevant data, especially the condition of the real economy, financial market expectations and the decisions of other monetary authorities. Secondly, they should have a fiscal policy that errs on the side of caution, and is designed to reduce the PSBR and to balance monetary policy so that, if monetary policy is easing, it may be considered necessary to tighten fiscal policy and vice versa. Within that, the Government should have a tax policy that concentrates on an approach founded on the broadest possible tax base at the lowest possible rates, and the greatest possible simplicity. I have argued that case previously.

Thirdly, and finally, it is obviously vital to complement those two main levers of policy with a raft of supply side policies, which need to enhance our competitiveness and to result in investment in physical infrastructure, but most of all in investment in human capital. We must learn the lessons from our main competitors, in Asia, the Pacific rim and elsewhere, who invest massively in education and training in all its forms. It pays off for them hand over fist in the global market.

Let us play to our cultural strengths, take advantage of what we achieved and build on our policies, which have been a manifest success.

7.22 pm

Dr. Jeremy Bray (Motherwell, South)

The story in the "Summer Economic Forecast" is yet again one of virtue postponed. As the hon. Member for Carshalton and Wallington (Mr. Forman) said—he is always fair, so let me try to be so too—all is not bad. Growth has continued, albeit not as fast as expected, inflation is under control and the balance of payments is healthy. It is just a small matter of public borrowing. Does that matter?

The 1995 forecast of the PSBR for 1995–96 was £29 billion and the outturn £32 billion—an error of only £3 billion, less than 0.5 per cent. of GDP. That is not bad, but it is not the whole story. The problem is the Government's repeated and accumulating failure to meet their PSBR target. The 1995 summer forecast of the PSBR for 1996–97 was £16 billion. The 1996 summer forecast has revised that to £27 billion.

The Maastricht hurdle for joining monetary union in the first round is that in 1997–98 the general Government deficit should be less than 3 per cent. of GDP, and in the summer forecast we just squeak in at £23 billion, with no safety margin. Britain has been comfortably below the required debt to GDP ratio of 60 per cent., and a Conservative Member said that we were well below. In fact, the ratio increased from 54.25 per cent. in 1995–96 to a forecast 56 per cent. in 1997–98.

Once we are over the required debt to GDP ratio, we are in the debilitating position of having to deflate an otherwise well-balanced economy just to repay our debt. Does that matter? Will monetary union be a problem? Then forget about monetary union! The trouble is that talk about monetary union has made the Maastricht conditions the criteria of a healthy economy, inside or outside monetary union. If we continue to breach those Maastricht conditions, we shall find that we must maintain higher interest rates or become vulnerable to flights of capital.

Does that not make the whole Maastricht story an even greater disaster? Should we not battle for a more relaxed order, which allows economies to grow and Governments to borrow to meet reasonable needs? It is a tempting argument, but the prize of avoiding crisis and maintaining steady growth is great. Highest among the rewards would be a return to something much nearer full employment, with unemployment falling below the 1 million mark. It is quite attainable, with a well-managed economy, some time in the next six or seven years.

Conservative Members appear incredibly slow at taking up the clear evidence repeatedly given by the shadow Chancellor. The Labour policy for borrowing is specified in the golden rule—borrow only to finance investment. The summer forecast gives some good numbers on that. Net capital spending of the public sector in 1997–98 is forecast to be only £8 billion, or 1 per cent. of GDP, which is a much tighter limit on borrowing than the 3 per cent. or £23 billion of Maastricht. It is nearer the balanced budget target, which the Chancellor claims to be pursuing as a medium-term objective but never even approaches.

I hope that we will look forward to increasing public investment under Labour. The European Union excessive deficits procedure—the Maastricht targets—only becomes tighter than the golden rule, on these definitions, when the £15 billion deficit on current expenditure in the summer forecast has been eliminated and net capital spending has trebled to £23 billion.

I doubt that those are the figures or the definitions that my right hon. Friend the shadow Chancellor has in mind. If the golden rile is to become a more substantial target than the vague medium-term aspiration of the Chancellor for a balanced budget, it will have to be an important element in a balanced set of objectives, appropriately defined along with other objectives.

The memory of hon. Members and of the country, not to mention the financial markets, of the undignified chase by the noble Lords Howe and Lawson through all the Ms defining the money supply before their successors ended up with the exchange rate, and then inflation, as their targets is all too vivid.

For Budget planning purposes in November, I would guess that the Chancellor will rely on maintaining the 3 per cent. PSBR for 1997–98 and make a 2 per cent. or £2 billion or £3 billion tax cut as an election sweetener—no more than that—with matching cuts in public spending and no change in the forecast PSBR. The trouble with that is that the Chancellor's borrowing forecasts are suspect. The errors in recently published forecasts have been mentioned. In fact, the revisions of forecasts and the errors have been less than the £12 billion average error in the past 10 years, but they have all been one way.

To overcome the problem, the proper course for the Chancellor in the Budget—I hope that the Chief Secretary takes due note of this—would be to make the increase in tax revenues or the cuts in public expenditure needed to reduce borrowing much nearer £5 billion or £6 billion. If he does not do so, the incoming Labour Government will be easily and credibly able to say, when they see the books, that the position is much worse than the Chancellor has said, blaming whatever tax and expenditure changes are then needed on the Tories.

The reflection on the economic competence of the Tories will refresh the memory of the mistakes that they made—the 1988 reflation, the over-valuation of the pound on entering the exchange rate mechanism and the ignominy of leaving it. I would be sorry for the Chancellor, because he has in many ways managed the economy rather well during his chancellorship, after the disasters of his predecessors.

Let me repeat a suggestion that I have already put to the Chancellor. The smart thing for him to do would be to open the Treasury's books and to publish them. If we have not had an election by then, a good time to do that would be the Budget in November. The books would demonstrate the reasons for the limits on the tax cuts that the Government are then able to make, and the underlying strength of the economy in the medium term—if the right steps are taken now.

The neat way to open the books would be to set up the Treasury's modelling, forecasting and analysis operations as an arm's-length Treasury agency, for which there is ample precedent, and to publish full forecasts and all the supporting material. This is an operation in the Treasury that can stand the light of day. Such openness would also do a power of good to the other forecasters, national and international, some of whose methods are rather worse than the Treasury's. Once the books were open, a Labour Government would hardly shut them again.

Present practice on publishing Treasury forecasts, as noted on the title page of the summer forecast, still follows the requirements of my amendment to the Industry Act 1975, as noted by successive Chancellors. I suggest that it is time the Chancellor took another look at that procedure. This will be the last year I shall be able to contribute to this debate on the summer forecast, and I offer this to the Chancellor as a parting present. If the right hon. and learned Gentleman fails to open the books in this way, I trust that my right hon. Friend will do so when he takes over.

Modern markets, and the major structural changes through which the economy and the next Government will have to pass will make great demands on the quality of government. They require a greater clarity and definition in the making and presentation of Government policy than we have yet attained.

7.50 pm

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

This afternoon, the right hon. Member for Dunfermline, East (Mr. Brown) tried to have a bit of fun with a leaked document—he tried to embarrass the Chancellor of the Exchequer with it. If we want to embarrass the Opposition, however, we do not need to find a leaked document. All we need is £10 with which to buy a document called "New Labour: New Life for Britain". Thumbing through the document we come across many things with which to embarrass the Labour party, particularly with regard to its economic policies.

First, we find the idea of the golden rule. The right hon. Member for Dunfermline, East says: We will only borrow to invest and not to fund current expenditure. He says that in the document, but he will not repeat it in the House or give the House any definition of what he means by "invest".

This afternoon, we have heard many quotations from the evidence that the Treasury Committee has taken in the past few days, but we have not yet heard the most apposite quotation from that evidence. It came when the hon. Member for Hackney, North and Stoke Newington (Ms Abbott) referred to the golden rule as a joke. She was spot on. She must have foreseen the sort of speech that the shadow Chancellor would deliver this afternoon. When asked to comment on the golden rule, the Governor of the Bank of England was more measured, saying only that the analytic basis for this rule is suspect". Tonight, the hon. Member for Oxford, East (Mr. Smith) will have to come up with a definition of what he means by investment, which Labour Front Benchers currently use a catch-all. The hon. Member for Hackney, North and Stoke Newington is obviously worried that the definition will be used to cut public spending. Judging by the speech we heard this afternoon by the right hon. Member for Llanelli (Mr. Davies), he too believes that it will be used as a device to cut spending. It could be—but it could also be used as a device to raise public spending, which would be more in tune with Labour's past. Labour could redefine items of current spending as spending incurred for investment—and hence as an excuse to raise public expenditure, and taxes.

At the moment, current expenditure exceeds taxation, so if Labour does not want to run a deficit, it will have the perfect excuse to raise taxation. In current conditions, Labour would have to raise it by £15 billion—the equivalent of 9p on income tax—to meet that policy objective.

The onus is therefore on Labour to explain tonight exactly what the policy means and to put an end to the jokes from Labour Back Benchers and the cynicism in the financial community.

The next Labour policy that we find in the document is the wish to depoliticise the setting of interest rates. Of course the Opposition want to do that; they know that, under Labour, interest rates would go up and they want to find someone else to blame when they do. The first scapegoat will be set up in the form of a monetary committee at the Bank of England, which will be given the job of setting interest rates so that, when they rise, Labour will be able to blame the Bank of England.

As the right hon. Member for Llanelli implied, behind the monetary committee is the European central bank. If transferring interest rate decisions to the Bank of England does not put enough distance between the Labour Government and the blame, they can go the whole hog and transfer the setting of interest rates to the European central bank in Frankfurt. So much is clear from Labour's agenda.

The next item in the document—just about the only policy mentioned by the right hon. Member for Dunfermline, East this afternoon—is the windfall tax, but there is no evidence of how it will be operated. There was a windfall tax on the banks in the early 1980s. It was simple to devise a way of calculating windfalls, based on the deposits held by the banks at a fixed point in time. But Labour has given us no idea of how it would calculate its windfall tax, although it is implied that it would be levied across all the utilities: gas, water, electricity and BT. What would it be based on—turnover, number of employees or a surcharge on other taxes?

The only people Labour seems to be getting at by way of this tax are the very ones of whom the Opposition are supposed to be in favour—long-term investors. It is they who would be hit by this arbitrary tax. If the Opposition really believe that the utilities' profits are too high, they should deal with that through regulation. That is precisely what the Government have done. Dealing with the utilities' profits by regulation means that the benefits are returned to the consumer, who pays lower prices. That is what privatisation is all about. Labour does not accept that route because it does not want to give the consumer the benefits. It wants the money in the hands of the state—always the Labour theme.

So much for Labour's embarrassing economic policies. There is also an attempt to give the impression that Labour is not far from the Conservatives in terms of economic policy. I say that there is a world of difference between Conservative and Labour economic policy. This afternoon, the shadow Chancellor endeavoured to throw up a smoke-screen because he is embarrassed by all the recent good news about the economy. The good news is that negative equity has declined by half in the past three months. There is good news today about lower unemployment. Last week there was good news about a fall in wholesale prices. Interest rates are at their lowest for 30 years. All this is a great embarrassment to Labour, showing the clear difference between our parties' policies.

Since 1979, we have reduced public spending as a proportion of GDP to a much lower level than have our major European competitors. France, Germany and Italy have pushed up public spending as a proportion of GDP whereas we have kept it down. We are now enjoying the benefits of that, with a lower tax rate as a percentage of GDP than all our major European competitors. We are also benefiting from lower social security contributions, so our wage costs are competitive. That is the difference that Conservative economic policies are making. Our competitive wage costs make Britain a more attractive place for companies around the world to invest in.

We have also done well on manufacturing. Labour Members often talk about manufacturing but productivity in manufacturing has risen sharply under a Conservative Government. We are now at the top of the table of the seven leading industrial countries for the rate of increase in manufacturing productivity. When Labour was in office, productivity in manufacturing halted, which is why manufacturing went into decline. There was no economic basis for maintaining manufacturing at that level.

Earlier this afternoon, several of my hon. Friends spoke of the need for the Chancellor to cut public spending. This is the point in the cycle when public spending needs to be cut. The prospect is for the private sector to grow strongly in 1997. In those conditions, public spending must be brought down by £6 billion to £7 billion for the coming year. During the lifetime of this Parliament, public spending has increased by £70 billion. There has been a 12 per cent. increase in real terms, amounting to £30 billion—roughly the size of our present deficit.

7.14 pm

Mr. Ken Livingstone (Brent, East)

Having heard such a litany of good news, it is hard to believe that an ungrateful British public still put the Labour party 20 per cent. ahead in the opinion polls. There is no gratitude in politics.

Conservative Members have attempted to talk up the wonderful position that we are in, but a good way to test what people think about the soundness of the British economy is to look at the yield from long-term Government bonds. The international markets are not full of dreadful lefties like us, constantly running the nation down. They consist of people who invest their own and other people's money, having seriously assessed the strength of the rival economies.

Interest rates for long-term Government bonds are consistently high. Government bonds in Japan yield 3 per cent.; in the United States and Germany they yield 6 per cent.; but here they run at two percentage points more than that. The international markets are making a fair assessment about the underlying weaknesses of the British economy, which is reflected in long-term 10-year bonds. Their assessment of the British economy 10 years hence is distinctly unfavourable compared with our major competitors, yet we are told how much better we are doing than they are.

As my hon. Friend the Member for Motherwell, South (Dr. Bray) said, one or two good things have happened under the present Chancellor. He has been the least bad Chancellor of the past 17 years. He was right to face down Eddie George on interest rates, and right to cut interests again recently. I still believe that they are too high. I see no reason why they should ever be more than two percentage points above the real inflation rate, so we could seriously think about deducting a further point. That would be extremely good for investment in Britain and for our economy.

We are being held back by the mad policies of the Bundesbank, which still goes for high interest rates and tight economic policies. In the past seven or eight years, to help get President Bush re-elected, the dollar has been massively undervalued against the deutschmark, so the whole of the European trading bloc has been at a competitive disadvantage vis-à-vis the United States.

The "Summer Economic Forecast" talks of the sluggishness of the European economies, but so long as the Bundesbank continues to be crippled by the psychology of what happened in the Weimar republic it will consistently take decisions that damage Europe's economic competitiveness and put us at a disadvantage vis-à-vis Japan and America. We should argue strongly against the Bundesbank's restrictive policies, because if we become locked into an exchange rate mechanism again, it will be even worse. At present, monetary union is inconceivable given the relative weakness of the British economy against the German economy.

