§ Mr. Peter Lilley (Hitchin and Harpenden)
Yesterday's Budget was the first that I have heard in which not a single measure introduced by a Chancellor of the Exchequer was costed. He gave no idea where the extra spending that he announced will come from. Overnight, we have been able to examine the small print and determine where the costs will fall. There will be a large cost, and it will fall on ordinary families and on businesses—which, ultimately, will have to pass on that cost to consumers, or reduce the number of those they employ.
The Chancellor pretended that we would have lots of goodies at no cost. He tried the oldest trick in the book: pretending that there is such a thing as a free lunch. What he really gave us was a menu without prices. I steer clear of establishments with such practices, because, although their presentation may be top class, one gets very small portions and pays very large bills. In paying the bill for the Chancellor's menu, we shall discover that he has, once again, betrayed the Prime Minister's promise to the British people not to impose any taxes other than the windfall tax.
Before the general election, the Prime Minister promised Birmingham business men:We have no plans to increase tax at all.He told the BBC:What I have said is the programme of the Labour party, and that does not imply any tax increases at all.Now—as we saw in last week's debate—Ministers are trying to airbrush those pledges out of the picture. They want us to think that the only pledge that matters is their narrow promise not to raise income tax rates. So when the Prime Minister made vows to his party conference, 1309 we should have taken no notice of him? When he gave unequivocal answers to the media, they counted for nothing? We should have read his lips, and seen "lots more taxes"? What arrogance from the Government. It tells us an awful lot about new Labour. Although new Labour thinks that words are cheap, British taxpayers will discover that believing Labour's words will cost them dear.
This Budget is new Labour's second tax-raising Budget. It raises taxes by another £2 billion a year, on top of the massive tax rises introduced in last July's Budget.
If Ministers are so keen—as they were last week—to direct us to the text of their manifesto pledges, will they tell us where in their manifesto they promised to cut the married couple's tax allowance? Perhaps in the section entitled "Supporting the Family"? Where did they promise to clobber businesses with almost £20 billion in extra taxes? In the section they headed "Promoting Enterprise"? Where did they spell it out that they would cut mortgage interest tax relief? Was it in the section on home ownership? Where did they spell out the increase in employers' national insurance charges for employees earning above the average wage? Where did they spell out three petrol duty hikes in 16 months? Where in their manifesto did they say that they plan to tax child benefit for upper-income families?
§ Ms Joan Ryan (Enfield, North)
Does the right hon. Gentleman agree that BP's announcement that it is reducing petrol prices in rural areas by a further 2p—totalling a 4p reduction in the past month—clearly shows that it approves of the Budget and is responding to the Chancellor's challenge to work with us in helping rural areas?
§ Mr. Lilley
That is a bit rich. Although the Government have hiked petrol tax three times in the past 15 or 16 months, Ministers claim credit for oil companies absorbing some of those increases because of low oil prices. They claim credit for that? The Government insult rural motorists by offering £50 million over three years, to compensate for almost £1 billion in extra taxation. Come off it. Read out something else from the brief next time.
Yesterday, the Chancellor may not have spelt out the cost of any of his policies, but his Red Book makes it clear. It shows that the share of national income taken in tax is set to increase. By the end of this Parliament, he will be taking nearly 3 per cent. more of national income in tax. That is the cost of Labour's tax programme; that is the cost of its stealth taxes. Public finances are strong, but because they are strong and doing even better than we expected, it should be possible to get back to a balanced Budget with fewer tax increases, not by adding to them as the Chancellor is doing.
The reason Labour is having to put up taxes is that it is breaking another pledge: its promise to cut the cost of the welfare state. Before the election, the then leader of the Labour party used to trail around editors' offices, particularly of right-wing newspapers, saying that, just as it took a Republican President such as Richard Nixon to recognise communist China, and just as it took a white President such as Pik Botha to do a deal with the 1310 African National Congress—[HON. MEMBERS: "It was P. W. Botha."] Well, whoever did it. The then Labour party leader said that it would take a Labour Prime Minister to cut the size of the social security bill.
Many editors thought that the then Labour party leader meant what he said. Indeed, Labour made cutting the social security bill a specific pledge in its manifesto. As part of its top pledge, it said that it would decrease the share of national income spent on the bills of economic and social failure. Labour said that it would cut the size of the welfare state, but since the election, every change that the Government have initiated in the welfare state—not those that they inherited from me—has involved increasing the cost of welfare; increasing spending on the welfare state, not reducing it.
The Red Book shows that yesterday's Budget will add another £10 billion to the cost of welfare this Parliament. That destroys Labour's promise and its claim that its programme could be financed without increasing taxes. Instead of reducing social security spending, Labour is increasing it. That is why people are having to pay more tax.
The Government do not even expect the welfare changes that they have introduced remotely to pay for themselves. It is clear from their figures that they expect very few extra people to be enticed back to work by the changes that they have made. I invite the Chancellor to tell us how many people he expects to be taken off the unemployment register as a result of the changes that he announced yesterday. Either he does not know or the number is so small that he will not tell. It is certainly invisible in the accounts that he published yesterday.
If unemployment is higher in two years' time than it is now, will the Chancellor admit that all his programmes have failed? We said—we have said all along—that we would support the Government if they brought forward the right welfare reforms. If they tackle the poverty trap, reduce the number of people who are dependent on benefit and bear down on the costs of the welfare state, they will certainly deserve the support of the whole House. This Budget does nothing of the kind. It increases spending, extends the number of people who are dependent on benefits and lumbers more people further up the income scale with greater disincentives to work.
The Red Book shows that the number of families facing a marginal deduction rate of more than 60 per cent. will be increased by 250,000 as a result of the changes that the Government have introduced. Therefore, more people will face greater disincentives, not fewer. As the Financial Times pointed out this morning in its analysis of the Government's child care credit:the assistance tapers so that help will be given for childcare costs for one child in families with incomes up to £22,000 and for two or more children in households with incomes up to £30,000".The Government are bringing households with such income into the benefits system. The truth is that extending help up the income scale to people with good jobs will not get people into work.
People can get off welfare and into work only if there are jobs for them to go to. Our reforms succeeded in creating jobs hand over fist. Before the election, unemployment had been falling month in, month out for more than four years. That momentum has continued. The good news today is that unemployment is down again, as the continued consequence of our reforms. 1311 The previous Government bequeathed a golden economic legacy of low inflation, steady growth, rising living standards and falling unemployment, which has come down to 5 per cent.—about half the level of France and Germany.
The new Government are betraying that golden economic legacy, putting this country's economic achievements at risk. After just 10 months in office, they have already hit pension funds with a £5-billion-a-year pensions tax, which means £5 billion a year less for British industry to invest. They have hit industry with a new quarterly payments regime that will cost companies £2 billion a year during this Parliament. In aggregate, industry will have to pay nearly £20 billion extra in taxes during this Parliament.
The Government have reduced the rate of corporation tax, but they have increased the burden falling on British companies. Businesses have been hit with higher national insurance contributions for employees earning more than the average level. That will hit high-tech companies, which the Government claim to want to promote. Because the Government have taxed business and savings, interest rates have had to go higher, driving up the exchange rate and hitting our exports.
Almost every economic decision that the Government have taken has helped to push our manufacturing sector towards the brink of recession. For five months in a row, output from manufacturing has fallen.
§ Mr. Lilley
Doubtless the hon. Gentleman wants to tell us that that is what he was elected to achieve.
§ Mr. Davies
Does the right hon. Gentleman agree that, arithmetically, only about a quarter of the exchange rate is explained by relative interest rates? Does he further agree that the real reason for the high value of the pound is the uncertainty over the euro—the fact that the drachma decided to come in and that nobody knows what the rate will be? The fact that people are investing in sterling is a testimony to the prudent policy of my right hon. Friend the Chancellor. People know that investing in sterling is an investment in certainty and stable policies for the future.
§ Mr. Lilley
The hon. Gentleman made a brave try, but he is in difficulty because he does not know his Chancellor's policy on the exchange rate. We also do not know the Chief Secretary's policy. He was asked five times on "Newsnight" last night whether he thought that the exchange rate was at the right level. The Chancellor has said that he wants a stable pound. Does he want it stable at the present level, or does he want mobile stability?
Whatever the Government say, their friends in the Trades Union Congress have become disillusioned with their policy. Their analysis says:Because of the combined impact of the exchange rate, higher interest rates and tight public spending controls, unemployment will start to rise by the end of this year.The Conservatives commissioned the Centre for Economics and Business Research, which has one of the best track records in recent years for forecasting the performance of the economy, to calculate the likely 1312 performance resulting from the combined effects of the two Budgets that the Chancellor has introduced compared with what would have happened under unchanged Conservative policies. It concludes that the main impact has been on the level of investment, which has been lowered by the taxes on business. As a result, the economy will grow more slowly and unemployment will be 100,000 a year higher under Labour than our policies would have achieved.
Thanks to decisions taken by our party in government, Labour inherited a buoyant economy that was generating increased tax revenues, taking people off welfare and helping to reduce public expenditure. That means that there was no need for the extra taxes that Labour has thrust on businesses and ordinary people. What it has done will damage investment and enterprise and will jeopardise our golden economic legacy.