We are supposed to have a monetarist Government making sound money, but the public sector borrowing requirement is going up as though Militant were running the country—borrow, borrow, borrow. Derek Hatton must somehow be working the system. It is absolutely bizarre. That money must be repaid. Conservative Members say, "We are not borrowing as much this year as we did last year," but we pay interest on all the extra money that we borrow, which is a drain on our annual Budget. As my hon. Friend the Member for Motherwell, South said, we are getting dangerously close to the 60 per cent. level.

Lenin said that the best way to precipitate a revolution is to debauch a nation's currency. After 17 years of this lot, the relative value of our currency against the basket of others has declined by 25 to 30 per cent., weakening the economy all the way along. Competitive devaluation is not the only way out of our economic problems and should be a one-off rather than a consistent strategy. The undermining of the pound year after year leads one to assume that successive Chancellors of the Exchequer, acting on Lenin's advice, must have been working for the KGB all along. They could not have done more damage to the British economy if they had been paid to do so. No sound economic base has been created.

Now, everyone is clutching the gimmicky idea that things will be alright if we have an independent central bank and that all the problems will be solved if we give powers to bankers with no democratic accountability. I do not believe that that will happen. The advice of an independent central bank, whether it is the Federal Reserve in America, the Bundesbank in Europe or Eddie George—who, fortunately, is not too independent—is always cautious and conservative and will always favour finance over industry. I see no logic in an established democracy saying that those key and vital decisions, which affect everyone's lives, should be taken out of the politically accountable arena.

The Liberals are openly in favour of that idea, and I detect one or two worrying phrases in the new Labour policy document about our policy on it. If Labour Front-Bench Members think that the majority of Labour Members agree with them about an independent central bank, they have another think coming. From my conversations with Labour Members, I can tell them that the majority do not support the idea of an independent central bank. If the next Labour Government poodles off in that direction, they may fall flat on their faces and have to be rescued by votes from Tory Members. I want accountability for those vital financial issues to remain on the Floor of the House, where the people's representatives can challenge those who take the decisions.

Our economy fails because of lack of investment. I return to the subject again and again. Britain consistently invests less than its major competitors. We invest some 15 per cent. of GDP whereas most of Europe invests 20 per cent. And Japan invests nearly 30 per cent. As long as we continue to invest less, we shall continue to fail. I welcome the emphasis that Labour Front-Bench Members have in the past couple of years put on increasing investment, although I should like to hear them say how we shall do it. Perhaps I may throw in an idea or two for debate.

When we look at what has happened over the past 17 years, we see a stark shift in the British economy. On the day that Mrs. Thatcher was elected Prime Minister, wages were 66 per cent. of GDP and dividend payments were 1.5 per cent. Last year, wages were 62 per cent. of GDP—that is why there is no feel-good factor: there has been a massive shift away from wages and incomes in real terms—but dividend payments rose to 5.8 per cent. The Government have presided over a shift in consumption from wage earners to those in receipt of dividends. Their logic must have been that, if company profitability is increased, companies will expand, invest and capture new markets—but they have not done so. Companies have taken short-term profits and inflated top salaries.

A Labour Government will have to intervene to change the way our financial sector works to prevent such short-termism. That will mean a tax on dividends, or dividend controls, and a much greater bias in the tax system in favour of investment. We will not go backward so that the next Labour Chancellor, or some new Mintech, decides investment for each individual, but we can change the tax system so that every company director recognises that it will be better to invest more and take out less in short-term profits. If we do that, we can lay the foundation for a successful reconstruction of our economy. If we do not, we risk being removed from government again after one term, as we have been in the past.

The chilling aspect of today's leak from the Treasury whiz kids is the insight it gives into the policies of the Tory party five years hence. Every time it has gone into opposition, it has come back more reactionary and with worse policies. We will never be forgiven if, when we get our chance in government in the next few months, we squander it and are out again after five years. We will have to win a second term, not only to complete our transformation of Britain, but to save the people from the policies that the Treasury is now discussing.

The people behind the Treasury paper have considered the trends among Tory Members and have made a realistic assessment of who will run the Tory party after its election defeat and the direction in which they will take it. They will make Newt Gingrich look like a kindly gentleman. We know that the Secretary of State for Defence's personal adviser often zips over to meet members of the Republican Congress. That is the danger we face, and we will never be forgiven if we squander the chance that the British people are about to give us. The key to making our programme work is tackling investment and ending short-termism.

7.51 pm

Mr. Anthony Coombs (Wyre Forest)

I did not think that I would ever agree with the Labour party's latter-day John the Baptist, the hon. Member for Brent, East (Mr. Livingstone), but I agree with his comments about the single currency and an independent central bank. I also agreed with him when he described the left as constantly talking Britain down, because that is what we have heard from Labour Members during the debate.

I was pleased that my hon. Friends, including my right hon. and learned Friend the Chancellor of the Exchequer, pointed out the real successes of the Conservative Government and their economic policy over the past few years.

I have all the statistics and I will not bore the House with them, but it is significant that growth has been consistent and sustained in the past few years. Consumer spending confidence is returning, and that is consistent with the low rate of inflation. Unemployment also continues to fall. For example, on today's figures, unemployment in my constituency of Wyre Forest has fallen by 3.3 per cent. in the past month. Therefore, as a result of the Government's economic policies, 228 people have found jobs now who did not have them before. The unemployment figure has fallen by nearly 40 per cent. since 1992.

Contrary to what has been said about exchange rates, terms of trade are improving in this country, as the "Summer Economic Forecast" reveals. It is small wonder that the director general of the German industry confederation said, after he had analysed the situation in Europe, that the United Kingdom economy, not the German economy, was best placed to deal with the challenge of international competitiveness. George Simpson, who will soon take over as the chief executive of GEC, formerly Lucas, and who is entrenched in manufacturing industry in Britain, has said recently that he cannot remember a time in his 25 to 30 years in business when macro-economic policy has been better managed to allow this country's manufacturing businesses to compete.

In The Sunday Times last week, David Smith, who is not exactly a fan of the Government, claimed that accelerating growth … on the back of rising consumer spending … is something of a dream scenario for a chancellor facing an election. When it is combined with low inflation … scheduled to drop"— from this year to next— and a narrowing trade deficit, it becomes the Treasury equivalent of fantasy football. The Government's economic performance is not a fantasy. If it were, fewer people would come to invest in this country.

Another article in The Sunday Times outlined the huge investment in this country by big companies from foreign countries. Accumulated investment in 1978 totalled £28 billion, but the figure is now £200 billion. Last year, no fewer than 48,250 jobs were created—an increase of a third on the previous year—by 477 manufacturing projects, not including the recent one in south Wales about which we have heard this afternoon. That investment is coming here because of good industrial relations, low-wage costs and, especially, non-wage costs compared with other European countries. We also have good skills and attitudes. In the same article, Professor Bhattacharyya, Warwick university's professor of manufacturing systems, discusses the new factories being built by foreign investors. He makes the point that the new factories are not low-tech, "screwdriver" assembly plants and he continues: These factories are not copies of plants in the companies' home countries … They are adjusting to British conditions so that, effectively, they and we are reaching a happy compromise. The result, as long as macro-economic policies are sound"— as indeed they are— will he a transformation of our competitiveness.

Dr. Lynne Jones

Will the hon. Gentleman give way?

Mr. Coombs

No, I have only 10 minutes.

The transformation would be sorely tried, even destroyed, should a Labour Government ever be able to implement their policies. I found it appalling that the right hon. Member for Dunfermline, East (Mr. Brown)—who purports to be the next Chancellor of the Exchequer if, heaven forfend, the Labour party were to win the election—could not advance any policies or targets for inflation, the minimum wage, the ratio of debt to GDP or tax rates. The only policy he seems to have produced in the past two years is the 10 per cent. tax rate—he has quietly dropped that now—which even the Institute for Fiscal Studies described as a gimmick.

The Labour party can run, but it cannot hide—to use Ronald Reagan's words. It drops hints about the appalling regime that it would visit on British industry if ever it got its hands on the levers of power. We have seen 30 new spending pledges in the Labour party's recent manifesto. The leader of the Labour party made no fewer than 15 spending pledges during his speech at last year's conference. The Labour party seems to vote against every attempt to reduce longer-term spending and it has spent its windfall tax on utilities 11 times already. It has tried to tie growth targets to inflation targets, but its economic adviser, Gavyn Davis, has said that that raises dangers of inflationary pressure.

The Labour party wants to impose the social chapter and it thinks that secondary picketing, which visits ills on companies not even involved in industrial disputes, can be sensible, workable and fair. It has also made noises about regional development agencies that will second-guess investment by trying to make investment decisions for business men. That will lower the rate of return, lower investment and politicise the industrial scene in the way that effectively bankrupted this country in the 1970s, when the last Labour Government could not manage their affairs and had to call in the International Monetary Fund.

The Labour party has no credibility and the Government are right to believe that we cannot stand still in an increasingly competitive world: we must constantly change for the better. I agree with my right hon. Friend the Member for Wokingham (Mr. Redwood) that we must reduce Government expenditure. The need for a reduction is shown by the fact that the control total is scheduled to rise by 5.5 per cent. in the next two years, in an environment of low inflation. That total also assumes that there will be no increase of any size in cyclical social security payments. A reduction of £6 billion or £7 billion pounds is not unattainable.

Strangely, I also agree with the hon. Member for Brent, East in relation to interest rates. I think that there is a lot of slack in the economy and that we could reduce interest rates without taking any risk on inflation—all the inflation indicators appear to be happily depressed at the present time. Recently, the Institute of Chartered Accountants released a survey showing that lack of finance for small companies is the biggest inhibitor of growth. If people can get cheap finance, there will be more investment and growth.

I welcome the bonds for pensioners that were introduced in the last Budget—I believe that they are 7 per cent. or 7.5 per cent. gross. Obviously, pensioners will suffer because of low nominal interest rates. I believe that we should go further in the next Budget and change gross to net—that is, introduce bonds for pensioners paid on a net basis. That would give pensioners a return on their savings and encourage thrift, which is necessary if we are to encourage investment over the next few years.

I congratulate the Government on their summer economic forecast and the report that goes with it. It is good, sound macro-economic management. The Labour party does not have any credibility so far as its non-promises are concerned. We would see a return to the 1970s, which is the last thing that the vast majority of my constituents want. New Labour will be the same danger as old Labour. I support the summer economic forecast.

8 pm

Mr. Hugh Bayley (York)

Last November—at the time of the last Budget—I asked the Library to calculate the level of taxation, at constant prices, under the last Labour Government and in every year since then. The figures revealed that, in real terms, every year that the Conservatives have been in power they have taken more money in taxes from the British people than the Labour party did in any year of the last Labour Government.

When I raised that fact in debate, Government Members said that it was not true. They then looked at the figures and saw that it was true and they admitted that taxes under the Conservatives had risen in real terms, but they claimed that a lower percentage of our national wealth—our gross domestic product—was taken in taxes. That is also wrong. In 1978–79, 34.3 per cent. of GDP was taken in tax, and that percentage has been higher every year since the Conservatives have been in power. It is projected that this year taxation will be 36.3 per cent. of GDP. Government Members finally admitted that taxes have been higher both in real terms and as a percentage of the national wealth under the Conservatives than was the case under the last Labour Government, but claimed that it is because borrowing under the Conservatives has been less. That is also wrong.

I asked the Library to update the figures for this debate. It has given me a set of figures, at 1995–96 prices. In relation to income tax—the flagship of the Conservative party's fraudulent claim that it is charging people lower taxation than the last Labour Government—in 1978–79 the then Labour Government took £57.2 billion in income tax at today's prices whereas last year the Conservative Government took an all-time high of £68 billion in income tax.

Social security contributions have increased from £30.6 billion, at current prices, under the last Labour Government to £46 billion. Taxes on expenditure, including VAT, are up from £71.7 billion under the last Labour Government to £118.8 billion now. If one looks at the total taxation figures, in the last year of the Labour Government it was £175.2 billion, or £3,070 per person, at 1995–96 prices; this year, according to the forecast that we are debating today, it is £264.4 billion, or £4,640 per person. As a proportion of GDP, taxation is higher now than it was in 1979 when Labour was in power.

As for the public sector borrowing requirement, excluding privatisation receipts, in the last year of the last Labour Government it was £27.4 billion at today's prices; last year it was £34.6 billion—a borrowing of £591 per person. I shall look at the PSBR broken down on a per capita basis, because that makes it more understandable for me and for most people in this country. I shall look at what the Conservative Government have borrowed since the last general election: in 1992–93, they borrowed £824 for every man, woman and child in this country; in 1993–94, they borrowed £912 per person; in 1994–95, they borrowed £743 per person; in 1995–96, they borrowed £591 per person; this year it is projected that they will borrow £523. They have borrowed more than £3,500 per person, and they claim to be a fiscally prudent Conservative Government. They cannot keep living on tick—at some point they have to repay the money. Borrowing is fine in the short term, but it is deferred taxation. That is why the Labour party subscribes to the golden rule that we should borrow only for investment.

The Chief Secretary to the Treasury (Mr. William Waldegrave)

What was the PSBR average as a percentage of GDP under the last Labour Government?

Mr. Bayley

I do not have that figure with me, but I know that it went down.

Mr. Waldegrave

The average was 7 per cent. of GDP.

Mr. Bayley

We left Government in 1979 with borrowing as a percentage of GDP lower than we inherited from the Heath Government. The Conservative Government have increased borrowing in real terms. Of course borrowing has gone up and down—that is the nature of the economic cycle—but the Conservatives are claiming that the reason why the level of taxation under them has been higher every year than that levied by the Labour Government in 1979 is that borrowing is under control: that is a myth, and we need to dispel it today.

How are we to deal with this problem? The Government's secret agenda—which was spelt out in The Times today—seems to accept that the country is locked in an inevitable spiral of economic decline, that we are going to be overtaken by Indonesia, Brazil and Thailand, that there is nothing we can do about it and that we must respond by cutting welfare. That will create a two-nation Britain: the rich will pay more for insurance, for razor wire and for security for their property; the poor will become ever poorer, more desperate and more disadvantaged.

The Conservative policy follows the orthodoxy of Newt Gingrich's contract with America and it has now become the orthodoxy of young career civil servants in the Treasury. The Conservatives seem to have forgotten that Newt Gingrich's contract with America was a failure. He may still be the Speaker of the House, but he is marginalised and Dole lags in the polls. I refer to comment from the United States. E. J. Dionne from the Washington Post has recently written a book in which he says that America is on the threshold of a new progressive era because the contract with America simply did not work.

The No Turning Back group and many people in the Treasury are calling for privatisation of the welfare state. Former NHS chief executive Duncan Nichol, in his "Healthcare 2000" report, called for the NHS to contract to become a welfare service for the poor. We should not be surprised to hear that, as he now works for BUPA. The study was funded by the private sector and it is in his interests to argue for private welfare.

It does not have to be like that. This country faces a simple choice: the option proposed by the No Turning Back group—the right wing of the Conservative party—and by civil servants in the Treasury of ever-increasing decline and lack of competitiveness, including the privatisation of welfare, or Labour's welfare-to-work strategy, which would begin the slow and difficult task of reducing the amount of public finance that is spent keeping people out of work. Under that strategy, people would be trained for work in order to improve this country's wealth and provide the resources to rebuild the welfare state.

8.10 pm

Mr. David Tredinnick (Bosworth)

When I was chosen as a parliamentary candidate for the constituency of Bosworth, I was told that the seat reflected opinions across England. I was told that it was a "swing" constituency and that I should monitor the statistics carefully. I have good reason to do that because, as the hon. Member for Oxford, East (Mr. Smith) will recall, the seat was originally held for the Labour party by the well-known former socialist Woodrow Wyatt. My predecessor Sir Adam Butler won the seat from him for the Conservatives and my hon. Friends will rejoice to hear that it is held by the Conservatives now with a 20,000 majority.

I pay tribute to the Trades Union Congress, which inspired my speech by sending me statistics reflecting the trends in middle England and in my constituency. My constituency is located geographically in the middle of England, on the boundary of the east and west midlands, on the county boundary of Leicestershire and Warwickshire, and two miles from High Cross, the Roman centre of England. The TUC wrote to tell me how the unemployment pattern has changed among my constituents aged under 20 and under 25.

Some 110 people aged under 20 are registered as unemployed in my constituency. I regret that fact. However, in 1991 the figure was 181. Therefore, we have seen a decrease of 71—a 40 per cent. reduction in the number of young unemployed. The unemployment figure for the under-25s is only slightly less impressive. It is now 430, but in 1991 it was 622—that is a reduction of more than 30 per cent.

The Government's economic policies have made it possible to reduce unemployment among the young. There has been a tremendous increase in inward investment in the part of the east midlands that I represent. We have heard about the Korean investments in south Wales, which I welcome. Investment in my area has been assisted by the Government's sensible policies and the approach adopted by my local council—which was controlled by the Conservatives until recently—over the years in encouraging companies to relocate to my area.

The economy of the east midlands has grown faster than the United Kingdom average. I would be concerned about that if I were a Labour Member of Parliament because, if the Labour party cannot win seats in the midlands at the next election, it will have little chance of forming a Government. The relatively low cost base in the east midlands makes it attractive to investors. I fear that, if a minimum wage were introduced, we would see a massive shedding of jobs in my constituency.

I am proud to represent a hosiery and knitwear constituency. Many of my constituents are employed in that industry. which has taken great steps forward in recent years. It has always faced competition from cheap imports and very low labour rates abroad. If the Labour party were to come to power, I have no doubt that the minimum wage would prove immensely damaging to my constituents' prospects.

I was much entertained by the speech of the hon. Member for Brent, East (Mr. Livingstone)—I regret that he is no longer in his place. Having stood in the 1981 Greater London council election and observed his style of politics, I remember that his approach was not too different from that of Newt Gingrich—I recall leisure centres appearing in the Brent constituency before general elections. He made an appalling contribution to the governance and management of London. In view of his track record, it is astonishing that he should talk about the transformation of Britain under Labour.

The policies of my right hon. Friend the Prime Minister have improved the road network in Leicestershire, with the Leicester western bypass, the A5, and new junctions on the M1 and the M69. However, there is mounting pressure on industrial space. Finding companies to move to the area is not a problem in Hinckley: the problem is where to put them. The Government's economic policies have proved so successful that companies are flocking to the area. Bulldog Computers is located on four sites but it cannot find one single site. I urge the local councillors to address that issue. I hope that the battle for space will be resolved successfully.

Companies that produce machine tools and metal works are also doing very well. The hon. Member for Oxford, East will be interested to learn that some car dealers in my constituency are reporting a 40 per cent. increase in sales from last year. The MG is in great demand from Trinity Motors, which is the main Rover distributor. Perhaps the hon. Gentleman will cast his mind back to the days of Red Robbo at Longbridge. Will he stand at the Dispatch Box and say that the British motor industry was better off in those days? Of course he will not because he knows that our policies have transformed Britain's motor industry. We introduced the disciplines of Japanese construction and management and revitalised Rover, saved Aston Martin and injected new capital into Jaguar. The Conservative Government are responsible for improving the motor industry, and the hon. Gentleman should recognise that fact.

The hosiery and knitwear industry faces real problems with the introduction of new environmental standards which threaten some of the dye works in Hinckley. I have appealed to Severn Trent to review the huge costs that it proposes to impose on some manufacturers in my constituency. I hope that Severn Trent will resolve that matter so that small companies are not forced to pay 100,000 for their own treatment works.

We are now in our fifth year of growth. Gross domestic product is projected to grow by 2.5 per cent. in 1996. Personal incomes increased by 3 per cent. in 1995 and they will continue to rise rapidly. House prices are up 5 per cent. while mortgage rates are at their lowest level for 30 years. Inflation has been crushed. As my hon. Friend the Member for Wyre Forest (Mr. Coombs)—he is in the Chamber but not in his proper place; he is a man of many places and many parts—said, this country's macroeconomic policies are the best for 30 years. We now have a balanced economy, and the stability that is so vital to the future of Britain. That stability would, of course, be destroyed by the Labour party, which already has 30 pledges in its manifesto which would involve higher spending.

What will a publicly owned, publicly accountable railway system cost? What will happen if council tax capping goes? I shall not entertain the House with the list of 30 pledges again, as I am sure that we heard it earlier, but with these additional spending policies, it is simply inconceivable that taxes will not rise under a Labour Government. We must recognise that. Labour cannot have it both ways. They will not give the true story to the British electorate. What is their target for the PSBR; interest rates; public spending; local government settlements; health spending; defence spending; inflation; and spending on police? They will not tell us.

I would fear for Hinckley and the surrounding areas in my Bosworth constituency if the Labour party ever found power again. It is new Labour, perhaps, but new danger for sure.

8.20 pm

Mr. Ian Pearson (Dudley, West)

Over the past few weeks, we have seen a ritual massaging of expectations from the Chancellor, talking down the scope for tax cuts in advance of the Budget. The summer economic forecast continues that process, carefully massaging figures and talking up the United Kingdom's prospects in advance of the tax cuts that are sure to come.

There is every sign that the Chancellor is playing fast and loose with inflation, stoking up a pre-election consumer boom in a cynical attempt to buy votes. One has only to look at some of the figures in the summer economic forecast to see that. It predicts that consumer spending will grow by 4¼ per cent. in 1997, which cannot easily be reconciled with projections that inflation will fall back to 2¼ per cent. next year. Both M0 and M4 are outside their monetary range.

I do not believe reports that inflation is dead. It is essential that we continue to bear down on inflation. Frankly, I am not convinced that we have done that sufficiently. The Government's record on inflation is poor by comparative standards. We are 10th or 11th out of 15 EU countries, depending on whether the measure of inflation is the current year method or the average inflation rate of one year compared with the previous, which seems to be the criterion that is likely to be adopted under Maastricht.

Mr. Tim Smith

Will the hon. Gentleman remind the House what the average rate of inflation was under the last Labour Government?

Mr. Pearson

I remind the House that I had just left school and was at university during the last Labour Government.

The Maastricht convergence criteria—that an economy has to be within 1.5 per cent. of the best three countries on inflation—is a useful discipline, but we should go further if we are serious about bearing down on inflation. As a policy on inflation, we should aim to be in the bottom quartile of EU countries in the medium term. Depending on the method used to calculate inflation, that implies a maximum inflation rate of 1.4 per cent. or 1.6 per cent. currently. I see no reason why, in the medium term, Britain should not aim to have inflation rates in the lowest quartile of our competitors. If we are to have a competitive, modern economy, our inflation record must be at least as good as that of Germany, France, the Benelux countries and Finland, which are some of the best performing countries at the moment.

With manufacturing flat on its back, but most of the economy starting to go like a train and consumer spending looking set to boom, it would be stupid and irresponsible for the Chancellor to look for a further ¼ per cent. cut in interest rates at the end of the month. I suspect that the financial markets might let him get away with it, but the best course of action at the moment would be for interest rates to remain at the same level.

I am concerned about the future of manufacturing industry. Interest rates are a crude weapon at the best of times, and I believe that what is required in the Budget—preferably sooner—are targeted initiatives to stimulate manufacturing and the construction sector, such as the phased release of local authority housing capital receipts. It is mind boggling that the Government have not considered and implemented that as an option.

The summer economic forecast revises down projected growth figures from 3 per cent. to 2¼ per cent. for this financial year. It is part of a miserable track record on growth. The average growth rate since 1979 has been just 1.9 per cent. a year—worse than any other Group of Seven country or, indeed, any other major EU country. In the 1990s, the United Kingdom economy growth rate has averaged less than 1 per cent.

I believe that we should set a target and try to increase the sustainable trend rate of growth to 3 per cent. per annum. That would put growth rates back almost to what they were in the 1960s, and almost to what the Government achieved in the 1980s. That is a wholly acceptable and sustainable policy objective. It would, however, require far better performance than the Government have achieved to date.

At the heart of such a policy objective is an improvement in this country's manufacturing sector. It is a disgrace that the summer economic forecast shows that the trade balance in non-oil goods was in deficit to the tune of £15¾ billion in the past financial year, which is projected to increase by a further £3 billion to £18¾ billion in 1996, and to be still higher in 1997. I accept that oil, services and interest on profits and dividends have helped to pull back some of our trade performance, but we are still not doing nearly good enough, particularly when export profit margins are still high, providing strong incentives for UK firms to supply foreign markets, and at a time when profits and the rate of return on capital remain high by historical standards.

Some promising leading indicators have come out of the Confederation of British Industry and the British Chamber of Commerce recently, but all too often the promise has been "jam tomorrow," and that has not happened. We have to do better, and we need to look at initiatives to support manufacturing industry, such as tax breaks for research and development, restructuring the capital gains tax system to encourage greater long-term investment. We also need to examine the entire structure of the advance corporation tax system if we are to provide the support that United Kingdom manufacturing industry needs. Finally, on the state of the nation's finances, at the time of the November 1994 Budget, when optimism was at a peak, the PSBR for 1995–96 and 1996–97 was forecast at 3 per cent. and 1¾ per cent. of GDP respectively. The gap between the outturn now expected in this summer's economic forecast, and the one expected little more than a year ago, is £13.9 billion. That is equivalent to 7p in the pound on the basic rate of income tax. What is more, the public sector ratio of net debt to GDP will have jumped from 27 per cent. in 1991 to 46 per cent. at the end of this year. It is not a sustainable performance, and it is a disgraceful record.

Our finances are in a hole. There appears to be a structural problem with corporation tax revenues and VAT revenues, and no amount of jiggery-pokery, with changes to the VAT payment on account scheme, in an attempt to put more money in this financial year, will solve that problem. The Government have blown a hole in public finances. They deserve to be blown away as soon as possible.

8.29 pm

Mr. Tim Smith (Beaconsfield)

Listening to the debate, one is inclined to ask oneself whether Labour Members have read the "Summer Economic Forecast" which we are supposed to be discussing. The hon. Member for Dudley, West (Mr. Pearson) spoke of Britain's exports. What has the forecast to say about that? It says: UK trade is highly competitive. Much of the gain to cost competitiveness and all of the gain to import price competitiveness have been maintained since sterling's exit from the ERM in 1992. It also says that in 1995 exports of non-oil goods"— that is precisely what the hon. Gentleman was concerned about— grew by 8¼ per cent. I would have thought that an 8 per cent. growth rate in exports was pretty good—perhaps even comparable to the kind of growth that the right hon. Member for Dunfermline, East (Mr. Brown) apparently thinks the whole economy should enjoy, as does Thailand, perhaps rather unrealistically.

The document also states: Exports fell slightly in the fourth quarter of last year, when activity in Europe weakened, but then increased by 3½. per cent in the first quarter of this year. I consider that a pretty strong export position. It is ludicrous to complain that we have a large imbalance in terms of non-oil trade: if we view the current account as a whole, we see that this country is broadly in balance. The current account deficit is about 0.5 per cent. of GDP, a very small proportion.

What irritates me about debates of this kind is the way in which Labour Members constantly run down Britain's manufacturing industry. The hon. Member for Dudley, West said that manufacturing was flat on its back. That is an outrageous criticism of British manufacturing: some British manufacturing companies can now take on the world. We have world-class companies in a range of industries. I am thinking particularly of pharmaceutical companies—very successful British companies in which there has been a tremendous amount of foreign investment, especially from America. Aerospace is another example. There has been investment by British Aerospace, and by many other successful companies—such as Shorts in Northern Ireland, owned by Bombardier of Canada.

Mr. Pearson

I am not convinced by what the hon. Gentleman is saying about our export performance. At this stage in the economic cycle, our balance of payments should be in surplus. We cannot get around the fact that we have a deficit in manufactured goods to the tune of £18 billion or more.

I do not want to talk the UK economy down; I do not want to talk the manufacturing sector down. I want to get us out of the mind set of the Beazer Homes league, and put us into the competitive position of the premiership. Let me quote a Japanese maxim: those who are dissatisfied will never make progress. We need constructive criticism; what we do not need are platitudes that suggest that everything in the garden is all right.