As well as arranging for that analysis of the economic impact of the Chancellor's policies, we commissioned a study of the impact on individual households of the changes introduced in this Budget and the previous one. It shows that the Chancellor got his figures wrong. In the Red Book, a table shows that almost all households are better off as a result of this Budget—although the Government had to publish a corrigendum, showing that all the figures that they published were too rosy. Even the corrected figures are wrong, because they take account only of direct taxes. The Labour Government think that people do not have a car, do not drink, do not smoke, do not have a pension and do not save: all those ways in which this and the previous Budget hit ordinary households were not taken into account.
We asked the experts to look at a typical family with a couple of children and a mortgage, who contribute to a personal pension and own a car; we shall assume that they are not smokers, because they are a virtuous couple. The study showed that, next year, as a result of the changes introduced by the Chancellor, every household at all levels of income will be worse off. In the year after—when his increase in child benefit and the change to working families tax credit comes into force—only households with an income below £16,000 will be better off. All households of that type with an income above £16,000 will be worse off, as a result of the combined effect of direct and indirect taxes, increased by the Chancellor.
One thing we have learnt about the Chancellor—from books, of course, and from leaks from No. 10—is that he suffers from a psychological flaw. That flaw seems to inhibit him in consulting people about his policies before he announces them. He does not even consult his own officials sufficiently. We found that in his first Budget—he clearly had not consulted in detail about the plan that they cooked up in opposition, to scrap advance corporation tax credits. The Government did not realise that that meant abolishing foreign income dividends and, in turn, abolishing ACT and, in turn, that they would have to replace it with quarterly payments. They then had to come back yesterday and revise the system, because it was putting too great a squeeze on business. That was muddle enough.
The Government also had the muddle on individual savings accounts and abolishing personal equity plans and tax-exempt special savings accounts. The original proposals were a dog's breakfast, which would retrospectively have hit the most prudent the hardest. We 1313 may not have won the vote in the debate the week before last, but we won the argument. We could see from the expressions on the faces of Ministers that the Government would have to come back with a changed policy. It may be better than what they were proposing last November, but as the Institute for Fiscal Studies pointed out today, the Government could clearly have achieved almost all of that change by adjusting TESSAs, to allow people to take out their money sooner than was previously the case.
§ Mr. Gerald Howarth (Aldershot)
Was not the original proposal indicative of Labour's total hostility to wealth creation? The Government have done a U-turn because of the arguments promoted by my right hon. Friend the shadow Chancellor and because their focus groups told them that the proposals were not popular. This is not a policy change out of principle—it is a policy change because they know that the proposal is unpopular in the country.
§ Mr. Lilley
My hon. Friend is right, but the damage has been done. The Government have revealed what they want to do to people's savings. That destroys trust, and it means that the likelihood of people saving as much in these ways in future is limited, because they fear that the Labour party might come back and change the system retrospectively, to damage them once again. That is why the Government forecast in the Red Book that the savings ratio is set to fall hard and fast in the years ahead. They themselves have undermined the savings culture in this country.
The Chancellor's failure to consult is revealed by more than the muddle arising from the changes to ISAs; he clearly has not thought out all the consequences of the move from family credit to working families tax credit. He recognises that, in 500,000 households, the woman could on average lose £40 a week to the benefit of the breadwinner into whose pay packet the money will be paid.
Although people will be given a choice about how the money will be paid, the Chancellor does not say how that choice will be exercised. He says that the choice is for the household, but will it be for the man or the woman? It will be a new source of discord for low-income families. Will he tell the House what will happen if they cannot agree? In her speech to the Fawcett Society, the Financial Secretary was unable to say what would happen, but perhaps she can tell us now. This is another matter about which there has been no consultation because of the Chancellor's psychological flaw.
§ Mr. Lilley
Perhaps the hon. Lady was consulted—I believe that she was recently married, so she will be able to tell the House how she will reach agreement with her spouse.
§ Yvette Cooper
If the right hon. Gentleman dislikes the working families tax credit so much, will he say whether a future Conservative Government would abolish it?
§ Mr. Lilley
The question is whether the Labour Government will fulfil the promises in their manifesto 1314 last year, not what will be in our manifesto in four years. They promised that they would reduce the cost of the welfare state and not plough further billions of pounds into it.
We also want to know whether the Minister for Welfare Reform still believes what he said when he commented on the Conservative Government's proposal to pay family credit through the wage packet. In a reasoned and thoughtful contribution, he said:Whatever scheme is enacted, if the parents behave as we hope we ourselves would behave, it would be irrelevant. But we are concerned with that minority—it may or may not be substantial—of families in which money for the children is not paid over to the wife. We must draw on our experience to decide whether it is more likely that the money will go where Parliament wishes it to go—towards the welfare of children—if it is paid to the mothers rather than the fathers. I believe from my experience and that of many other organisations that more money will get to children in those families where something is wrong if we pay the money to mothers rather than fathers.The House has a right to know whether the Minister for Welfare Reform has altered his view on that. Conservative Members realise that the problems exist—we listen to reason and do our homework—but the Chancellor has not learnt from experience.
Again, on the proposal to tax child benefit for those on high pay, the Chancellor is too confused and muddled to spell out the details. He rushes to say that the proposal will be implemented, but he does not know how that will be done. I tell him that he faces some serious dilemmas. If he decides to tax on the basis of the income of the whole household, he must do away with independent taxation and take into account the joint income of husband and wife. However, if he does not do that, and taxes only the recipient of the child benefit—usually the mother—that will be very unfair, as modestly paid women who receive the benefit will have to pay tax on it because they are working, whereas the wives of rich husbands will not pay any tax on it, and will be given it in full.
The Chancellor hinted at a third option, whereby child benefit will be taxed only if one or other member of the household is liable to the 40 per cent. rate of tax. That infringes the principle of independent taxation and will prove unfair because, unlike at present, the couple will have to reveal to one another which tax band they are in.
If the Chancellor insists on making those whose household contains one or more members who are liable to tax at 40 per cent. pay a tax on their child benefit, a couple with a combined income of £50,000 might not have to pay, while someone with an income of £30,000 would. How can that be fair?
§ Mr. Robert Sheldon (Ashton-under-Lyne)
The right hon. Gentleman referred to child benefit. I had something to do with its introduction to replace the child tax allowances. That change was undertaken on the basis of an agreement between our two parties that child benefit would be uprated in the same way as the allowances were. The previous Government broke that promise, and the new Government have tried to restore some of the advantages that we—and, indeed, the Opposition of the day—foresaw.
§ Mr. Lilley
That is a fair enough point. The right hon. Gentleman played a distinguished part, and he will remember that child benefit replaced a tax allowance. Is it 1315 not extraordinary to tax a tax allowance? That is a strange proposal. It is the sort of idea that the Chancellor cooks up in the Paymaster General's Park lane flat or in one of his country retreats in Italy or France, without consulting officials.
§ The Secretary of State for Education and Employment (Mr. David Blunkett)
Perhaps the right hon. Gentleman will recall for us the attitude that his party took towards joint and several liability for men and women under the poll tax, and tell us what action he took as Secretary of State for Social Security. Perhaps he will tell us whether he is for or against the proposal in the Budget.
§ Mr. Lilley
We abolished the poll tax and replaced it with the council tax. The Government have introduced the biggest rise ever in council tax. Before the general election, the Prime Minister—
§ Mr. Deputy Speaker (Mr. Michael J. Martin)
Order. Both right hon. Gentlemen must sit down. The right hon. Member for Hitchin and Harpenden (Mr. Lilley) is not going to give way.
§ Mr. Lilley
I did not want to cause you to rule out of order a long debate on the poll tax, Mr. Deputy Speaker.
Before the general election, the Prime Minister tried to convince the British people that Labour's days of redistributive politics were long gone, but the more one looks at the Budget, the more its redistributive nature becomes clear. Perhaps the title of the Red Book, "New Ambitions for Britain", provides a clue.
Yesterday, the Prime Minister was sitting on the Front Bench. His ambition was to win the general election. Standing at the Dispatch Box was the Chancellor. His ambition is to win the leadership of the Labour party. He has his own agenda and needs to convince Labour Back Benchers that he is on their side. That is why the Budget conflicts with the Prime Minister's promises: the Prime Minister made promises to appeal to the British electorate, and the Chancellor breaks them to appeal to the Labour selectorate.
The Government believe in slick presentation and think that it is more important than keeping their promises. They think that they can tell us that black is white, spending is saving and taxes are good for us. They say that they want to encourage pension provision and they put a £500-million-a-year tax on pension funds. They say that they are the friends of business and they put nearly £20 billion of tax on business. They say that they are really country folk at heart and then slap the best part of £1 billion of extra taxes on motor fuel and gasoline, and believe that they can buy off rural anger by insulting people with £50 million for rural buses over three years. They say that this is a Budget for women and children, but they create a situation in which up to 500,000 women and children could lose £40 a week.
This Budget betrays the Government's pledges to middle Britain, it betrays their promise to reduce spending on the welfare state and it betrays the golden economic legacy that we bequeathed them. The Chancellor may 1316 have seen the waving Order Papers yesterday, but the people of this country will see the bills of his Budget landing on their doorstep in the months and years to come.
§ 5.5 pm
§ The Secretary of State for Education and Employment (Mr. David Blunkett)
The official Opposition seem to have gone into a paradox and a paradigm of denial. (HON. MEMBERS: "Which?"] It is both. First, the right hon. Member for Hitchin and Harpenden (Mr. Lilley) cannot remember the poll tax. Then he can remember only that the Conservative Government replaced it, as though they had inherited it from the Opposition. Now, having forgotten the introduction of the poll tax, the Opposition have forgotten the instruments with which they imposed it. They followed that up this afternoon with the most wonderful denial of all—they pretended that we started the process of reducing the married couples' allowance and mortgage interest relief at source, when it was them. Then they invent a new research project in 24 hours that proves that the British people are not on average £250 per family better off, with the lowest 20 per cent. on average £500 better off, but that everyone is worse off.