Mr. Smith

The hon. Gentleman overlooks the fact that the Government have taken a series of supply-side measures over the past 17 years which have improved the United Kingdom's competitive position. For example, the productivity gap in manufacturing between this country and Germany has been considerably eroded. I believe that we are now in a much stronger trading position than either Germany or France. Both those countries desperately need to take the kind of supply-side measures that our Government have taken if they are to restore their own competitiveness. We are in an extremely strong position, and I am very sorry that the Opposition see fit to complain constantly about our circumstances.

I congratulate my right hon. and learned Friend the Chancellor of the Exchequer. In the three years during which he has held his present office—I think that it is about three years—he has been one of the most successful Chancellors since the second world war. He has had to make some very difficult judgments, and he has got them right. As a result, we have arrived at a virtuous circle which few people would have predicted 15, 20 or 25 years ago.

People used to say that in circumstances such as these—circumstances in which there was a good rate of economic growth and consumer spending was forecast to increase by more than 4 per cent. in the ensuing year, as the hon. Member for Dudley, West said—there would be inflationary pressures in the system. I do not agree with the hon. Gentleman. I think that the Chancellor has it absolutely right. Of course we should not be complacent about inflation, but I believe that there is plenty of spare capacity in the economy and that we shall see continuing growth without inflation. That is a remarkable achievement by the Government.

I welcome the motion, and the Government's economic achievements. I hope that no sudden or fundamental changes will be made to their economic policy. I think that, if we continue our current policy, the benefits will gradually feed through to the consumer. As my hon. Friend the Member for Bosworth (Mr. Tredinnick) said, the housing market is picking up, and I think that the number of people with negative equity will start to decline.

I am sorry to say—because I am sometimes quite entertained by speeches made by the right hon. Member for Dunfermline, East—that the right hon. Gentleman's speech was the worst that we have ever heard from him. It contained no humour, and nothing about economic policy. What a contrast it made with the speech of my right hon. Friend the Member for Wokingham (Mr. Redwood). It was an insult to the House. [Interruption.] The hon. Member for Rotherham (Mr. MacShane) cackles from a sedentary position, but the fact is that we heard constructive proposals from my right hon. Friend the Member for Wokingham, although we may not have agreed with every one of them. We did not hear a single constructive idea from the shadow Chancellor.

Mr. MacShane

Is the hon. Gentleman prepared to apply the equivalent phrase to the Chancellor?

Mr. Smith

I certainly am. I do not know where the hon. Gentleman has been, but I have said that I consider my right hon. and learned Friend to be one of the most successful Chancellors since the war. I mean that. I believe that his management of the economy has been greatly in the interests of the United Kingdom, and I am desperately worried by even the faintest prospect that the right hon. Member for Dunfermline, East might take over at the Treasury, because the record of past Labour Governments is so appalling.

The hon. Member for Dudley, West (Mr. Pearson) said that he was at school at the time. I wonder what happened to his pocket money in 1975. I wonder whether his father increased his pocket money by 25 per cent.—for that is what he would have had to give to maintain the purchasing power of the hon. Gentleman's pocket money. People forget that, but we shall soon be celebrating—if that is the right word—the arrival of Dr. Johannes Witteveen, the director of the International Monetary Fund. He had to come in to sort out the United Kingdom's finances.

Mr. Bayley

My hon. Friend the Member for Dudley, West (Mr. Pearson) pointed out that the United Kingdom is currently 10th or 11th out of the 15 European Union countries in the inflation league. Would the hon. Gentleman care to tell us where the UK was placed under the last Labour Government?

Mr. Smith

Bottom of the league. The Labour Government's inflation record was appalling, and I am astonished that the hon. Gentleman even mentions it. I remember it better than most. I came into the House in April 1977, at the height of Chancellor Healey's unpopularity, when inflation was rising for the second time and the miners in Ashfield were concerned about the amount of money that was being taken from them in income tax. The standard rate of income tax was 35 per cent. One of the present Government's most magnificent achievements was to reduce that to 24 per cent., which has made a considerable difference to incentives. People should not be allowed to forget the last Labour Government's appalling record on inflation, tax, spending and borrowing.

As I have said, it is 20 years since the IMF was hauled into this country to sort out the problems of the Labour Government. That is the extent of the depths that we reached. This country was the sick man of Europe. That is the short answer to the point on league tables made by the hon. Member for York (Mr. Bayley). People were desperately worried about this country's economic position. Today, this country is in a stronger position than for many years and that is why I warmly welcome the Government motion.

8.39 pm

Mr. Barry Jones (Alyn and Deeside)

I am glad to follow the hon. Member for Beaconsfield (Mr. Smith), but I disagreed with his speech. Her Majesty's Government have had a bad time today, not because the Chancellor of the Exchequer gave the distinct impression that he was not in charge of his Department or because the right hon. Member for Wokingham (Mr. Redwood) made another bid to seize his party's intellectual leadership, but because Conservative Members looked divided.

The right hon. Member for Wokingham made an animated and seemingly spontaneous speech. He was listened to by Conservative Members as a leadership contender and as a rebel. He set out his stall and suddenly we had a debate. As we listened and watched, some of us thought that we had discerned the opening round of the imminent general election.

Whatever, my right hon. Friend the Member for Dunfermline, East (Mr. Brown), the shadow Chancellor, had a good time. He played the Chancellor like the angler plays his catch. By the time my right hon. Friend had finished with him, the Chancellor had resolved to return speedily to the Treasury so as to skin that anonymous grade 7 civil servant who had constructed such an explosive right-wing memorandum.

References have been made to investment in Wales and to the 6,000 Korean jobs coming our way. That investment coup is one of the greatest ever for Wales in the employment sector. It is a great credit to the Welsh Office, to Newport county borough and to the Welsh Development Agency. All in all, it is a great credit to the people of Wales. In the years ahead into the next century, in south-east Wales, there is likely to be an explosion of prosperity. I hope so. The recipe for that success will include expanded training capacity in south-east Wales, two River Severn bridges, an effective motorway system and two good go-ahead cities in Newport and in Cardiff. I emphasise also the availability of a co-operative, loyal and flexible labour force. I hope that the former steelworkers and coal miners from the eastern valleys get a fair crack of the whip when they seek the available jobs. After the torrent of redundancies that they have suffered, they deserve to do so.

May I make a plea for British Steel? What will the Government do? It is the third largest producer in the world. In 1994–95, it had revenues of £6.2 billion. It is now in the top 10 of Britain's best exporters, and everyone says that it is a lean and powerful industry. Hon. Members may know that 46 per cent. of its production is exported. Its European Union competitors, however, are not playing fair. Illegal subsidies are being paid. For example, the Belgian Government pump subsidies into a loss-making steelworks in Wallonia. My steelworkers at the Great Shotton steelworks seek a level playing field on which to compete with their EU rivals. After losing about 10,000 jobs in a short period, those steelworkers deserve that level playing field and more help from the Government.

In our country, 560,000 people under 25 years of age and 168,000 people under 20 years of age are unemployed. In my constituency, the figures are 621 and 189 respectively. I did not hear a scintilla of a proposal or policy from the Chancellor which would enable those groups of our fellow citizens to be given priority for work and for training, which was regrettable.

In that context, if I may make a strong constituency point, the proposed closure of the jobcentre in the largest town in my constituency is cruel nonsense. The Buckley jobcentre is a valued facility which is used by many hundreds of people each week. The town of Buckley is appalled at the proposal to close the jobcentre. The town council of Buckley is astonished that the proposal should have been made. We all think that the centre should remain open. 'We want Ministers to intervene and to instruct the Benefits Agency to think again. No closure should be the answer. We and the community that I represent believe that the closure proposal engenders only distrust and insecurity in a large community.

The request from north-east Wales is for the restoration of development area status, which was only recently taken from us by the Government in policy changes. We need both the social chapter and the minimum wage. Many people in work are bereft of dignity and of security and they have precious little hope. If the army of the young unemployed are not given better training and more meaningful work, in the fullness of time, they may wreck the communities in which they live. Throughout the Chancellor's speech, I did not hear him give answers to these deep-seated problems. He was over-sanguine in his approach. He gave us no new policies.

The astonishing thing is that Britain has squandered £120 billion-worth of North sea oil revenues. In recent years, Britain has also squandered £80 billion-worth of proceeds from privatisation. We must ask: where did those moneys go? This national treasure was certainly not invested to any considerable degree in British manufacturing, in railway infrastructure, in the national health service, in the school service or in municipal housing. Those are sufficient reasons for us to say to the Government, "For heaven's sake, call the general election and face the country."

8.47 pm

Mr. David Shaw (Dover)

There is no doubt that the "Summer Economic Forecast" is a remarkable document, because almost every page contains a considerable amount of good news. The only marginally less than good news is that the deficit is not coming down as fast as we would like, but it is coming down, so the document has a considerable amount of improving trends and good news—the sort of news of which any Government can be justly proud.

We are starting our fifth year of economic growth. Even my constituents, especially those in the building trade, who had a particularly tough recession, are now acknowledging the improvements in the economy and the fact that trade for them is better than for some time. In my constituency, employment figures are much better than for some years. When I fought the general election in Dover in 1992, unemployment was some 15 per cent. more than it is today. We have a significantly improving trend, and I certainly hope that that will continue and that my constituents continue to benefit from a Conservative Government for many years to come.

I was enormously disappointed by the speech of the Opposition spokesman. The right hon. Member for Dunfermline, East (Mr. Brown) sometimes manages to get a laugh or two in the House. He sometimes manages to entertain us and comes out with some interesting arguments. The speech today was the most appalling that I have heard from the Opposition. There was little mention of the economy. It was all on some civil servant's desktop exercise in the lower basement section of the Treasury—probably one of the sections that is prone to flooding and has a number of rats that eat away at the paperwork. I do not think that the Treasury desktop exercise was of much value and it certainly should not have taken up the amount of debate that it did.

What had the shadow Chancellor learned from that desktop exercise? It was something about Thailand, which he alleged would overtake the United Kingdom. He should watch his affair with Thailand carefully, or he will earn the nickname of Bangkok Brown in this Chamber. It is laughable to suggest that Thailand has a better economy than the United Kingdom, or is likely to have one for many years, if ever. It is also laughable to imply that the current growth rate in Thailand is to do with socialism in any way, shape or form. Far eastern countries such as Thailand, Japan and Malaysia, which are experiencing strong growth rates, are doing so without socialism. They do not achieve high economic growth rates through a minimum wage or a social chapter. They steer clear of those disadvantages, which the Labour party wants to impose on us. They do not use socialist policies in Malaysia; they use strong, free market policies with an entrepreneurial background to them.

The weakness in Labour's argument is that they are not only weak on policies, but weak on attacking our policies. They try to attack us on borrowing. When Labour was in office, it borrowed at twice today's levels. The Opposition try to attack us on the national debt now, but it was much higher as a proportion of gross domestic product when Labour was in office than it is today.

One of the great successes of the 1980s was that we used oil revenues to keep our debt down. The United Kingdom has much less borrowing as a proportion of GDP compared with many counties in the European Union and the rest of the world. Indeed, we also ran our economy sensibly in relation to unfunded pension liabilities. Those are a major problem in many European countries, including Germany, France and Italy, but they are not a major problem in the United Kingdom. We have managed our social security and unfunded pension liabilities much better than any of the other European countries—those major countries that now have considerable difficulties to which they must face up. The cost of those difficulties may be as high as £10 trillion in the next 50 years. I hope that we never have those problems, and we have to ensure that we never have a socialist Government that would give us them.

Mr. Bayley

At constant prices in 1974, the Labour Government inherited from the Heath Government a public sector borrowing requirement of £43 billion in today's prices. By the time we left office, it was down to £27.4 billion. Last year, it was up to £34.6 billion and it is projected to be £30.7 billion next year. Surely we had a better record on getting the PSBR down than the Conservative party, which has put it up.

Mr. Shaw

The hon. Gentleman is trying to inflate the PSBR by a retail prices index figure. He is not considering the gross domestic product. He should consider how much GDP and debt are as a proportion of the PSBR. If he did so, he would realise that the Labour Government left office with average borrowing of some 7 per cent. of GDP, as the Chief Secretary to the Treasury told us earlier. It is less than half that today—we are down to just over 3 per cent. of GDP on an annual deficit basis.

Also, we do not have the unfunded pension liability problems of Europe, so we are more likely to meet the Maastricht criteria than Germany, France and Italy. Those countries will meet them only if they are fiddled criteria. This country's position is very strong indeed.

The Labour party has been distorting other figures. The Opposition tried to refer to the proportion of taxes taken by GDP today, but they did not say that one has to add taxes and borrowing together to get a true measure of what the Government are taking out of the economy. I am pleased to say that, this year, the Government have got the proportion of the economy taken out by taxes and borrowing down below what it was when Labour was in office in 1979. More important, we have got it down below what it was under Labour, with lower interest rates because the City is confident that this Government are worth lending to. It charged a Labour Government a higher rate of interest.

Mr. Bayley

rose—

Mr. Shaw

I would like to give way again, but cannot do so because of the time.

In the remaining part of my speech, I want to question Labour policies. The main policy which I heard was of taxing the utilities and squeezing resources out of them. Who is going to pay? Do the British public think that, if Labour squeezes the utilities, the money comes from nowhere? Of course it does not. It is real money that the utilities would have to find, and there are only two sources: ultimately, they would have to find it from the shareholders or from the customers. Who are the shareholders? They are the 16 million ordinary men and women who are savers in pension funds, private pension funds and life insurance. So, the Opposition have said today that their tax on the utilities will squeeze shareholders who are savers in pension funds, private pensions and life insurance. Ordinary men and women will have their savings squeezed by Labour, if there is a windfall profit tax on the utilities.

Ultimately, customers will also have to pay the tax. That means that electricity, water and gas bills will rise. It means that we will have to have a wattage tax, a water tax and a therm tax. Three new Labour taxes that will hit the utilities and their customers. The Opposition have not even explained what they will do in Scotland with the windfall tax on Scottish water, which is in the public sector. Who will pay the extra windfall tax in Scotland, or will it be an extra surcharge on English people? Will we have to pay on English water the extra money for Scotland? The reality is that Labour will tax the consumer and it will charge the consumer.

Mr. Deputy Speaker (Sir Geoffrey Lofthouse)

Order. Time is up.

Several hon. Members

rose—

Mr. Deputy Speaker

Order. If the hon. Members who are hoping to catch my eye are brief, they will be able to speak.

8.58 pm

Mr. Stephen Timms (Newham, North-East)

During Nelson Mandela's visit to London last week, the joy and celebration surrounding the President were palpable. We can be proud of the welcome that our communities gave to a man who restored many people's faith in politics.

The welcome for President Mandela in Brixton was warmer than ever, but he saw there a side of modern Britain that I suspect the Government would rather he had not seen. For despite the tremendous spirit of people who live in Brixton and in my constituency, such places give the lie to the Chancellor's portrayal of a country in the full bloom of economic recovery.

Mr. Mandela saw a community where, for many, the idea of a secure job is nothing but a pipedream; where an increasing number, particularly of young men, but also of young women, have never had a job; and where too many young people face the prospect of permanent exclusion from economic life—of moving from being unemployed to being unemployable. The community that the President of South Africa saw should, for all its spirit and resilience, make the Chancellor very uncomfortable indeed. The Government have failed the hardest pressed, and all of us are paying the price. That is the context for the debate.

The most telling comment on the President's visit was made in a television interview with one of the community leaders in Brixton, who has lived there for a long time. He said that things are getting gradually worse in the community because of the large and growing number of young people, especially young men, who do not have a job, who have never had a job and who have no prospect of a job in the foreseeable future. That is a dreadful state of affairs for them, but not only for them, and that is what the Government have disastrously overlooked. The price is being paid not only by young unemployed people, but by the whole community—in benefit payments, in wasted energy and ability, in crime and in a next generation brought up from birth in a hopeless situation.

I am pleased that my right hon. Friend the Member for Dunfermline, East (Mr. Brown) has put that problem at the heart of his economic programme for the next Government, with a pledge to get 250,000 under-25s off benefit and into work. We neglect those people at our peril, and we cannot afford to do so for much longer.

The Chancellor may not have many friends in Brixton, but he does not seem to have all that many friends elsewhere—he certainly does not have many in the press. When he published the "Summer Economic Forecast" last week, the Financial Times said that it showed that Britain's fiscal position could be toppling into a hole". Far from having room for tax cuts, as his party has required of him, the Financial Times says: On plausible assumptions about economic growth, fiscal buoyancy and spending, tax increases may be required. Yesterday in the Treasury Committee, the Governor of the Bank of England told us that the poor state of the public finances worried him. He said: It leaves me uncomfortable that there has been this kind of slippage", and he referred to the unsustainability of the 4¼ per cent. growth in consumer expenditure that the Chancellor forecasts for next year. The Chancellor's continued bland denial of the problems in the economy must be disconcerting indeed.

One might assume that the Chancellor has one or two friends on the Conservative Back Benches—presumably he does, although they have not been evident in the debate. The hon. Member for Beaconsfield (Mr. Smith) paid tribute to the Chancellor, but on the whole we have heard Conservative Members' usual attacks about his spending too much. We heard an interesting speech from the right hon. Member for Wokingham (Mr. Redwood), who seemed to believe that some accounting devices to do with contingencies could be used to achieve substantial spending reductions.

Presumably the Chancellor still has one or two friends on his Back Benches: according to one Conservative Member quoted in Sunday Business he has not just one or two, but five. We are told that that is the number of Conservative Members who believe in what he is doing.

There are real problems in the economy, and they have been laid out once again in the Treasury's "Summer Economic Forecast". In particular, the level of public borrowing is giving great cause for concern. After yesterday's announcement of a £3.7 billion deficit just last month, expectations are clearly rising that this latest revision will have to be revised in the wrong direction again.

There are some serious problems about the shortfall in revenues, which has led to this PSBR overshoot. Some parts of the shortfall can be attributed to the weakness of the economy. The low income tax receipts are perhaps unsurprising given the increase in part-time work and the stubbornly low wages that are a trademark of the post-recession period. The poor corporation tax returns are indicative of weaknesses in the corporate sector—another sign of the painfully slow recovery. The real mystery is what has happened to VAT. Why were last year's VAT returns 2 per cent. lower than projected, creating a significant and worrying £900 million hole in the finances which the Government are unable to explain? I urge the Chief Secretary to ensure that more is done to find out what has happened to that tax revenue.

Customs and Excise should be asked to carry out a sector-by-sector—firm-by-firm if necessary—survey of companies, comparing last year with the year before to establish just what has happened to VAT, which had been expected but has not materialised, and which of the many possible explanations are correct. We need to know what has gone wrong. The Government do not know, and they need to find out.

Lower VAT receipts contributed to the higher than expected PSBR, but one aspect of the borrowing forecast which puzzled me was the relationship between the PSBR and the general Government financial deficit—the alternative measure of the same thing—the significance of which is that it is the measure on which we shall be judged for the Maastricht criteria next year, the target being that the GGFD should be below 3 per cent. in the next calendar year.

The Chancellor has told the Treasury Committee that it is touch and go whether we shall be within the Maastricht limit. I hope that we shall be, so that if we choose to join the single currency at the outset we shall be in a position to do so, but it requires an optimistic reading of the "Summer Economic Forecast" to believe that it will still be possible to do so.

What is puzzling is that the forecast shows the GGFD to be £4 billion more than the PSBR last year and almost £4 billion more this year, but next year, suddenly, the GGFD is forecast to fall below the PSBR and so, miraculously, to scrape just within the Maastricht ceiling. I find that just a little implausible.

It is an irony that, in November, the Chancellor will face the decision about tax cuts in order to please his Back Benchers, knowing that if he goes ahead with them he will almost certainly make it impossible to achieve the Maastricht 3 per cent. deficit criterion.

I urge the Chancellor to do the right thing rather than yield to the siren calls—of which we have heard so many today from Conservative Members—to cut taxes irrespective of the damage to public finances and public well-being which will result. The reality behind the figures in the forecast is that the problems of the young, long-term unemployed in areas such as Brixton and my constituency are not being addressed and we will continue to pay a high price until they are.

9.6 pm

Mr. Bernard Jenkin (Colchester, North)

I am grateful for the opportunity to catch your eye, Mr. Deputy Speaker, at this late stage of the debate, particularly as I have not had the privilege of being present in its early stages due to my duties elsewhere in the House, in particular on the Select Committee on Social Security.

I am mystified when I hear Opposition Members urge the Government to achieve the Maastricht deficit criteria, as if there was anything less relevant to the real lives and anxieties of business men and individuals throughout the country. Nothing is more calculated to destroy the credibility of public policy than imposing those artificial debt criteria on the economies of Europe when it is entirely inappropriate.

A more appropriate subject for discussion is what business men in my constituency raise with me when I discuss the current business climate. They talk about a steady increase in business confidence and a steady improvement in the business climate, which is borne out by their experience and by the unemployment in my constituency. Since unemployment peaked in December 1992, unemployment in my constituency has fallen by 43 per cent.

If there is one measure that is a testament to the success of Government policy in recent times, it is that dramatic fall in the rate of unemployment. We know that unemployment in the United Kingdom is now substantially below the average of our European competitors. That is strong testament to the success of Government policy in recent years.

I want to relate to the House one brief anecdote from the run-up to last year's Budget. We had a presentation in my constituency by a Midland bank economist. He said, "Ladies and gentlemen, when you hear the Chancellor of the Exchequer telling you that we have the most benign economic circumstances for a generation, I am terribly sorry to tell you he is telling the truth." That not only gave me great comfort, but as the message went around the country, it gave great confidence to British business.

The opportunity that we now have, as we consider the "Summer Economic Forecast" and the run-up to the next Budget, is not as fraught with difficulty as some would have us believe. The deficit that the Government must fund is certainly a matter of concern, but while deficits have to be funded, the overall economy must be the priority. We would do well to learn from what Ronald Reagan achieved for the American economy in the 1980s. The fact is that Reaganomics works. It got a bad reputation because Congress refused to cut public expenditure in the light of President Reagan's defence expenditure priorities.

The key element of Reaganomics was that tax reform led to substantial improvement of Government revenues. That is the opportunity that we should grasp. If we have the courage to reform taxation by, for example, reducing substantially the rates of inheritance tax and capital gains tax, we will reap the benefit of extra tax yields and be able to reduce the Government's deficit accordingly. Timidity and the conventional economic forecasts that tend to be produced by the kids in the Treasury are not a reliable guide to the likely outturn of such reforms. I congratulate my right hon. and learned Friend the Chancellor on showing suitable cynicism about what some of his officials produce. He should show the same sort of cynicism to their traditional view of cuts in the rate of capital gains tax. Such cuts will not reduce revenues, but increase them.

We must bear in mind the threats to the benign economic circumstances that we enjoy today. I despair when Opposition spokesmen talk about what they believe to be the frittering away of oil revenues and privatisation proceeds. They demonstrate a fourth-form understanding of economic dynamics in a modern, industrial economy. The proceeds of privatisation and oil revenues have been put to good use not only in increasing the rate of investment but in substantially restructuring the economy so that industries which had previously been a great burden on the British taxpayer and a drag on economic growth have become part of the dynamic of the British economy. They add not only to economic growth, but to the Government's revenues. We used to pay more than £50 million a week in subsidies to the industries that we privatised. Now, they yield £50 million a week for the Government in dividends and tax revenues. We should celebrate such a turnround, but the Opposition do not understand it. Such fourth-form economics is a threat to our future.

The Opposition do not appreciate other threats, such as the growth of social security expenditure, which the Government have been struggling to control. As a member of the Social Security Committee, I am well aware of its growth under the Government. However, in recent years, we have had an excellent Secretary of State and successive Chief Secretaries to the Treasury who have fought to control the rate of its growth so that it is now below the rate of economic growth. That is the key point. Social security expenditure is now growing at a lower rate than the trend rate of economic growth.

The Labour party criticises the Government for the growth in social security expenditure, but that opposition should be juxtaposed with the fact that it has opposed every measure that we have proposed. Perhaps the Opposition were relieved to lose the Division earlier this week on the restoration of benefits to bogus asylum seekers. The amount may have been insignificant—it was £300 million and growing—but nothing better demonstrates the Opposition's unfitness to govern than their failure to understand that such measures are absolutely necessary to control social security expenditure.

I want to refer to the research conducted by my hon. Friend the Member for Dover (Mr. Shaw) into unfunded liabilities, which are another threat to the United Kingdom's economic growth. It is most important that we continue to fund the future liabilities that we have taken on as a Government for future pensions. The progressive capitalisation of the state earnings-related pension scheme by opting out, and perhaps the progressive capitalisation of occupational pension schemes, but most particularly the rigorous control of that pension liability, is important and compares extremely favourably with our continental competitors. Their unfunded pension liabilities represent significant proportions of their future gross domestic product, and a considerable threat to the stability of any future single currency. Perhaps they represent the strongest argument for Britain not to participate in a single currency.

Germany's, unfunded pension liabilities, discounted to a present day price, represent 122 per cent. of its GDP. It is ridiculous that Britain should merge its currency with Germany to share that liability when we have gone so far to structure our economy so that our liability is properly funded. The danger of pursuing blindly the Maastricht criteria and the instincts continually exhibited by the Opposition demonstrates the key threats to our economy.

The key question that we must keep asking is what are the real measures that we need to take to increase the trend rate of economic growth in our economy? They are not ones that would deliver higher public expenditure or mean sticking to particular economic criteria that might be laid down in a particular document. We must pursue measures that are designed to allow us to remain competitive, flexible and continue a downward pressure on public expenditure. We must also have an adventurous outlook on tax reform to maximise tax revenues. That is how we will get the deficit down and continue to secure the progress that we have enjoyed in recent years.

9.17 pm

Mr. Denis MacShane (Rotherham)

In the two and a half minutes left to me, I have something to say.

The Chancellor made a vigorous speech, but I think he will go down in history as the Chancellor of decline, because no index which places our nation in comparison with others shows that we have moved up under his stewardship. He is also the Chancellor of incompetence, because of his absurd handling of the public sector borrowing requirement—an impossible concept to get over to the person in the street—which is now utterly out of control. If he had been the financial director of any plc he would have been dismissed months ago.

He is also the Chancellor of mediocrity, because of his failure to reform our tax system, which is not appropriate to the needs of our economy in the modern world. No new serious ideas have been proposed, except to increase the burden of taxation on the British people. Conservative Members may have seen the report published last week, which showed that the Government take a greater part of the pay of salaried employees than their counterparts in France or Germany. The 22 new taxes imposed since 1992 have had their impact.

My main complaint against the Chancellor is based on the fact of my being the Member of Parliament for Rotherham in South Yorkshire, a part of the country completely ignored under the Chancellor's economic stewardship. As I pointed out to him earlier, the Deputy Prime Minister was in Wakefield yesterday, to make a long list of complaints about low investment, poor economic performance, poor-quality managers and low-performing firms, all of which contribute to Yorkshire's poor performance. After 17 years of Tory stewardship, the Deputy Prime Minister might have accepted some responsibility for that.

Instead we have had this bravura performance today, in which the Chancellor said that we are living in the best of all possible worlds. It will not wash in Yorkshire, it will not wash in the country, and, as every Conservative Member well knows, it will not wash in the general election. I wish them well in their private sector retirement.

9.20 pm

Mr. Andrew Smith (Oxford, East)

The Chancellor is settling into a pattern with these debates. Each time, he blusters his way through a load of nonsense about Labour having no policies, hurls some harmless abuse at my right hon. Friend the Member for Dunfermline, East (Mr. Brown), refuses to answer my right hon. Friend's questions, ducks and weaves his way through selective statistics to avoid explaining why his own promises have come unstuck, then makes those same promises again, in the hope that the electorate will judge him on his prospectus, not his record. As my hon. Friend the Member for Rotherham (Mr. MacShane) said, it will not wash with the electorate.

The Chancellor painted a rosy picture of the economy tonight, but my right hon. Friend the Member for Ashtonunder-Lyne (Mr. Sheldon) put it well when he said that the Chancellor's optimism was wholly out of line with … previous experience". Labour Members reject the Chancellor's complacency about the condition of the British economy. We argue for the policies that we have set out—for macro-economic stability, for promoting long-term productive and profitable investment, for raising education standards and skills, for energising public-private partnership, for getting people off welfare and into work, for sticking to the golden rule on borrowing, and for sensible and constructive involvement in Europe.