Suddenly, all the things that happened yesterday are no more. This is an entirely new political stance. It is not simply a caricature of the Government's position, but a terrible dilemma—waking up in the night, sweating and thinking, "I wish I had introduced those policies," and then remembering that one is in opposition and has to go on the "Today" programme to denounce them. Is the right hon. Gentleman against the policies or in favour of them? Is he envious of them or contemptuous? We are not absolutely sure.
§ Mr. Blunkett
No doubt during the debate the hon. Gentleman will be able to tell us exactly what the shadow Chancellor actually believes in. is he in favour of the cut in corporation tax? Is he in favour of the cut in corporation tax for small companies and the cut in employers' national insurance for the lower paid and for all employees? Is he in favour of the cut in capital gains tax on long-term investment? Is he in favour of the cut that the Chancellor has already made in value added tax on fuel?
§ Mr. Gibb
Of course the Opposition are in favour of the cut in corporation tax. It was the Conservative party that brought down the rate of corporation tax from 52 to 33 per cent. However, we are against the big rises in the burden of corporation tax that this Government have imposed on business in their two Budgets since 1 May.
§ Mr. Blunkett
As my right hon. Friend the Chancellor pointed out in his brilliant presentation yesterday, we have cut corporation tax to its lowest ever level. So this not hearing, not thinking, not seeing and then denying seems to be becoming a terrible habit. 1317 Let us face it industry and commerce know better about what they feel and think than Opposition Members. That is why the British Chambers of Commerce have said:This is a valuable Budget for enterprise and employment. It is both prudent and positive.I will give way to the right hon. Member for Charnwood (Mr. Dorrell) so that he can explain why he does not believe that they are right.
§ Mr. Stephen Dorrell (Charnwood)
The Secretary of State wants a little clarity. I wonder whether he can clear up one thing that was left unclear at the end of yesterday. During the Budget speech, the Chancellor said first that an extra £100 million would be allocated to tackle the skills gap. Later, he said that an "additional £250 million" would be allocated for education—those are his words, not mine. Arithmetic suggests that that would be £350 million for the Secretary of State's Department. However, when we consult the Red Book in the name of the Financial Secretary, we see that the Secretary of State will get not £350 million as the Chancellor announced at 4 pm yesterday, but £250 million. I would be grateful if the Secretary of State could clarify whether the Chancellor or the Financial Secretary is right.
§ Mr. Blunkett
One thing that is certain is that it is £250 million more than the Opposition would have allocated. I am always delighted to give way, because I am not afraid of the Opposition in the way that they appear to be afraid of us. It is £250 million for education and skills that will be spent in addition to the £2.25 billion that my right hon. Friend the Chancellor has earmarked for education since the general election. He has been able to do that precisely because, as the shadow Chancellor said this afternoon, we have done better than the Opposition expected. That is praise indeed, and I hope that he will not be churlish. He should congratulate us and say that he is delighted with our performance so far, and that they are finding it difficult to lay a finger on us or undermine what we are doing.
The bulk of the British people would want to congratulate us on the Budget. After all, its three key pillars are: work—making sure that people are in work and that work pays; enterprise—enabling small, medium and large businesses to flourish; and reinforcing and supporting children and the family.
§ Mr. John Townend (East Yorkshire)
If the burden of taxation on companies was coming down year on year, I would congratulate the right hon. Gentleman, but will he confirm that there will no benefit from reductions in taxation until after 2000? Page 18 of the Red Book shows that companies will pay £1.6 billion extra in 1999–2000 as a result of the quarterly payment of corporation tax. In 2001, they will pay another £2 billion, and only £700 million will be offset by corporation tax reductions. Even in that year, the overall burden of corporate taxation will rise by £1.3 billion.
§ Mr. Blunkett
I did not hear the hon. Gentleman denounce the British Chambers of Commerce. I think that he may be the chairman of a Back-Bench 1318 committee; if so, he understands the system that applies in other developed nations. The introduction of a phased quarterly payment system inevitably means a phased-in approach and a carry-over point.
The reason why business and commerce are enthusiastic about what we are doing is precisely because the Chancellor is underpinning a long-term strategy to ensure that this country will never again have the boom-bust that the previous Government inflicted on us. A so-called boom 10 years ago led to the most enormous bust in term of people's jobs, livelihoods, homes and fears, and the large-scale unemployment from which we are only now recovering.
I would have hoped that the Conservatives would congratulate us on reaching the level of unemployment that we bequeathed to them. The new unemployment figures today show a further 14,000 off the claimant count and that we have got back to the position of June 1980. Some 150,000 people gained jobs in the final quarter of last year, an acceleration of what was happening before the general election. We will support long-term policies to ensure that that continues.
I want to ask the shadow Chancellor some simple questions, and I will be happy to give way to him if he wants to answer. Does he support the measures that we have taken to make work pay? Does he support the working families tax credit scheme and child care disregard, about which my right hon. Friend the Secretary of State for Social Security will say more tomorrow? Does he support our measures to ensure that the taper is gentler, so that people do not lose out when they take jobs? Two thirds of people who experience the 70 per cent. taper will be better off because of the measures taken yesterday which will genuinely make work pay. Above all, does he support the new deal, which is all about preparing people for the world of tomorrow and equipping them with confidence, skills, social experience and the expectation of having a job?
I ask those questions because I understand that, in an interview in The Independent on Sunday the shadow Chancellor was asked such questions and, in talking about the Conservatives' attitude, said that adebate at this point would be bad for our party.I do not know whether it is bad for his party but I should have thought that the new deal was good for young people.
To paraphrase the television advert, there may be the odd person who is mad enough to be against the new deal. There may be a couple of people—the Leader of the Opposition and the shadow Chancellor—who are misguided enough to be against it. When they get to a sect of 10 they may think that there is a cult against it. When they get beyond the membership of the Tory party, say 1,000, it is such a movement that it is difficult to be against it. When there are 100,000, it is a revolution and the Tory party will change its mind to be in favour of it.
The shadow Chancellor must come clean. Will he, in a fortnight's time, take on the challenge? Will he or the Conservative party in Smith square take on a new deal youngster? If they took on rehabilitating the Leader of the Opposition, they would have a lifetime job—no danger of losing it after only six months.
§ Mr. Geoffrey Clifton-Brown (Cotswold)
Will the right hon. Gentleman confirm that the new deal will be 1319 paid for entirely by a one-off windfall tax, and that the number of long-term unemployed has decreased greatly in the past six months? How long does he expect that reduction to go on for, and what will pay for the new deal when unemployment starts to rise?
§ Mr. Blunkett
I had hoped that the hon. Gentleman would welcome the challenge and say that he would take someone on in his office as a gesture of good will. He makes a serious point, which I shall answer. Of course the new deal is being paid for from the windfall tax; everyone knows that. The shadow Chancellor condemned the windfall tax. On 3 July last year, he suggested that the windfall tax would either be bad for consumers because it would put prices up or bad for shareholders because, if the regulator held prices down, shares would fall. He was wrong on both counts. Prices have fallen in each of the affected industries, and the share price has gone up by 23 per cent. The FTSE index is now at 5,800–1,000 above what it was on 3 July when he made that suggestion.
The intention is to ensure that people are prepared for long-term jobs and have the social skills needed. That is why the Chancellor yesterday announced a series of new measures that will enable us to carry our programme forward, making it possible to ensure that work pays but also making it possible for us to extend what we are doing so that more people can benefit from the new deal. Another £100 million will be devoted in the next two years to ensuring that 70,000 people aged over 25 will have the sort of opportunities available to those under 25. We are piloting those programmes to ensure that people can learn from them and gain skills.
There is £50 million to extend the gateway. Whatever the Opposition are against, they should never be against preparing people for meaningful work through social and educational skills. A substantial part of the extra £50 million will be used to make it possible to help those in the greatest difficulty, those facing particular problems in their lives. They would be expected to be dependent on the welfare state unless their problems are overcome. Inevitably, they would be long-term dependent on the welfare state unless we invested in the gateway.
For the partners of those who receive jobseeker's allowance we have allocated an extra £60 million to ensure that they have the opportunities that were previously denied them. Couple that with the announcements that my right hon. Friend the Secretary of State for Social Security will make later this week in respect of child care. Couple that with the 12 pilot programmes—six projects from September this year and a further six a few months later—that we are initiating for disabled men and women to ensure that they can get back to work and have an opportunity to take advantage of the disregard brought in by my right hon. Friend the Chancellor.
All that is a positive programme of change for the future. It secures the long-term gains that my right hon. Friend the Chancellor has already set in place through his changes to the Bank of England and with his Budget of 2 July. It is a long-term programme for a long-term Government ensuring that the economy of this country is in safe hands and that the stability we seek provides stable growth with low inflation. That is a prize worth having, and it is a prize which all of us on the Labour Benches will work to achieve.
§ Mr. John Townend (East Yorkshire)
The Budget lives up to the reputation of the Government, in that it treats the House of Commons with contempt. At one time, the contents of the Budget were revealed first to the Cabinet and then to the House of Commons. Now, the political spin doctors receive the details first and we Members of Parliament read them in the press. That is done to soften us up for bad news on Budget day, but what really annoys me is that the details are not even spun with truth—they think that in that way, when the Budget is not as bad as expected, middle England will be relieved and welcome it.
It would be churlish of me not to acknowledge that I agree with some of the contents of the Budget. We all accept that being able get more money on benefit than in work is wrong; we all want the poverty trap to be reduced and eliminated. I have always strongly believed in the concept of a balanced Budget, so I welcome the Chancellor's aspirations in that respect.
However, those are as yet only aspirations: Labour Members must not forget that, when the Conservatives were in office and Lady Thatcher was Prime Minister, we achieved a balanced Budget—indeed, we had a substantial surplus for several years. It was only when Lord Lawson started to shadow the deutschmark at DM3 to the pound and my right hon. Friend the Member for Huntingdon (Mr. Major) joined the exchange rate mechanism that things started to go radically wrong.
I remind Labour Members that the current Chancellor was very keen that we should join the ERM, and when we came out of it, he called for us to rejoin it within a matter of weeks. I should be happier if I thought that the Chancellor believed in a balanced Budget for its own sake, but I have a sneaky feeling that his desire to join economic and monetary union and the single currency is the driving force.
My other major criticism is that the Chancellor's success in reducing the deficit is not the result of taking tough decisions and reducing the excessive level of public expenditure in this country that we have borne for some years, but the result of increasing the overall burden of taxation. Labour is reverting to type: it is, and always has been, a high-tax party. As my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) pointed out, the secret is given away on page 119 of the "Financial Statement and Budget Report", which shows that, in the last year of the Conservative Administration, the total tax take with social security contributions was 36 per cent. of GDP, yet now the graph is going up and up, and the projections show that it will reach nearly 39 per cent. of GDP. The Labour party will preserve its record of leaving office with the overall burden of taxation higher than when it went in.
The big increase was the boost that the Government tried to hide last year by stealthily hitting private pensions and the corporate sector. The people in the front line of the main tax increases this year are motorists. Again, the Labour party has confirmed itself as the anti-motorist party par excellence. It fiddled the system: motorists expect one increase a year, but we have had two in nine months—4p the first time and 4.4p this time.
1321 Anyone who thinks that raising the tax on petrol way above the level of inflation will stop people driving cars does not understand how people live today. I do not know anybody who drives any less; they just spend less on other things, including their family. The only people who actually stop driving are poor people, especially those living in the countryside. Are those the people whom the Labour party wants to hit? Low-income car owners in my rural constituency are to be discouraged from travelling into Hull and York in their cars because of the cost, so they will be unable to get the benefit from the free museums the Chancellor favours so much. What a warped sense of priorities.
§ Mr. Don Foster (Bath)
Does not the hon. Gentleman recall that it was the Conservative party that introduced the 5 per cent. above inflation escalator? Presumably, he was critical of that, but does he agree that if you use that sort of escalator—it is now sensibly set at 6 per cent.—it is important that there is an offset in terms of a reduction in vehicle excise duty? The great pity of the Budget is that it does not contain clear proposals on that subject.
§ Mr. Townend
I shall deal with our position in a few minutes. Because of the distances and the infrequency of public transport that one experiences living in a small village—nearly everybody needs a car—£50 million over three years for rural transport is peanuts. Most Labour Members have probably never lived in a village, so they do not realise that, if there is only one bus a day, which is doubled to two buses a day, not only will that cost hundreds of millions of pounds across the country, but people will still need to use their cars.
The increase in petrol duty will also increase business costs. The Government say that industry should be competitive, but do they think that industry does not use petrol? Do they think that fewer goods will be delivered because they have put up the price of petrol? Will there be fewer calls by salesmen? I suggest that this is an increase too far—enough is enough. It is time that one party in the House started to speak up for the motorist. I hope that my right hon. Friend the Member for Hitchin and Harpenden is listening when I tell him that we should abandon road fuel escalation and say that there should be no more increases above inflation.
Corporate car drivers are being hit yet again with another penal increase. That increase is surprising, because it hits the very people whom new Labour is always saying it wants to encourage—the managers, salesmen and entrepreneurs who are all part of middle England. What is the sop? We are going to have a £50 reduction in vehicle excise duty for small cars and clean cars, but what is small and what is clean? If it means small new cars, that will hit the poor, who mainly own older and second-hand cars.
§ Mr. Geraint Davies
Is the view the hon. Gentleman is expressing his personal view, or does it reflect the wider view of the Conservative party? Is it just an odd little view?
§ Mr. Townend
I am speaking for myself, but I would not be at all surprised if on Monday, when I go into the Lobby to vote against Labour's proposals on petrol, my right hon. Friend the Member for Hitchin and Harpenden is with me.
§ Mr. Townend
That is a matter for my right hon. Friend. I represent a rural constituency, and I shall fight 1322 on behalf of the motorists. Enough is enough. There comes a point when one should not go any further and, when 80 per cent. of the cost of petrol is tax, I believe that we have reached that point.
The cornerstone of the Government's Budget is the welfare-to-work package, including family tax credit and national insurance contributions reform. While the Chancellor's motives are praiseworthy, there remain many unanswered questions and some serious reservations. First, although I welcome the abolition of the national insurance entry fee—I always thought that it was nonsense—I am a little disturbed about who will meet that cost. It will hit the high-productivity, high-tech and high-wage firms that the Government claim that they want to encourage. Many firms that pay high wages operate—or are trying to operate—in the export industry, and that cost will reduce their competitiveness even further.
Secondly, as my right hon. Friend has said, the reforms were first mooted as supposedly reducing the cost of the social security budget, which was getting too big for the country to afford—it was getting out of hand. As we have heard today, far from reducing that cost, the Budget will increase it. People do not realise that the pensioners will pay for that. The Government stole £5 billion from the occupational pension funds last year in order to finance it—and it will do that this year, next year and every year. I think that that is awful. Married couples will also contribute £1 billion. That is appalling, as it signals a withdrawal of support from the institution of marriage at a time when most people believe that marriage breakdown is the major cause of many social problems.
Thirdly, I have doubts whether it should become the accepted wisdom that most mothers should work and their children should be left with child minders. I am old-fashioned enough to believe that the best environment for bringing up children is in the home with the mother as carer. As a result of the costs that we are now incurring, which will increase over time, we could reach the stage where it will cost as much to get mothers into work as it will cost to get them to look after their own children. We must consider that.
My fourth criticism is that the Government appear to have no policies designed to reduce the growing problem, not of lone parents or single mothers, but of unmarried mothers. I believe that Britain has the highest number of unmarried mothers in Europe—and that number is growing. We must address that situation and encourage young women not to have children outside marriage.
I must also ask where all the new jobs will come from. The main failure of the Budget is that it does nothing to encourage the Bank of England to reduce interest rates and the value of the pound. Indeed, the market's first reaction to the Budget was to push up the pound even further. That will cause our exporting industries to shed labour.
Despite all the incentives and the money that will be spent in an attempt to get people into work, I think that the Government will find that a significant number of people are unemployable or do not want to work—I call them the "professional unemployed". Constituencies such as mine have many such people. Unemployed people come to Bridlington from Sheffield, Leeds and Halifax. believing that it is far better to live by the seaside. They certainly do not come to Bridlington seeking work, because there is none.
1323 I turn briefly to the other taxes in the Budget. Stamp duty on more expensive houses has been increased. That is a return to the traditional Labour taxation of envy: it is a tax on mobility. Why should executives, entrepreneurs, export salesmen—and Prime Ministers—who must move house frequently have to pay that extraordinary level of tax? Someone who buys a house for just over £500,000 must pay the Government £15,000 in tax. That is a tax on mobility, and it is wrong.
I make it clear that I have a lifetime's experience in the alcohol industry. That industry is facing difficult times because of cross-border shopping and smuggling. The Financial Secretary should not laugh, because she is responsible for that problem. [Interruption.]
§ Mr. Townend
Not only are the Government losing an enormous amount of revenue but, as I have warned from my own experience, organised crime is taking over the smuggling. Only last week smuggling gangs used guns in Dover. The only long-term answer to this problem—the Chancellor, who is pro-European, should realise it—is a progressive reduction in the differential between our duties and those of the French and Belgians.
Far from accepting that there is a problem and dealing with it progressively—we know that it cannot be solved in one go—the Government have made it worse by increasing duties on wine and beer yet again. The barriers came down in January 1993 and we have seen a massive increase in smuggling every year since then. Has the differential been reduced in that time? No, it has not. It has not even stayed the same: the differential on wine has increased by 18.4 per cent.
The same principle applies to tobacco. I do not smoke, but I know that, by increasing the duty on tobacco by more than 5 per cent., we will encourage more people to buy from smugglers. If people buy cheap tobacco, they will smoke more. Is it not incredible that duty is not paid on half the hand-rolled tobacco used in this country? The Government have accepted that there is a problem because they have not increased that duty this year—but they have not reduced it, either.
The Budget must be considered not in isolation, but together with the last Budget delivered nine months ago. Although I accept and support several measures, I believe that many people have done badly. Savers, pensioners and pension schemes have done badly. Companies have done badly through the windfall tax and the collection of corporation tax on a quarterly basis. Marriage has been undermined. The Budget does nothing to create jobs, as all the emphasis is on getting people to apply for jobs. The motorist has been savagely attacked and the overall burden of taxation continues to rise.