We argue for the policies necessary to get Britain pulling together for economic success, in the knowledge that economic strength and fairness go hand in hand, and that a Government cannot simply leave everything to the market if every individual is to make the most of their potential.

That is Labour's approach, in place of the complacency and failure of the Government—a Government whose summer forecast shows higher borrowing, lower investment and weaker growth than they promised, more than 2 million people still unemployed, a million households in negative equity, inflation above the Chancellor's target and long-term interest rates one quarter higher than those of our competitors. And the Chancellor tells us that all is well with the economy.

In last year's summer forecast debate, the Chancellor boasted of the performance on output, inflation, exports and unemployment. Let us consider what happened subsequently. The summer forecast tells us that output growth halved to 2 per cent. in 1995. Underlying inflation increased from 2.3 per cent. in 1994 to 2.9 per cent. last year. Exports slowed, as did the fall in unemployment. The summer forecast admits: rising employment accounts for very little of the fall in unemployment". Across the 17 years of this Tory Government, output growth has averaged 1.9 per cent., even with the oil, compared with 2.4 per cent. for the G7. Inflation has averaged 5.8 per cent., compared with 4.3 per cent. for the G7 countries. Export growth here has averaged 3.5 per cent., compared with 5 per cent. for the G7. Unemployment has averaged 8.5. per cent., compared with 6.6 per cent. for the G7. Britain has the worst record of job generation of the major European economies, and the worst record of investment. We have fallen from 13th to 18th in the world prosperity league.

As my hon. Friend the Member for Coventry, North-West (Mr. Robinson) said, these Tories are acquiescing in a disgraceful national decline. No wonder the kids in the Treasury now see Britain falling behind Brazil, Indonesia and Thailand.

Mr. Robert -G. Hughes (Harrow, West)

The shadow Chancellor spent a lot of time on what have been called the kids in the Treasury. If he and his party are so against the idea of privatising, as he would put it, any of the welfare services—particularly pensions—can the hon. Gentleman explain his view of people who go to Singapore, which has a private pension scheme, and then return here and praise that scheme as one that has much to offer this country?

Mr. Smith

The hon. Gentleman gives the game away. It is clear that the document is right, and that the Tories want to privatise the state pension and the welfare state.

Mr. Hughes

The hon. Gentleman deliberately seeks to avoid answering the question. The state pension system in Singapore is private, as everyone knows. [HON. MEMBERS: "Wrong."] It is publicly invested, but it is a private system run by private companies. The Leader of the Opposition and the shadow Social Security Secretary have praised that scheme and, to some extent, the Chilean scheme. Does the Labour party want to emulate it?

Mr. Smith

The hon. Gentleman has not been here for most of the debate, and to judge by the ignorance displayed in what he has just said, that is a good thing. He clearly does not understand the difference between first tier pensions—we have all made it clear that the state pension remains the foundation for security in retirement—and second tier pensions. The hon. Gentleman has given the game away: the Tories are interested in privatising the whole welfare state and the pension system.

To return to investment: the Chancellor today said next to nothing about it—and I am not surprised. Total gross domestic fixed capital formation actually fell last year. As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) pointed out, business investment rose by only 1.5 per cent., compared with the 10.75 per cent. forecast in the November 1994 Budget.

Such statistics would be worrying at any time, but at this stage of the economic cycle they are as alarming as they are unprecedented. At this stage of the 1970s cycle, investment was 26 percentage points above its level in the depth of that recession. In the 1980s cycle, it was 30 percentage points up. Now, it is only 5.8 percentage points higher.

In the absence of sufficient productive and profitable investment, the danger remains, as the Government engineer their pre-election consumer boom, that weaknesses in capacity may result in unsustainable pressures on the balance of trade, on inflation, or on both.

Mr. David Congdon (Croydon, North-East)

rose—

Mr. Smith

What is happening in particular sectors also contradicts the Chancellor's complacency. Manufacturing industry has moved into recession—a serious signal of economic weakness. As the Hongkong and Shanhai Banking Corporation put it in its economic prospects report last month: The speed with which the industrial outlook has deteriorated over the past few months is frightening. Only an implausibly rapid rebound in the United Kingdom's key markets in continental Europe can now prevent 1996 becoming a year of stagnant output, struggling exports and lost jobs. The picture is no brighter in the construction industry, which has seen real output fall in four of the past five quarters. Large and small construction firms are being hit by the weakness in public and private capital investment, and by the fact that the PH has failed to match the Government' rhetoric.

A number of my hon. Friends, including my right hon. Friend the Member for Llanelli (Mr. Davies) and my hon. Friends the Members for Brent, East (Mr. Livingstone) and for Newham, North-East (Mr. Timms), pointed out that, on public borrowing, we have seen the Chancellor's most abject failure to hold to his Budget promises.

In his Budget speech, he said: We have … got the public finances under control. I have therefore been cautious and prudent … in setting out the latest projections from the PSBR … The ratio of public spending to national income will be below 40 per cent. from 1997–98 onwards."—[Official Report, 28 November 1995; Vol. 267, c. 1057, 1063.] Although those were the Chancellor's words just eight months ago, they are contradicted by the "Summer Economic Forecast" before us tonight. Public finances are not under control and, as my hon. Friend the Member for Motherwell, South (Dr. Bray) pointed out, not only are the forecasts wrong—that might be understandable—but they are all wrong in the same direction.

The Government's borrowing is set to exceed the borrowing they promised at the last general election by no less than £65 billion cumulatively. Last year's borrowing has been revised up by £10 billion; this year's borrowing has been revised up by £4 billion; and next year's has been revised up by £8 billion.

We now learn that the ratio of public spending to national income will stay above 40 per cent. next year. Whereas in 1993 the Chancellor promised to eliminate the current public sector deficit by 1997–98, he now foresees a deficit of no less than £15 billion. The ratio of debts to GDP will have risen from 36 per cent. in 1991 to 56 per cent. by 1998.

It is alarming that, even as the Government continually revise their borrowing upwards, they cut their capital investment. Net public capital investment at the time of the Budget was thought to be 14 per cent. lower than at the last general election. That is bad enough, but the figures in the "Summer Economic Forecast" now show that that has been revised to a 25 per cent. cut. Moreover, the forecast now projects net capital investment for the three years 1995–98 at 11 per cent., or £3.5 billion less in real terms than in the Budget.

As the CBI warned yesterday, the PHI will not compensate for the scale of reduction in conventional capital spending. The "Summer Economic Forecast" shows that, at today's prices, public net capital spending in the three years since the PFI was launched was £4.9 billion less than in the previous three years, and the most recent estimate shows that private capital made up only £1.2 billion of the gap.

Under this Government, borrowing will increasingly meet the current expenditure deficit. The Conservatives have not only broken the golden rule of public finances throughout the cycle, but they have replaced it with Clarke's leaden rule, that investment must be cut to enable borrowing to cover day-to-day running costs.

The Chancellor keeps promising fiscal balance, but when will it come? He says that it will come in the medium term. He says that public expenditure as a share of national income will go down to below 40 per cent. in the medium term. He says that he will cut income tax to 20p in the medium term. The trouble with the Chancellor is that the medium term never comes.

The Tories are borrowing like there is no tomorrow, perhaps in recognition of the fact that, for their Government, there will be no tomorrow. But the British people pick up the tab for their borrowing. It already costs £1,000 per household to service the national debt—nearly double the amount in the second half of the 1990s that it cost in the first half. What order of priorities is it for the Government to spend, as they do, more on servicing the national debt than on the whole of further and higher education put together? That shows the real cost that the people of this country pay for the grotesque financial mismanagement by the Chancellor.

Whom does the Chancellor blame? He says it is not his fault: the boffins in the Treasury are to blame. On "Breakfast with Frost", he said: My boffins got their estimates wrong. [Interruption.] Those were his words, and that is far worse than admitting that the Government's fiscal strategy is off course. He shamefully abdicated the responsibilities of his office, because it is contemptible for Ministers to blame civil servants, who cannot answer back, for the Government's failures.

The Chancellor's stance put me in mind of the Rudyard Kipling poem, "Tommy", and a new verse could be affixed to the Treasury notice board: It's Chancellor this and Chancellor that, when there's credit to be claimed, But it's all the fault of boffins when the forecasts can be blamed; It's boffins this and boffins that, and anything you please, But the public are not fools, you know, you bet the public sees.

Mr. Kenneth Clarke

That is the best composition so far. The Opposition are having great fun spoofing the British press with the document that they claim contains our policy. The hon. Gentleman has now said that have blamed other people for problems with the public finances. I have been a Member for 20-odd years, and no Government have ever failed to alter their forecasts. A Labour Government would alter their forecasts, and that is why Parliament wants forecasts every six months.

The Labour party is bereft of policy and criticism, and has built a ridiculous pyramid of claims that I blamed someone else for a crisis. That is complete nonsense. Can we hear a policy from the Government? [Interruption.] I mean the Opposition. Would they implement any different policies that might contribute to the situation that they have described?

Mr. Smith

Yes, we would act for a strong economy; yes, we would increase productive investment; yes, we would get people back to work; and yes, we would bring borrowing down. During what must surely be the weakest intervention the Chancellor has ever made, I saw the right hon. Member for Wokingham (Mr. Redwood) smiling as he saw his prospective opponent for the Tory leadership handle so poorly my attacks on his borrowing record.

Mr. Redwood

indicated dissent.

Mr. Smith

The Chancellor showed how defensive he is by intervening about the leaked document.

Mr. Clarke

It is not a Treasury document.

Mr. Smith

It is a Treasury document. The Chancellor blamed officials, but he got the forecasts wrong, and they are produced in his name. He answers the parliamentary questions, and it is not good enough for the Government to blame the boffins, any more than it is good enough for the Chancellor to blame the kids in the Treasury for something for which he should take responsibility. If the Government do not intend to privatise the welfare state, why set up a meeting with leading insurance companies to discuss privatising the welfare state? Why did that meeting take place today?

We are not surprised when the Chancellor takes no responsibility for the fact that the country has its lowest share of world trade this century. We are not surprised when the Chancellor accepts no responsibility for the disgraceful levels of youth and long-term unemployment, and has no new ideas to do anything about that. But if the Chancellor will not accept responsibility for the documents being produced in his Treasury, that replicate pamphlets pumped out by his party's No Turning Back group, he should resign, and take the Government with him.

People want a Government whom they can trust; they want a Government who will deliver on the action for investment, skills, welfare to work and fairness, which is needed for sustainable growth, sound public finances and quality services. That is what people want in the place of the confidence tricks, wishful thinking, buck passing and broken promises of the Chancellor and his discredited and divided party.

Within 10 months, the people of Britain will have the chance to start anew and to have a better economic future with Labour. The Conservative party, with its record of broken promises, has nothing to offer this country but a campaign of fear and half-baked ideas from the American right. The British people will have none of it. They want a strong economy, a welfare state to be proud of, and fairness. With Labour, that is what they will get. I commend our amendment to the House.

9.40 pm

The Chief Secretary to the Treasury (Mr. William Waldegrave)

It is difficult for me to comment on the speech of the right hon. Member for Dunfermline, East (Mr. Brown), because I cannot find anything to comment on. He referred to the great conspiracy of the insurance industry—as far as I can make out, we are searching for this great conspiracy everywhere, and we have not yet found it.

The meeting that took place today was one of a series of meetings between the Department of Trade and Industry and the six big insurance companies—they have been taking place for years. The meetings were initiated by the Deputy Prime Minister when he was the President of the Board of Trade. They talk about the competitiveness of the insurance industry, which is a sensible thing for them to talk about.

We published a Green Paper about this—perhaps the right hon. Gentleman did not read it—and about our plans for partnership schemes for long-term care. That is a sensible thing for us to talk to the insurance industry about. That issue took up about nine tenths of the right hon. Gentleman's long speech, and his argument in that regard falls.

It is a pleasure to listen to the hon. Member for Brent, East (Mr. Livingstone) in his new mode. He talked about the serious contribution of the international bond markets—he never talked like that in the old days. However, he made one mistake in relation to business investment and Britain's performance on business investment—a mistake that was repeated by several Labour Members. Since 1979, the United Kingdom's ratio of business investment to gross domestic product has been marginally higher than that of Germany, France and Italy—the other European states in the G7. Of the G7 countries, only Japan has had a higher ratio than the United Kingdom since 1979, which is something to be proud of.

The right hon. Member for Dunfermline, East actually made a policy statement—albeit a small policy statement—and it was the first policy statement that we have ever heard from him. He endorsed my right hon. and learned Friend's cut of ¼ per cent. in interest rates. It is the first time that he has made any comment whatsoever on these matters. It was a small policy, but it was the best that he could do. However, it is not entirely clear whether the right hon. Gentleman endorsed all the other interest rate cuts that led up to it.

The right hon. Gentleman was not in the Chamber when his hon. Friend the Member for Dudley, West (Mr. Pearson) said that there was a grave danger of inflation, and that, if anything, interest rates should go up. This ¼ per cent. policy is already the source of a Labour split.

I move from the not so grand contributions of Labour Members to the debate, to the contributions of Government Members.

Mr. Pearson

Will the Minister give way?

Mr. Waldegrave

No, the hon. Member has already made his speech. The debate should return to the realities of the economy.

As has been said, unemployment has fallen today by 14,300, bringing it to the lowest rate for five years. My hon. Friends the Members for Colchester, North (Mr. Jenkin) and for Bosworth (Mr. Tredinnick) said that the unemployment rate is falling to a satisfactory level, especially among younger workers. According to the European Union standard basis, unemployment in Britain is 8.3 per cent. It is 8.9 per cent. in Germany, 11.6 per cent. in France, and 12.1 per cent. in Italy. The European Union average is 10.8 per cent., and we are well below that. We have seen a fall of about 830,000 in claimant unemployment since December 1992. Earnings growth fell today to 3.5 per cent., demonstrating once again the underlying strength of our economy.

Mr. MacShane

Will the Minister give way?

Mr. Waldegrave

No. The hon. Gentleman made a short and eccentric speech, and that is enough for now.

I pay tribute to the hon. Member for Motherwell, South (Dr. Bray), who said, sadly, that it was his last contribution to the annual debate. He made a characteristically thoughtful and interesting speech about forecasting, which is his perennial expertise. I shall draw the attention of my right hon. and learned Friend to the interesting points he raised.