The Government's Budgets will not be judged now. Hon. Members should consider that the Budgets that receive the most cheers from their supporters on Budget day are often the ones that come home to roost. We shall judge the Budgets in two years' time according to whether unemployment, growth and taxes are higher or lower. Despite some beneficial measures, such as the reform of national insurance contributions, the whole complicated welfare-to-work package will he judged to be successful only if it gets the professional unemployed into work. I regret that I am pessimistic, because I do not think that the carrot will work without the stick.
§ Mr. Derek Foster (Bishop Auckland)
The House has been highly entertained by the hon. Member for East Yorkshire (Mr. Townend). He said that he had lifelong experience in the alcohol industry—which I believe explains a lot about his speech. As if that were not bad enough, he went on to blame my hon. Friend the Financial Secretary for his problem. I have been an almost lifelong teetotaller, and I have been the butt of many jokes in that regard. People say to me, "It must be terribly depressing waking up in the morning and knowing that that is as good as you will feel all day." [Interruption.] I am glad that that entertains my right hon. and hon Friends.
I have sat through 19 Budget debates in my parliamentary experience. This is probably the first one in which I have taken part. Year after year, I have listened to Conservative Members in government announcing proposals that increased the burden of taxation while claiming great credit for reducing the rate of income tax. It therefore comes a bit rich to hear the Opposition's charges against my right hon. Friends.
My right hon. Friend's speech yesterday was a tour de force. When I listened to the shadow Chancellor, I wondered why, if things were so magnificent on 1 May last year, we won a landslide victory.
§ Mr. Foster
I also wondered why, if the Budget was as bad as the right hon. Gentleman said, it has been so well received in the City, by the business community and by families throughout the country. The Opposition protest too much. The language of betrayal is exaggeration in the extreme.
§ Mr. Foster
I shall give way in a moment.
Just before the Labour party conference last year, my right hon. Friend said that he wanted a crusade against unemployment and poverty. I know that my right hon. Friend is often accused of being ambitious, but such ambition is worthy of the brightest and best of any generation and would have united the Labour party at any time during its 90-year history. It is the reason why I joined the Labour party, and why I am so enthusiastic about the Budget, which has been the first powerful clarion call for a crusade against unemployment and poverty.
I welcome the widespread improvements offered by all the new deals. My right hon. Friends the Chancellor and the Secretary of State for Education and Employment deserve credit for putting so much drive, energy and money behind those powerful new programmes. Now they are to be extended in a way that the Employment Committee—which, as the House knows, I chair—called for some weeks ago. We asked the Secretary of State to build in sufficient flexibility to respond to the changing nature of the jobs market. We pointed out that there were other groups that deserved priority.
A few short weeks later, the money and the political drive are there to extend all those initiatives. Now those aged 25 to 50 are being substantially catered for, and the over-50s are being brought into the programme. Now there is a substantial improvement to the new deal 1325 for single parents, and the new deals are being extended in various other imaginative ways. I welcome that whole-heartedly.
I promised to give way.
§ Mr. Lansley
I am grateful to the right hon. Gentleman, even though he has moved on a little. He criticised former Conservative Chancellors for, as he put it, increasing the tax burden while reducing the rate of income tax, although perhaps he will acknowledge that Conservative Chancellors left the tax burden as a proportion of gross domestic product unchanged, as compared with 1979. Why does the right hon. Gentleman think that it is such a triumph for the Chancellor of the Exchequer to increase the burden of taxation while not reducing the rate of income tax?
§ Mr. Foster
It is a triumph for the Chancellor to increase the burden of taxation and to receive accolades from the electorate for doing so. That was what the Opposition achieved over 18 years, which irritated and frustrated me greatly at the time.
The new deal is being extended considerably and is entirely welcome. If we are to get large numbers of single parents into work, which is what I want, the child care package is crucial. I am glad that my right hon. Friends have recognised that. However, if single parents are not to be locked into the low-wage, part-time, temporary sector of the jobs market, we must write into the single parents' new deal a substantial education and training option. At least 40 per cent. of single parents have no qualifications. We need to enhance their employability and earning capacity, if we want to make it worth their while to get a job.
The new deals would not have been introduced by the Conservatives. They still do not know whether to support the programme. The programme to make work pay would not have been initiated by them. I pay tribute to the shadow Chancellor because of the imaginative work that he did to reform the welfare state. Incidentally, most of that was pretty punishing to groups of needy people, but he did tackle the problem.
We have moved on a little further. The concept of making work pay is an exciting one. It will be extraordinarily difficult to pull off, because the complexities of the barriers to work for various groups of people are beyond the majority of Members of Parliament and perhaps beyond many civil servants to negotiate. I am certain that making work pay will be as crucial to modernising the welfare state as the high and stable level of employment written into the White Paper of 1944 was to the proper funding of the welfare state when it began.
I have signed up whole-heartedly to the concept of increasing the number of employable people, not just because it is good for them and good for society, but because it makes economic sense. The pool of employable people will bear down on inflation and allow the Chancellor to run the economy at a higher rate of growth than would otherwise have been the case. As Professor Layard said in his evidence to the Employment Committee, the net result of that should be a net increase in jobs.
Another group who deserve priority are those who are already in work. Some 80 per cent. of the work force over the next decade are already in work. My right hon. Friends 1326 are missing a trick, because there is a far greater and earlier payback to the Government from enhancing the productivity of those who are already in work than there will be from increasing the employability of those who will move into work. We must do both.
Moreover, although the schools agenda has greater political saliency and may have more profound effects in the long term, within the realistic life of the Government—say, within the next decade—there is a greater return if we invest in the people who are already in work.
In the next Budget, I shall look for tax breaks for companies to invest in training. If we are not going down the levy route, we must make it worth while for companies to invest in training. I shall explain why.
I have cited before the case of House Thorn Lighting, in Spennymoor in my constituency, whose managing director said, "We discovered that with every pair of hands we got a free brain." That expression highlights the problem that we are trying to solve: we do no more than scratch the surface of the skill and creativity of our work force. It is the companies that are the most adaptable, flexible and able to respond quickly to market situations that release the creativity of their work force and make them partners in the management of change and in improving productivity and quality. Thorn Lighting does that, as does another company in the north-east.
Nissan spends 7 per cent. of its turnover on training. The average for British industry is below 1 per cent., and for French and German companies it is between 2 and 3 per cent. It is small wonder that, in 14 years, Nissan has made itself the most efficient motor manufacturer in Europe. If we are to make an impact on our competitiveness—which we must—over the next five to 10 years, this is where the greatest return will be made. I urge my right hon. Friend to pursue strongly his lifelong learning agenda, and to remain strongly in favour of encouraging business to train those who are already in work.
The hon. Member for East Yorkshire and the shadow Chancellor referred to the high pound, which is a severe problem for most of Britain's manufacturing industry. I hope that there is not an enclave of people in the Treasury who still believe that a high pound is good for British industry—that, as a strong currency was good for Germany and Japan, British industry should have to live with the overvalued pound. Such people forget that Germany and Japan achieved a high currency through economic efficiency and economic strength. While those were being built up, they did not have to cope with the problems of an overvalued currency.
It seems clear that the Monetary Policy Committee will have to raise interest rates. If that is the case, short-term funds will flow into the pound, raising it even further. Some, including the Manufacturing Science and Finance union, warn that 100,000 jobs may be at risk because of the overvalued pound, so we must take the matter seriously. I read that those at No. 10 and No. 11 Downing street do take it seriously, and that they are rather worried about the problem. It is about time that they started to do something about it, because if we lose 100,000 jobs over the next 12 months, it will undermine all the new deals, making work pay and the modernisation of the welfare state.
§ Mr. David Willetts (Havant)
What the right hon. Gentleman is saying goes to the heart of the Chancellor's 1327 Budget judgment. I put it to the right hon. Gentleman that he is saying that, because of the Budget judgment, the City expects interest rates to rise, and that that is why the exchange rate has firmed since the Budget, giving rise to his fears about unemployment. What he just said is a fundamental attack on the Chancellor's Budget.
§ Mr. Foster
I am pointing out to the Chancellor what many of us know to be true in our constituencies: unless we begin to take seriously the overvalued pound and find some way of dealing with it, it will hit us in the face later this year or next, and could undermine our entire economic strategy. Therefore, it should be taken seriously.
For the past 40 or 50 years, successive Chancellors have tried to discover an economic strategy in which exports and investment drive forward growth. For a while after we had been blasted out of the exchange rate mechanism—much to the pleasure of some Opposition Members—it seemed as though the Conservative party had stumbled into a half-competent economic strategy: exports forged ahead and interest rates fell. Now we have the opposite problem. The question is, where are the jobs to come from?
We may end up with a large pool of employable people who are job-ready but without jobs to go to. We must take that seriously, because if we succeed in making people employable and enhance their ability to go straight into work, they will be severely disillusioned if there is no work for them.
We cannot look to exports to drive growth. Despite the enormous amount that my right hon. Friends have done to encourage business investment, which is why the Budget has been welcomed by the business community, I cannot see that, on the brink of even a mild recession, business investment will drive growth. So what can we look to? Perhaps we should look to public investment—perhaps to the private finance initiative.
Perhaps at last the PFI will spring into life. I read in the Red Book that there are only £1.5-billion-worth of signed deals this year, and that next year there should be £3-billion-worth of signed deals. With PFI and conventional public investment, growth is still not as high as it was a couple of years ago. The PFI will not drive growth. Perhaps conventional public investment will, but it is reducing and is planned to reduce still further, according to the Red Book.
It is time for my right hon. Friends to begin to take seriously the problems of the definition of the PSBR. I shall explain why. Let us take Newcastle airport. It is a successful airport in a rapidly growing industry—tourism. It is wholly owned by the local authorities. The commercial banks are bending over backwards to lend money to develop the airport on the strength of its balance sheet or its assets. That investment would immediately produce jobs in the construction industry in the north-east, where we badly need them. Ultimately, it would produce jobs at the airport, too. It would enhance the competitiveness of a regional airport in a rapidly expanding industry. What can be more sensible than to invest in it?
However, because the airport is wholly owned by the local authorities, it falls foul of the PSBR regulations. Such investment would amount to further borrowing by central Government and is therefore disallowed. None of our European competitors treat such investment in 1328 that fashion. It is not required by the Maastricht criteria, so why do we have the most restrictive PSBR regulations in Europe? They were introduced, I believe, in 1976, when we had to bring in the International Monetary Fund. It is time that we reviewed them.
We could invest not only in Newcastle and Teesside airports but in the Post Office. The Post Office is longing to be liberated by commercial investment so that it can respond to its own rapidly expanding market in a changing marketplace. I know that my right hon. Friends will not be able to respond to my remarks immediately, but I want to open up the debate. Let us look again at the PSBR regulations to see whether there is a way to fuel growth by sensible investment of this nature.
My constituency contains 600 square miles of rural territory. I wrote to my right hon. Friend the Chancellor last Friday to urge him to introduce compensatory measures to offset increases in petrol prices. We are trying to make work pay for the working poor in the countryside, but increased transport costs are a great deterrent. I asked my right hon. Friend to reduce vehicle excise duty on the basis of post codes in rural areas, although I am not bothered how that should be done.
I urge Treasury Ministers to take the problems of rural areas far more seriously. I welcome what they have done, and spending the £50 million on imaginative public transport schemes in rural areas would be a good investment. However, the extra money will disappear if it is spread thinly over existing services.
I make a final plea to Treasury Ministers: £50 million is welcome, but it only scratches the surface of the problem of making work pay for the working poor in rural areas. I make a clarion call for a crusade against unemployment and poverty. I eagerly look forward to future Budgets that will drive ahead with such a crusade so that we become a far more civilised society.
§ 6 pm
§ Mr. Don Foster (Bath)
I am delighted to speak after the right hon. Member for Bishop Auckland (Mr. Foster), who made a thought-provoking speech that hon. Members will have enjoyed. He and I correspond almost daily: we share surnames and initials and are for ever passing on misdirected post to each other.
I agree with many of the points made by the right hon. Gentleman and support what he said about the widening of eligibility criteria for the new deal. He was right to stress the importance of training, and used Nissan as an example. I hope that Ministers listened to him carefully.
The right hon. Gentleman was more provocative about other issues. He was right: we must do more about the vital issue of job creation, and should not just talk about job readiness. Having got people ready for jobs, there must be jobs for them to go to. I agree with him about the controversial issue of redefining the public sector borrowing requirement. The construction industry would benefit from such a redefinition, as would other sectors. Most student loan is repaid as debt, so if it were not treated as part of the PSBR, additional funds would be released for investment in that sector.
The right hon. Gentleman's most controversial remarks were about the pound. He may have upset Treasury Ministers—especially the Chief Secretary, who spent a great deal of time on "Newsnight" last night trying not to 1329 make remarks similar to the right hon. Gentleman's remark about the pound being overvalued. Hon. Members will have noted the right hon. Gentleman's honesty.
I join the right hon. Gentleman in giving qualified support for the Budget, which is in the right direction. Unlike the official Opposition, I am honest enough to say that we welcome some aspects of it, fundamentally disagree with certain measures and are disappointed by others. Pensioners could have been given additional support to tackle the serious problem of pensioner poverty. The Chancellor rightly made more resources available for children and had the opportunity to do the same to deal with the plight of the elderly.
This morning's edition of The Guardian quotes a pensioner, who said:I was hoping for a decent hike in the old age pension, especially when he said he was increasing child benefit by 20 per cent.—mind you, at my age I should have known better.It is a pity that he thinks that way. Our alternative Budget offered to increase the over-80s pension supplement from 25p a week to £5 a week, which would have helped the oldest and poorest pensioners.
We are also anxious about the environment. We welcome the £50 million of support for rural transport, but many cuts in rural transport occurred because local authority budgets had been cut. Although the boost to public transport in rural areas is welcome, it will simply make up for local council cuts.
The Government have made two significant and worrying U-turns. First, the Labour manifesto claimed:We will lead the fight against global warming through our target of a 20 per cent reduction in carbon dioxide emissions by the year 2010",but paragraph 5.28 of the Red Book—on page 72—makes clear that the Chancellor is committing the Government only to the European Union's target of an 8 per cent. carbon dioxide emissions reduction by 2010.
I particularly look forward to hearing the Government's comments on their second U-turn. In 1994, the Labour party, when in opposition, promised an environmental Green Book to accompany the financial Red Book. The Financial Secretary reiterated the promise when she said:We have every intention of keeping that promise from the first full Budget."—[Official Report, 10 July 1997; Vol. 297, c. 1062.]Sadly, that promise has been broken. Instead of a book, which should have had several pages at least, we have only one green page—page 78—in the Red Book.
It is not surprising that the Government broke their promise; the Budget does so little for the environment that there is little with which to fill a Green Book. The Budget contains a modest energy efficiency scheme; there is no carbon tax; there has been backsliding on CO2 emissions; and fuel duties still represent tax rises—they have not been used to bring about a switch from vehicle excise duty as we recommended.
Cuts in VED are referred to, but there are no details about how they would work. The Liberal Democrats proposed a £10 VED rate for cars up to 1,600 cc to compensate for petrol price increases, whereas the Chancellor's measures will, as the right hon. Gentleman 1330 rightly pointed out, leave motorists in rural and other areas worse off. No wonder Charles Secrett, director of Friends of the Earth, said:This Budget is about as green as a smog alert.We have other worries. For example, we are disappointed that the anomaly of differential two-tier tax rates on insurance products has been resolved by raising VAT for both to 17.5 per cent. We are worried about higher rates of stamp duty and believe that they could be especially harmful for people such as widows in high-price housing areas who want to trade down to smaller houses. The increase in stamp duty from £5,000 to £10,000 will be difficult for them.
We welcome many features of the Budget, not least the measures to help small businesses and tighten up on offshore trusts. We welcome measures to tackle unemployment, not least through the boosting of skills—and changes in national insurance contributions. We welcome the introduction of a fiscal responsibility code, which—rather like the independent Bank of England—was first proposed by the Liberal Democrats. We welcome measures to provide attendance allowances for women. That is another move that Liberal Democrats proposed some time ago. We are delighted not only that the Government have accepted our proposal, but that they have now accepted that it should be backdated. They did not agree with that last July.
As I have said, we welcome the extension of eligibility for the new deal. We welcome the plans that will reverse the Government's earlier proposals for independent savings accounts, personal equity plans and tax-exempt special savings accounts; and, of course, we welcome the fact that, judging by this one, Budgets seem to be starting to plan for the long term. We broadly welcome the Government's ambitious welfare reform package—particularly their introduction of a new system of tax credits, including much-needed child care improvements and a sizeable shift in the tax burden to help the least well off.
I was disappointed by the reaction of the shadow Chancellor, the right hon. Member for Hitchin and Harpenden (Mr. Lilley), who is not in the Chamber now. He made it clear that he did not favour redistribution. Indeed, we gain the impression from the comments of some Labour Members that they are not particularly interested in redistribution.
§ Mr. Foster
The Prime Minister would be a good example, in view of some of his remarks. Liberal Democrats, at least, welcome the redistribution proposals in the Budget and welcome the principle of redistribution.
I shall ask Ministers two questions about the welfare reform package. First, why is the cut in lone parent benefits, against which we have argued vociferously, to be made in the near future while the offsetting benefits that are due to be introduced through working families tax credit will not reach pay packets until April 2000? We urge the Government yet again to consider whether they wish to proceed with that cut.
Secondly, I wonder whether the Chancellor is aware of information given by the Institute for Fiscal Studies in a post-Budget presentation today. The institute points out that, although 1.1 million people will have better work 1331 incentives as a result of the working families tax credit and other measures, some 2.8 million will have worse incentives. According to the institute—the point was also made, rightly in my view, by the shadow Chancellor—it will now be impossible to predict the net effect of the measures on employment. It is impossible to say whether jobs will be created in the way that both the right hon. Gentleman and I consider vital.
The Budget contains some measures that we may welcome in principle, but which we do not think go far enough. We believe that there are three reasons why the Government have not allowed themselves to go as far as they should have. First, they have agreed—wrongly, in our view—to stick to Tory spending limits. At least, that is what they said up until yesterday: they told us that they would stick to the overall control total for 1998–99. Those who analyse the Red Book, however, will discover that the Government have broken the clear promise that they made to the House—although it is one of the broken promises that Liberal Democrats welcome.
The second problem that has constrained the Chancellor and the Government is their refusal to consider raising the level of personal income tax. As has been pointed out, the Government have raised taxation overall in their package, but what has been raised is regressive taxation, not—as we would have liked—progressive taxation. The Government's failure to consider raising income tax levels means that they have no mechanism with which to control the current consumer boom and its effect on the economy.
The third problem is the Government's continued uncertainty about our membership of the European currency. It was no surprise to read today that the pound had reached a nine-year high, which threatens to create problems for our exporters and to lead to higher interest rates. With no controls on either our membership of the European currency or the ability to raise income tax, the pound will be left bobbing around, out of control.