The second fundamental of the economy is inflation. Retail prices index inflation in the year to June was 2.1 per cent.—a decrease from 2.2 per cent. in May. Producer input prices fell by 2 per cent. over the same period, and producer output prices rose by about 2.6 per cent, giving us another month of the best inflation performance for about 50 years.

We are below the European Union average for unemployment, and we are now also below its average for inflation. According to the EU comparative measure, it averages 2.8 per cent, and our performance is below that at 2.7 per cent. I do not think that there have been many years—it certainly did not occur under the last Labour Government—when we beat the European averages for both unemployment and inflation. We should be proud of that achievement. The hon. Member for York (Mr. Bayley) referred to inflation under the last Labour Government, which averaged 15.9 per cent. That was higher than the European Union average for the same period.

The third fundamental of the economy is growth. It was 4 per cent. in 1994, 2½ per cent. in 1995 and 2½ per cent. again this year, and it is projected to be 3.25 per cent. next year. The panel of independent forecasters believes that gross domestic product growth is liable to be close to 3 per cent. next year, and others think that it may be higher. Over the cycle, we have the ritual 1.9 per cent. average growth rate since 1979. Everyone knows that that is the wrong measure. When we measure cycle to cycle, we find that only Japan beats us on growth rate.

The fourth fundamental of the economy is the household sector. It is understood that living standards are rising. Real personal disposable income rose by 2½ per cent. this year, and it will be about 3 per cent. next year. My hon. Friend the Member for Wyre Forest (Mr. Coombs) referred to several powerful independent voices, and reminded us how well the economic fundamentals are performing. He quoted George Simpson, who is a very good industrialist, and I agree with his comments.

My hon. Friends the Members for Bury St. Edmunds (Mr. Spring) and for Milton Keynes, South-West (Mr. Legg) referred to the recovery in the housing market and its effect on negative equity. There was welcome news from the Woolwich today, which announced that negative equity fell by about 40 per cent in the second quarter of this year. That means that it has fallen by half in the last two quarters. They are very good figures. Its economist, Mr. Ellis, said that the steadily improving confidence, underpinned by stronger disposable earnings growth, lower interest rates and highly affordable housing, should ensure that the housing market recovery is sustainable. That is welcome news.

We are performing better than the EU average on inflation and unemployment. Our current account deficit is entirely sustainable, as my hon. Friends the Members for Wycombe (Mr. Whitney) and for Beaconsfield (Mr. Smith), the latter in a characteristically excellent speech, said.

That fact is recognised also by Labour supporters. Lord Desai, writing in The New Statesman in March, said: Inflation is not only low by the standards of the past 30 years, but is going down. He was proved right. He also said that unemployment is falling, and continued: Come election time, the economy may very well not be the strong card that Labour thought it would be". When those remarks were drawn to the attention of the right hon. Member for Dunfermline, East on the "Today" programme, his only response was to attack poor Lord Desai for being a Lord. That is not entirely his fault, as the Labour party made him a Lord. So, in the circumstances, that seemed a rather unfair ad hominem argument.

The principles that underlie these very good performances in the economy do not come by accident; they come because of the performance, competitiveness and flexibility of the labour markets that the Government's measures have introduced over the years. My hon. Friend the Member for Carshalton and Wallington (Mr. Forman) said, "Think globally." He is right. In terms of the global economy, it is hard to find a mature economy that is more competitive than Britain now in terms of flexibility of labour markets and competitiveness.

Mr. MacShane

The right hon. Gentleman lavished praise on all the Conservative Back Benchers who have spoken, but was scornful about me—[HON. MEMBERS: "Ah."]. Given that most Conservative Back Benchers who spoke praised excessively the speech of the shadow leader of the future Opposition, the right hon. Member for Wokingham (Mr. Redwood), can we have the Chief Secretary's comments on the contribution of the right hon. Member for Wokingham, who is in favour of the Treasury kids?

Mr. Waldegrave

It never occurred to me that the hon. Gentleman needed any help from me in blowing his own trumpet, but I am quite happy to say that his short—eccentric, but short—speech was remarkable.

I will indeed come to the point about my right hon. Friend the Member for Wokingham. My right hon. Friend made a number of extremely helpful suggestions, and I have to tell the Labour party that those suggestions will be useful to me in my job as Chief Secretary. Some of them I had already, with his help, and some of them—he will give me credit for—I might have spotted myself. But in saying that we shall return to the subject of public expenditure seriously this year, he is right, and we shall do that. I am grateful for his support, but I am also grateful for the support of everybody on the Conservative Benches.

My hon. Friends the Members for Wyre Forest and for Bury St. Edmunds spoke about the outstanding performance of the economy in attracting inward investment. I think it was my hon. Friend the Member for Wyre Forest who referred to my friend, Professor Bhattacharyya, who, quite rightly, says that the investment that is coming here now may give the lie to the rather cheap line that Opposition Members try to put, that it is sweatshop investment. It is not. It is high-quality, high-tech investment. People come here because they know that we have highly skilled people, that we have a competitive market, that we believe in liberal free trade, and that we welcome them, unlike some other countries that are not so welcoming. We shall continue to do that.

The CBI today, in a useful report, made those points, and said: We have a leaner and more competitive industrial base both in manufacturing and in service sectors … Our Labour markets have become more flexible and responsive. The report reiterated the hostility of business to European social policies. It said that business wants our opt-out from the social chapter to remain, as it will, and argued: Business opposes a national minimum wage, which would undermine flexibility and is a poor way to tackle poverty. That is what the CBI said today. Those are the policies that have produced the flexibility and good results that we have seen coming through.

Mr. Paul Flynn (Newport, West)

On the minimum wage, will the Chief Secretary explain why, two years ago, a British semi-conductor plant, which was on the site adjacent to where 6,000 Korean semi-conductor jobs are to come in my constituency, left to go to two countries—it is still prosperous and still producing semi-conductorsthat— have the social chapter and the minimum wage? Why was that?

Mr. Waldegrave

For its long-term development, it seems to have been a strange decision. I suspect that it would have done better to have stayed in the hon. Gentleman's constituency.

The right hon. Member for Sedgefield (Mr. Blair), the Leader of the Opposition, is, as always, beginning to get cold feet. He likes to give the feeling of the smack of firm government, but he caves in under pressure. That is an interesting point about him. He has already caved under the pressure of my right hon. Friend the Secretary of State for Scotland on devolution. He caved on the pensions pledge, which caused the formidable Lady Castle to say that she will come and haunt him. I suspect that being haunted by Lady Castle may cause him to do another U-turn on that matter.

I understand that he has done a U-turn on the tube strike today. Interestingly, he is trying to signal to business that he is going to do a U-turn on the social chapter, but he has made such a pig's ear of it that it is clear once again that he does not understand the social chapter—and most of it goes through under qualified majority voting, which he has pledged to expand. I do not think that that attempted mini-U-turn will cut much ice.

Labour is clear on only one thing—that it will reverse the policies that have led to our competitiveness. It will reverse them through the minimum wage, the social chapter and the restoration of the trade union power that has been properly limited by law in this country. To obtain testimony to that, and to the strength of the underlying changes that we have made and their connection to inward investment and job creation, it is best—as it often is—to seek an independent observer from abroad. People often see this country more clearly from abroad.

Here are some quotations. Excessively high German labour costs are costing more and more German jobs … There is really no call for a minimum wage in our economic system. In Tony Blair's home country, unemployment has dropped in absolute terms by 20 per cent. since its peak in the eighties. In West Germany it has risen by 10 per cent. Those are not my words, but the words of Hans-Olaf Henkel, president of the German BDI, who—helpfully—spoke to Tony Blair when he went, as the Daily Mail said, to cuddle up to Mr. Kohl.

On public spending, the president of the BDI said: One of the Governments"— he meant the United Kingdom Government— has steadily reduced state influence. The other"— Germany— has done no such thing. In Germany, the ratio of public spending to GNP has risen to 50 per cent. In Great Britain, it has fallen to 42.2 per cent. In Germany, average taxes on retained profits are 64.9 per cent. In Great Britain the figure is 33 per cent. In all those claims, the president of the BDI was right. That is proof that the stereotype suggesting that Germans have no sense of humour is false—although I know it to be false anyway. The fact that Mr. Henkel teased the Leader of the Opposition with that speech—to the point at which, I understand, he made his excuses and left—shows that Mr. Henkel not only knows the truth but has a sense of humour.

Mr. Henkel ended by saying that the Leader of the Opposition knows one thing too: Great Britain has become the most attractive location in Europe. Although the German market is twice the size of Britain's, foreigners have invested ten times more in Great Britain than in Germany since 1985. I am sure he does not want to alter this. In their hearts, Labour Members know that the economy is in good shape. The Leader of the Opposition clearly knows that his policies were damaging, which is why, characteristically, he is beginning to equivocate about them again. In his latest policy document—which the Independent on Sunday described as a mighty whimper at his enemies—he began to try to obfuscate them further. That is why Labour Members have not talked about the economy today, but have shifted to an attack on public spending, debt and tax.

Here we need no lessons from Labour Members. They argue to the spending lobbies that they will increase spending. I do not have time to quote from the piles of material that I could produce—[HON. MEMBERS: "Go on."] All right, I shall quote from just a few. The first action I would take would be to refuse to abolish the community action programme". That was said by the right hon. Member for Dunfermline, East. Why don't you"— that is, the Secretary of State for Health— fight to restore NHS dentistry. Because that's what Labour will do". That was said by the right hon. Member for Derby, South (Mrs. Beckett). The Home Secretary must continue compensation under the Criminal Injuries Compensation Scheme as it operated before 1 April 1994". That was said by the hon. Member for Blackburn (Mr. Straw). And so on, and so on. Hundreds of clear spending pledges have been made.

Then the Labour party says that taxes are too high. It put up a sign at Piccadilly Circus saying that Tories tax too much. First it says that spending must be higher; then it says that our taxes are too high; then it says that our borrowing is too high. It is not possible to believe all three propositions at the same time.

We know perfectly well—and, to be fair, so do the Liberal Democrats—which pledge the Labour party would break. It would spend more, and tax more. To be fair to the Liberal Democrats, they are nearly brave enough to say, "We accept that, and we would put taxes up." They do not cost their programme properly, but they are willing to engage in the argument. The official Opposition are simply not brave enough to do that. They are fairly criticised for that.

Borrowing and taxing would rise again under Labour. On average, borrowing under the Labour Government ran at 7 per cent. of GDP. In their best year, it was about 3.5 per cent., which we achieved last year. In their worst year, which is far more typical, it was 10 per cent. That is what Labour would achieve again if the country ever entrusted the national finances to it.

Question put, That the amendment be made:—

The House divided: Ayes 262, Noes 297.

Division No. 205]	[9.59 pm
AYES
Abbott, Ms Diane	Benn, Rt Hon Tony
Adams, Mrs Irene	Bennett, Andrew F
Ainger, Nick	Benton, Joe
Ainsworth, Robert (Cov'try NE)	Bermingham, Gerald
Allen, Graham	Berry, Roger
Anderson, Donald (Swansea E)	Betts, Clive
Anderson, Ms Janet (Ros'dale)	Blunkett, David
Armstrong, Hilary	Boateng, Paul
Ashdown, Rt Hon Paddy	Bradley, Keith
Ashton, Joe	Bray, Dr Jeremy
Austin-Walker, John	Brown, Gordon (Dunfermline E)
Banks, Tony (Newham NW)	Brown, N (N'c'tle upon Tyne E)
Barnes, Harry	Bruce, Malcolm (Gordon)
Barron, Kevin	Byers, Stephen
Battle, John	Caborn, Richard
Bayley, Hugh	Calaghan, Jim
Beckett, Rt Hon Margaret	Campbell, Mrs Anne (C'bridge)

Campbell, Menzies (Fife NE)	Hill, Keith (Streatham)
Campbell, Ronnie (Blyth V)	Hinchliffe, David
Campbell-Savours, D N	Hodge, Margaret
Canavan, Dennis	Hoey, Kate
Cann, Jamie	Hogg, Norman (Cumbernauld)
Carlile, Alexander (Montgomery)	Home Robertson, John
Chidgey, David	Hood, Jimmy
Chisholm, Malcolm	Hoon, Geoffrey
Church, Judith	Howarth, George (Knowsley North)
Clapham, Michael	Howelles, Dr Kim (Pontypridd)
Clark, Dr David (South Shields)	Hoyle, Doug
Clarke, Tom (Monklands W)	Hughes, Kevin (Doncaster N)
Clelland, David	Hughes, Robert (Aberdeen N)
Clwyd, Mrs Ann	Hughes, Roy (Newport E)
Coffey, Ann	Hughes, Simon (Southwark)
Connarty, Michael	Hutton John
Cook, Frank (Stockton N)	Illsley, Eric
Cook, Robin (Livingston)	Ingram, Adam
Corbyn, Jeremy	Jackson, Glenda (H'stead)
Corston, Jean	Jackson, Helen (Shef'ld, H)
Cousins, Jim	Jamieson, David
Cox, Tom	Janner, Greville
Cunningham, Jim (Covy SE)	Jenkins, Brian (SE Staff)
Cunningham, Rt Hon Dr John	Johnston, Sir Russell
Dafis, Cynog	Jones, Barry (Alyn and D'side)
Dalyell, Tam	Jones, Jon Owen (Cardiff C)
Darling, Alistair	Jones, Lynne (B'ham S O)
Davidson, Ian	Jones, Martyn (Clwyd, SW)
Davies, Bryan (Oldham C'tral)	Jowel, Tessa
Davies, Chris (L'Boro & S'worth)	Keen, Alan
Davies, Rt Hon Denzil (Lianelli)	Kennedy, Charles (Ross,C&S)
Davies, Ron (Caerphilly)	Kennedy, Jane (L'pool Br'dg'n)
Davis, Terry (B'ham, H'dge H'l)	Khabra, Piara S
Denham, John	Kilfoyle, Peter
Dewar, Donald	Lestor, Joan (Eccles)
Dixon, Don	Lewis, Terry
Dobson, Frank	Liddell, Mrs Helen
Dowd, Jim	Livingstone, Ken
Dunwoody, Mrs Gwyneth	Lloyd, Tony (Stretford)
Eagle, Ms Angela	Liwyd, Elfyn
Eastham, Ken	Loyden, Eddie
Etherington, Bill	Lynne, Ms Liz
Evans, John (St Helens N)	McAllion, John
Ewing, Mrs Margaret	McAvoy, Thomas
Fatchett, Derek	McCartney, Ian
Faulds, Andrew	Macdonald, Calum
Field, Frank (Birkenhead)	McFall, John
Fisher, Mark	McKelvey, William
Flynn, Paul	Mackinlay, Andrew
Foster, Don (Bath)	McLeish, Henry
Foulkes, George	Maclennan, Robert
Fraser, John	McMaster, Gordon
Fyfe, Maria	McNamara, Kevin
Galoway, George	MacShane, Denis
Gapes, Mike	McWilliam, John
Garrett, John	Madden, Max
George, Bruce	Maddock, Diana
Garrard, Neil	Mahon, Alice
Gilbert, Rt Hon Dr John	Marek,DrJohn
Godman, Dr Norman A	Marshall, David (Shettleston)
Godsiff, Roger	Martin, Michael J (Springburn)
Golding, Mrs Llin	Marttew, Eric
Gordon, Mildred	Maxton, John
Graham, Thomas	Meacher, Michael
Grant, Bernie (Tottenham)	Meale, Alan
Griffiths, Nigel (Edinburgh S)	Michael, Alun
Griffiths, Win (Bridgend)	Michie, Bill (Sheffield Heeley)
Grocott, Bruce	Michie, Mrs Ray (Argyll & Bute)
Gunnell, John	Mitchell, Austin (Gt Grimsby)
Hall, Mike	Moonie, Dr Lewis
Hanson, David	Morley, Elliot
Hardy, Peter	Morris, Rt Hon Alfred (Wy'nshawe)
Harman, Ms Harriet	Morris, Estelle (B'ham Yardley)
Harvey, Nick	Morris, Rt Hon John (Aberavon)
Henderson, Doug	Mowlam, Marjorie
Hepped, John	Mudie, George

Mullin, Chris	Snape, Peter
Murphy, Paul	Soley, Clive
Nicholson, Emma (Devon West)	Spearing, Nigel
Oakes, Rt Hon Gordon	Spellar, John
O'Brien, William (Normanton)	Squire, Rachel (Dunfermline W)
O'Hara, Edward	Steel, Rt Hon Sir David
Olner, Bill	Steinberg, Gerry
O'Neill, Martin	Stevenson, George
Orme, Rt Hon Stanley	Stott, Roger
Parry, Robert	Strang, Dr. Gavin
Pearson, Ian	Straw, Jack
Pendry, Tom	Sutcliffe, Gerry
Pickthall, Colin	Taylor, Mrs Ann (Dewsbury)
Pike, Peter L	Taylor, Matthew (Truro)
Pope, Greg	Thompson, Jack (Wansbeck)
Powell, Sir Ray (Ogmore)	Timms, Stephen
Prentice, Bridget (Lew'm E)	Touhig, Don
Prescott, Rt Hon John	Trickett, Jon
Primarolo, Dawn	Turner, Dennis
Purchase, Ken	Tyler, Paul
Radice, Giles	Vaz, Keith
Raynsford, Nick	Walker, Rt Hon Sir Harold
Reid, Dr John	Walley, Joan
Rendel, David	Wardell, Gareth (Gower)
Robertson, George (Hamilton)	Wareing, Robert N
Robinson, Geoffrey (Co'try NW)	Watson, Mike
Roche, Mrs Barbara	Wicks, Malcolm
Rooney, Terry	Wigley, Dafydd
Ross, Ernie (Dundee W)	Williams, Rt Hon Alan (Sw'n W)
Rowlands, Ted	Williams, Alan W (Carmarthen)
Sedgemore, Brian	Winnick, David
Sheerman, Barry	Wise, Audrey
Sheldon, Rt Hon Robert	Worthington, Tony
Shore, Rt Hon Peter	Wray, Jimmy
Short, Clare	Wright, Dr Tony
Simpson, Alan	Young, David (Bolton SE)
Skinner, Dennis
Smith, Andrew (Oxford E)	Tellers for the Ayes:
Smith, Chris (Isl'ton S & F'sbury)	Mr. Eric Clarke and Mr. John Cummings.
Smith, Llew (Blaenau Gwent)

NOES
Ainsworth, Peter (East Surrey)	Brown, M (Brigg & Cl'thorpes)
Alison, Rt Hon Michael (Selby)	Browning, Mrs Angela
Allason, Rupert (Torbay)	Bruce, Ian (South Dorset)
Amess, David	Budgen, Nicholas
Arbuthnot, James	Burt, Alistair
Arnold, Jacques (Gravesham)	Butcher, John
Ashby, David	Butler, Peter
Atkins, Rt Hon Robert	Butterfill, John
Atkinson, Peter (Hexham)	Carlisle, John (Luton North)
Baker, Rt Hon Kenneth (Mole V)	Carlisle, Sir Kenneth (Lincoln)
Baker, Nicholas (North Dorset)	Carrington, Matthew
Baldry, Tony	Carttiss, Michael
Banks, Matthew (Southport)	Cash, William
Banks, Robert (Harrogate)	Channon, Rt Hon Paul
Bates, Michael	Chapman, Sir Sydney
Batiste, Spencer	Churchill, Mr
Beggs, Roy	Clappison, James
Bellingham, Henry	Clark, Dr Michael (Rochford)
Bendall, Vivian	Clarke, Rt Hon Kenneth (Ru'clif)
Beresford, Sir Paul	Clifton-Brown, Geoffrey
Biffen, Rt Hon John	Coe, Sebastian
Body, Sir Richard	Colvin, Michael
Bonsor, Sir Nicholas	Congdon, David
Booth, Hartley	Coombs, Anthony (Wyre For'st)
Boswell, Tim	Coombs, Simon (Swindon)
Bottomley, Peter (Eltham)	Cope, Rt Hon Sir John
Bottomley, Rt Hon Virginia	Cormack, Sir Patrick
Bowden, Sir Andrew	Couchman, James
Bowis, John	Cran, James
Boyson, Rt Hon Sir Rhodes	Currie, Mrs Edwina (S D'by'ire)
Brandreth, Gyles	Curry, David (Skipton & Ripon)
Brazier, Julian	Davies, Quentin (Stamford)
Bright, Sir Graham	Davis, David (Boothferry)
Brooke, Rt Hon Peter	Day, Stephen

Deva, Nirj Joseph	Jackson, Robert (Wantage)
Devlin, Tim	Jenkin, Bernard
Dorrell, Rt Hon Stephen	Jessel, Toby
Douglas-Hamilton, Lord James	Johnson Smith, Sir Geoffrey
Dover, Den	Jones, Gwilym (Cardiff N)
Duncan, Alan	Jones, Robert B (W Hertfdshr)
Duncan Smith, Iain	Key, Robert
Dunn, Bob	King, Rt Hon Tom
Durant, Sir Anthony	Kirkhope, Timothy
Dykes, Hugh	Knapman, Roger
Eggar, Rt Hon Tim	Knight, Mrs Angela (Erewash)
Elletson, Harold	Knight, Rt Hon Greg (Derby N)
Emery, Rt Hon Sir Peter	Knight, Dame Jill (Bir'm E'st'n)
Evans, David (Welwyn Hatfield)	Knox, Sir David
Evans, Jonathan (Brecon)	Kynoch, George (Kincardine)
Evans, Nigel (Ribble Valley)	Lait, Mrs Jacqui
Evans, Roger (Monmouth)	Lamont, Rt Hon Norman
Evennett David	Lang, Rt Hon Ian
Faber, David	Lawrence, Sir Ivan
Fabricant, Michael	Legg, Barry
Fenner, Dame Peggy	Lennox-Boyd, Sir Mark
Field, Barry (Isle of Wight)	Lester, Sir James (Broxtowe)
Fishburn, Dudley	Lidington, David
Forman, Nigel	Lilley, Rt Hon Peter
Forsyth, Rt Hon Michael (Stirling)	Lloyd, Rt Hon Sir Peter (Fareham)
Forth, Eric	Lord, Michael
Fowler, Rt Hon Sir Norman	Lyell, Rt Hon Sir Nicholas
Fox, Dr Liam (Woodspring)	MacGregor, Rt Hon John
Fox, Rt Hon Sir Marcus (Shipley)	MacKay, Andrew
Freeman, Rt Hon Roger	Maclean, Rt Hon David
French, Douglas	McLoughlin, Patrick
Fry, Sir Peter	McNair-Wilson, Sir Patrick
Gale, Roger	Maitland, Lady Olga
Gallie, Phil	Malone, Gerald
Gardiner, Sir George	Mans, Keith
Garnier, Edward	Marland, Paul
Gill, Christopher	Marlow, Tony
Gillan, Cheryl	Marshall, John (Hendon S)
Goodlad, Rt Hon Alastair	Marshall, Sir Michael (Arundel)
Goodson-Wickes, Dr Charles	Martin, David (Portsmouth S)
Gorman, Mrs Teresa	Mates, Michael
Gorst, Sir John	Mawhinney, Rt Hon Dr Brian
Grant, Sir A (SW Cambs)	Mayhew, Rt Hon Sir Patrick
Greenway, Harry (Ealing N)	Mellor, Rt Hon David
Greenway, John (Ryedale)	Merchant, Piers
Griffiths, Peter (Portsmouth, N)	Mills, Iain
Grylls, Sir Michael	Mitchell, Andrew (Gedling)
Hague, Rt Hon William	Mitchell, Sr David (NW Hants)
Hamilton, Rt Hon Sir Archibald	Moate, Sir Roger
Hamilton, Neil (Tatton)	Molyneaux, Rt Hon Sir James
Hampson, Dr Keith	Monro, Rt Hon Sir Hector
Hanley, Rt Hon Jeremy	Montgomery, Sir Fergus
Hannam, Sir John	Needham, Rt Hon Richard
Hargreaves, Andrew	Nelson, Anthony
Haselhurst, Sir Alan	Neubert, Sir Michael
Hawkins, Nick	Newton, Rt Hon Tony
Hawksley, Warren	Niecholls, Patrick
Hayes, Jerry	Nicholson, David (Taunton)
Heald, Oliver	Norris, Steve
Heathcoat-Amory, Rt Hon David	Oppenheim, Phillip
Hendry, Charles	Ottaway, Richard
Hicks, Sir Robert	Page, Richard
Higgins, Rt Hon Sir Terence	Paice, James
Hill, Sir James (Southampton Test)	Patnick, Sir Irvine
Hogg, Rt Hon Douglas (G'tham)	Patten, Rt Hon John
Horam, John	Pattie, Rt Hon Sir Geoffrey
Hordern, Rt Hon Sir Peter	Pawsey, James
Howard, Rt Hon Michael	Peacock, Mrs Elizabeth
Howell, Rt Hon Davit (G'dford)	Pickles, Eric
Howell, Sir Ralph (N Norfolk)	Porter, Barry (Wirral S)
Hughes, Robert G (Harrow W)	Porter, David (Waveney)
Hunt Rt Hon David (Wirral W)	Portillo, Rt Hon Michael
Hunt, Sir John (Ravensbourne)	Powell, William (Corby)
Hunter, Andrew	Rathbone, Tim
Hurd, Rt Hon Douglas	Redwood, Rt Hon John
Jack, Michael	Richards, Rod

Riddick, Graham	Taylor, John M (Solihull)
Rifkind, Rt Hon Malcolm	Temple-Morris, Peter
Robathan, Andrew	Thomason, Roy
Roberts, Rt Hon Sir Wyn	Thompson, Sir Donald (C'er V)
Robertson, Raymond (Ab'd'n S)	Thompson, Patrick (Norwich N)
Robinson, Mark (Somerton)	Thornton, Sir Malcolm
Roe, Mrs Marion (Broxbourne)	Thurnham, Peter
Rowe, Andrew (Mid Kent)	Townend, John (Bridlington)
Rumbold, Rt Hon Dame Angela	Townesnd, Cyril D (Bexl'yh'th)
Sackville, Tom	Tracey, Richard
Sainsbury, Rt Hon Sir Timothy	Tredinnick, David
Scott, Rt Hon Sir Nicholas	Trend, Michael
Shaw, David (Dover)	Trotter, Nevile
Shaw, Sir Giles (Pudsey)	Twinn, Dr Ian
Shephard, Rt Hon Gillian	Vaughan, Sir Gerard
Shepherd, Sir Colin (Hereford)	Viggers, Peter
Shersby, Sir Michael	Waldegrave, Rt Hon William
Sims, Sir Roger	Walden, George
Skeet, Sir Trevor	Walker, Bill (N Tayside)
Smith, Tim (Beaconsfield)	Waller, Gary
Soames, Nicholas	Ward, John
Speed, Sir Keith	Wardle, Charles (Bexhill)
Spencer, Sir Derek	Waterson, Nigel
Spicer, Sir James (W Dorset)	Watts, John
Spicer, Sir Michael (S Worcs)	Wells, Bowen
Spink, Dr Robert	Whitney, Ray
	Whittingdale, John
Spring, Richard	Widdecombe, Ann
Sproat, Iain	Wilkinson, John
Squire, Robin (Hornchurch)	Willetts, David
Stanley, Rt Hon Sir John	Wilshire, David
Steen, Anthony	Winterton, Mrs Ann (Congleton)
Stephen, Michael	Winterton, Nicholas (Macc'f'ld)
Stern, Michael	Wolfson, Mark
Stewart, Allan	Wood, Timothy
Streeter, Gary	Yeo, Tim
Sumberg, David	Young, Rt Hon Sir George
Sweeney, Walter
Sykes, John	Tellers for the Noes:
Tapsell, Sir Peter	Mr. Derek Conway and Mr. Simon Burns.
Taylor, Ian (Esher)

Amendment accordingly negatived.

Main Question put and agreed to.

Resolved, That this House welcomes the publication of the Government's latest forecast, which shows growth strengthening, prosperity rising, inflation falling to within the Government's target of 2½ per cent. or less, and a further decline in Government borrowing; notes that the United Kingdom has a lower unemployment rate, a higher proportion of its people in work and a lower burden of tax and public spending than any other major European country; and recognises that the favourable economic outlook reflects the success of the Government's policies to promote a modem, deregulated, dynamic and more competitive economy.