Those constraints, with the Government's apparent determination to build up a war chest of money that they will be able to spend in the few years running up to the next general election—it is currently estimated that it will amount to £123 billion by the end of the Parliament—mean that the Budget has simply not gone far enough, especially in relation to public services. The extra cash for health and education falls far short of what is needed: it is just a drop in the ocean.
The trouble is—the Chancellor did not mention this in his speech—that the extra money he announced was largely offset by the upward revision of inflation, which means the cutting of about £750 million from real public spending next year. That cancels out almost all the spending increases announced by the Chancellor. It also means that the black hole in the Government's finances caused by higher inflation has cut a massive £6.8 billion from the real value of public spending plans for 1998–99, which are now well behind the proposals of the last Conservative Chancellor.
I shall now mention two aspects of public spending that I consider particularly important. The first is health. We heard much about the Government's commitment to health in today's statement by the Secretary of State for Health and, as hon. Members will remember, the Labour party's manifesto for the last election said:We will rebuild the NHS…cut NHS waiting lists by 100,000".1332 Since then, the pledge has been somewhat watered down. In yesterday's Budget statement, we heard that the NHS would have an additional £500 million, but that is much less than the £2.25 billion that we said was necessary in our alternative Budget. Furthermore, with the higher GDP deflator hidden away in the Red Book, the amount available to the NHS will be worth nearer to £400 million in real terms.
Given the pressure on the Budget caused by inflation rate trends in the NHS and the millennium computer time bomb problem, it is worrying that the Chancellor seems to believe that that amount will be enough to cut waiting lists in the way described by the Prime Minister today at Prime Minister's Question Time. We do not think it will be possible.
To sum up my views about the situation in the NHS:Opposition Members welcome any additional resources for the national health service and any plan to break down the appallingly high waiting lists. However…When health costs are rising faster than even ordinary inflation, the sum that the Chancellor has provided today will barely cover the basic inflationary pressures that the health authorities face, far less deal with their huge backlog of structural repairs."—[Official Report, 1 November 1988; Vol. 139, c. 826.]Those are not my words; they were spoken by the current Chancellor nearly 10 years ago, when his party was in opposition. What he said 10 years ago we believe today about what this Government are offering to the health service.
We remember the Government's commitment to make education their number one priority. They also told us that it was their intention that the share of GDP spent on education would rise over the lifetime of a Parliament. With the Chancellor's announcement, unfortunately, they are not making any progress on that promise. The share of GDP has hardly altered over previous years. In fact, if anything, it has made a small downward movement.
The question is whether the education proposals will deliver much at all. According to the spin doctors, who had a field day up to and including yesterday, much is going to happen, but when the £250 million—that, of course, is in comparison with our Budget proposals for £2.5 billion—was announced, the Chancellor did not mention the effects of the upward revision of inflation.
Because the increase in inflation affects the entire education budget, the net extra that yesterday's Budget offers for education is, in fact, only £148 million. Of that, £100 million will go to the new skills programme and £10 million to education action zones, both of which we welcome—but that leaves only £38 million extra for our schools. We welcome that, but, frankly, it is not very much.
§ Mr. Phil Willis (Harrogate and Knaresborough)
Does my hon. Friend agree that the Budget announcement—and, indeed, the announcement of the Secretary of State for Education and Employment—included no resources whatever to support the learning age? The idea that we can build lifelong learning in the next millennium on absolutely no resources is hypocritical—sorry, I should not use that word. It is misguided.
§ Mr. Foster
I entirely agree with my hon. Friend. I do not know whether he noted that, when the announcement came about the small extra amo,unt of money for education, and it was made clear that there was no extra 1333 money for further or higher education, we also had an announcement that there was to be a continuation of the Oxbridge colleges' money. For a Government who concern themselves with providing for the many and not the few, that seemed bizarre.
As my hon. Friend knows only too well, there is a desperate need for additional money in higher education. Sir Ron Dearing, for example, said that, if we are to address the falling qualities of libraries, teaching facilities and especially information technology, we need £365 million this year, £575 million next year and £1 billion by 2000. The Government have, in practice, offered no new money in the Budget. Before it, they offered £165 million, of which £40 million is to improve access, and they will top-slice higher education budgets by £150 million by reclaiming the new tuition fee element.
As the Under-Secretary of State for Education and Employment, the hon. Member for Birmingham, Yardley (Ms Morris) will know, the £165 million is not new money; it comes simply from staging Higher Education Funding Council grant payments so that the Government make a saving.
The House may be interested to know that Baroness Blackstone said:I have tried to say as clearly as I can that we are committed to trying to find additional funding for universities."—[Official Report, House of Lords, 10 March 1988; Vol. 587, c. 188.]It is clear from yesterday's Budget that the Government have failed in their effort to find additional funds for universities. Sadly, they have failed also to find any additional money for further education. Baroness Kennedy recently commented that our Cinderella further education sector neededa sustained and massive investment in tackling the backlog of underachievement in the population to create a self-perpetuating learning society".The reality from yesterday's Budget is that no additional money is to go into the further education sector.
There is some additional money for our schools and for skills, both of which are welcome, but there is no additional money for further or higher education. There is no opportunity, then, to start to address some of the problems that need to be tackled in our education service.
Yes, the Government are committed to reducing primary class sizes for key stage 1 pupils, but we argue that we should reduce class sizes for all primary school children. There is little or no additional money to help tackle the backlog of repair and maintenance work in schools. There is no opportunity to start to put in place early-years education for three as well as four-year-old children whose parents want it.
There is no opportunity to start to introduce a cap on technology and science class sizes in secondary schools, or significantly to increase the amount of money for books and equipment in schools. There is no additional money really to tackle the problems that I have described in further and higher education and, in particular, to start to give some support to part-time students in both further and higher education. This Budget has moved in the right direction, and for that we welcome it, but it has disappointed in a number of sectors, not least in funding for higher and further education.
§ Mr. Tim Loughton (East Worthing and Shoreham)
I have listened intently to what the hon. Gentleman has 1334 said. Before he finishes, will he perhaps undertake that his Liberal Democrat colleagues will turn up this year during the Standing Committee stage of the Finance Bill and go through the detailed work of criticising and amending the Budget—making the points that he has been making in detail—rather than, as last year, contributing 15 minutes out of the 26 hours of debate, which was undertaken mostly by Conservative Members? The hon. Member for Gordon (Mr. Bruce), the Liberal Democrat spokesman, appeared for just 30 minutes in the whole week.
§ Mr. Foster
I am certainly not going to make any commitments on behalf of my hon. Friends. They can make commitments for themselves. Earlier today, one Conservative Member told us what his views were and, when asked whether he was speaking for himself or the party, pointed out that he was speaking for himself. We then heard the shadow Secretary of State for Education and Employment, the right hon. Member for Charnwood (Mr. Don-ell), say that that is the way in which Conservatives always speak, so I shall let my hon. Friends speak for themselves as well.
We welcome the direction in which the Budget has gone. It has huge gaps, not least its failure to address the need to provide support for pensioners and to tackle this nation's environmental problems. We welcome a number of its measures, but argue that they simply do not go far enough. However, given that there is a movement and direction in this Budget that we support, we give it the qualified support that the right hon. Member for Bishop Auckland also gave it.
§ Mr. Alan Simpson (Nottingham, South)
I offer the Chancellor of the Exchequer congratulations on introducing four extremely important principles in this Budget, which could easily be overlooked in the detailed exchanges.
I congratulate my right hon. Friend on raising child benefit. In particular, it is important that the House notes the Prime Minister's comment at today's Question Time—that a belief that tax policy should favour the child, rather than judge the household, underpinned that change. That is extremely important when we place our children in the context of the best assets that a society has. If we can recognise that as a Budget principle, we will be much the better for it.
The second thing that I wish to congratulate the Chancellor on is his decision to reduce value added tax on the installation of home insulation products. Again, it may involve a relatively small amount in actual terms—perhaps no more than an extra 40,000 properties a year are likely to benefit—but it establishes a tax principle that will be central to how we view economics in the next century. The principle is this: it is wrong for any Government to tax energy-saving more heavily than energy-consuming. Labour fought for that argument in opposition, and I am pleased to see that in government we have stuck to the principle for which we argued, and made the decision to reduce VAT on home insulation products.
§ Mr. Loughton
On that point, will the hon. Gentleman admit that the Government have reneged on the campaign 1335 that the Financial Secretary to the Treasury led two years ago, in that the VAT reduction applies only to grants from local authorities, not to energy-efficient goods in general, which anyone here, even the Lord Chancellor, could go down to B and Q tomorrow and buy?
§ Mr. Simpson
No; I think that we are at the first stage of a process that will move the whole eco-taxation agenda on to a significant point. It will profoundly shift the way in which we think about the relationship between taxation, economics and the environment, and I am pleased that we have made that start.
That fits in with the third factor on which I congratulate the Chancellor—the beginnings of a framework of green taxation. Spirited as was the defence by the hon. Member for East Yorkshire (Mr. Townend) of the rights of the private motorist, if we are to continue to exist on a planet and in an environment that will sustain us all, we must face the consequences of Kyoto. The principles of contraction and convergence that came out of the Kyoto agreement will force us all down a path which not only will mean that we take seriously our responsibilities for environmental taxation, but will probably become the central pillar of taxation policy for the 21st century.
Finally, I thank the Chancellor for issuing a pre-Budget consultation document. Many of us complained for years that the House was not taken seriously during the process of Budget formulation and consideration. This year—for the first time to my knowledge—a Chancellor has published a pre-Budget report, and invited contributions and responses.
I assumed that that invitation included me, and I had the temerity to submit my own Budget to my right hon. Friend about a week ago. Not much of it appeared in the Budget statement yesterday, but I am certain that the Chancellor has tucked it up his sleeve and is ready to unfold it in the next Budget, or perhaps later this year.
I shall describe some of the "big picture" issues against which the Budget must be measured, which the House has not properly addressed so far. Those focus on three factors—the real prospect of a recession, the case to be made for a reflationary and reinvestment programme, and the relationship between work and welfare.
When I wrote my Budget submission, I was greatly influenced by several commentators who had written about the changes that had taken place in the global economy over the past year. Those range from—before the Budget—people such as Robert Reich, the former American Secretary for Labour, to—after the Budget—Roger Bootle, one of the most senior economists and commentators in the United Kingdom.
Neither of those is a known member of the "usual suspects" group in the parliamentary Labour party, but each warns that the world is sitting at the edge at a large unco-ordinated global contraction, of which we have seen only the beginnings. To retain a monetarist obsession with the risks of inflation is to flirt with the real danger of missing the next war, because the serious challenge we face is the risk of an unco-ordinated global recession.
In that context, we must address some of the contradictions that one finds in almost every modern economy, such as the signs of boom and the signs of bust appearing at the same time—a boom in consumer spending and credit debt, co-existing with a bust in manufacturing output and manufacturing investment.
1336 Those are new and difficult problems for any Chancellor and any Government to deal with, but deal with them we must. The likelihood is that the consequences already being seen to follow from the Budget statement will accelerate rather than delay the point at which the contradiction will have to be dealt with.
The value of the pound has already increased today. That makes it almost certain that, when the Monetary Policy Committee meets, it will raise interest rates. The fall in manufacturing and manufacturing investment that will follow will add to the Budget predictions for manufacturing industry, which have been downgraded from a presumption of 1.5 per cent. growth this year to an assumption of growth between 0 and 0.5 per cent.
That is all likely to come through in the second half of this year, when the welfare-to-work programme will be producing people who are at the point of looking for work. We shall face a real problem if employers are having to make decisions about whether they can retain existing employees, at the same time that we as a Government are asking them to take on the new trainees and recruits coming through the welfare-to-work programme. At that point we will be asked serious questions about where the work is to be found.
When the Institute of Fiscal Studies said that, out of this year's Budget, it would be possible for us to release between £3 billion and £3.5 billion for public investment, it was being excessively cautious. The real figure, as the hon. Member for Bath (Mr. Foster) said, is probably more; between £5 billion and £10 billion could have been released. That reinvestment is what we need for a publicly led and publicly financed programme to deliver real jobs in the real economy.
I looked at several of the newspapers this morning, and saw that one of them announced that the Chancellor had declared war on the work-shy. If we can inspire young people and others among the long-term unemployed to go into the welfare-to-work programme, and if we give them the skills to enable them to participate and the enthusiasm to seek permanent work, where will that work be found, if the economy is on the point of a serious and possibly sustained downturn?
I believe profoundly in our new deal proposals. There is nothing more important for a society than finding productive, secure and well-paid work. Yet, in the broader economic context in which the new deal is having to be framed, it may be difficult for us to deliver on that. I draw a comparison with the previous and probably better known "new deal" introduced by President Roosevelt after his victory in America in 1932. There are significant factors in what underpins each of the two approaches that are entirely different.
Under Roosevelt, the new deal programme built 651,000 miles of roads, 78,000 bridges and viaducts, and 38,000 municipal buildings; 2 million young people went into youth conservation work. The Government of the day introduced a minimum wage and price controls, regulated the financial markets and abolished child labour. Huge numbers of teachers were involved in keeping open rural schools that would otherwise have been closed on economic grounds, while the economies that supported their communities were rebuilt, underpinned and strengthened.
1337 That all took place around a presumption that public borrowing was not a carnal sin, and did not make one blind. It was the basis on which to rebuild a sensible economy. People in work were themselves tax contributors rather than welfare dependents.
The Government of the day borrowed to accomplish those goals. The issue was not whether they had debt, but where the debt was owed and how it would be used. Those are still the central issues, and will determine how we underpin a reflationary package to deliver real jobs in the United Kingdom economy.
There is no point in saying that we can leave it to the private sector. If there is one absolutely clear lesson to be learnt from the Tories' 18 years in power, it is that they gave the free market freedoms to do anything it liked, and that the one thing it did not do was reinvest massively in long-term job security in our economy. In those 18 years, our downgrading of private investment—in which the United Kingdom has always failed to meet the Organisation for Economic Co-operation and Development average—was made worse by the planned collapse of public investment and the planned sell-off of public assets.
When the Tories came to power in the late 1970s, net public wealth as a proportion of gross domestic product was 70 per cent. When they left power, it had been run down to 10 per cent. It was an exercise in long-term asset stripping rather than long-term reinvestment.
How will we underpin a real, serious and sustainable new deal programme? Although I do not urge that we build 651,000 miles of new roads—I am not a roads-supporting person—I remind Ministers that there is a rough equivalence in the number of houses in the UK that are miserably insulated and desperately in need of upgrading to modern home insulation standards. In the second appendix to my Budget submission, I outlined the basis on which the Government could begin the first stages of a 15-year programme to end fuel poverty in the United Kingdom.
The programme would require us to upgrade 500,000 properties a year for each of the next 15 years. Consequently, we would immediately create sustainable work for many of today's unemployed. We would also raise the quality of life of the many households who live in miserable, unhealthy accommodation. We would save money for health service, and raise the standard of the United Kingdom's capital housing stock. Environmentally, the programme would save large amounts of carbon emissions, and it would create a virtuous circle, in which all will win and none will lose. That is how we can create work, wealth and well-being.
We could also develop comprehensive national programmes to restore and rebuild public transport infrastructures in all our towns and cities, and to serve all our rural areas. However, such programmes will not be created by providing a few market incentives.
Although the £500 million provided in the Budget will be a start in developing such programmes, it will allow us—if we spread the amount over three years, across the country—only to draw up the plans, not to deliver the networks. Again, we will need a public investment-driven programme, which would underpin welfare to work and 1338 provide the arena in which we will allow people who are not work-shy to find a real and useful place in our economy.
The Chancellor, in accomplishing those objectives, may wish to examine and embrace other tax principles. One principle is very simple: a public stakeholding should be attached to every public subsidy—an interesting notion, which Conservative Governments studiously avoided in their 18 years in office. I shall develop later the point that those Governments were very good at shifting the locus of public subsidy from personal welfare towards corporate welfare.
Those who say that we should not attach conditions to public subsidies to the private sector might like to examine the United States' community reinvestment legislation, in which the private and financial sectors' social obligations are legally binding, and cover matters such as community reinvestment and not-for-profit work in local communities. Their obligation is one of demonstrating how public moneys will be used to benefit the communities from which that money is drawn.
Organisations such as Greenpeace, Friends of the Earth and the Association for the Conservation of Energy have all, in their own way, stated the colossal potential of environmental technologies and environmental repair in generating real, sustainable jobs. The sooner we seriously embrace our Kyoto obligations and an environmental agenda, the sooner we will engage in the economics of the next century.
Accepting those obligations will dovetail with some of the issues and contradictions that we will have to resolve in the transition to a welfare-to-work system. The Chancellor was absolutely right to set himself the task of reducing poverty, and particularly of reducing the outrageous marginal tax rates that fall on the poorest in the land.
Often, those who move from welfare to work face marginal tax rates of up to 96p in the pound. If they receive passported benefits—such as free school meals or school travel—the reclaim rate may amount to 117p for every 100p they earn. That is crazy. Therefore, trying to connect the benefits system with the wage system is an extremely important idea and objective.
Connecting the two systems will, however, have some real difficulties, and the House must not be deluded about them. The House attempted twice before to develop its own version of working families tax credits. On each occasion, it failed to enact workable legislation. The first problem—making the proposals complex and unworkable—was the legacy of an obsession with means-tested benefits.
The problem is not only the administrative difficulties of moving family credit from the welfare system to the work system—by means of income tax—but the relationship between whatever system eventually emerges and the remaining aspects of the means-tested benefit system. If we are left with a legacy of clawing back housing benefit and council tax rebates, we will discover that exactly the same poverty traps remain, but appear at different points. We may try to introduce different tapers and stages at which the clawbacks occur, but it will simply make a monster of the current mess.
I make those comments not to be critical of the idea of connecting the systems, but to acknowledge the scale of the complexity that we will have to sort out. If there is 1339 one possible way in which the process can be made simpler, it is by simplifying the process by retreating from means-tested benefits. The simplest way of delivering a new system would be to return to many of the Beveridge assumptions about universal platform entitlements underpinning the benefits system, and to a progressive taxation structure—however it is constructed—as the means of claiming back benefits from those, at whatever position in the earnings scale, who are deemed not to be entitled to be net beneficiaries.
Returning to those earlier assumptions would remove the barriers between welfare and work. We remove the complexities of collection not by diving into separate taxation processes on individual benefits but by taxing overall disposable income. It is called progressive income tax—[Interruption.] Yes, it is unashamedly redistributive; but that is what society should do. We cannot tackle poverty without redistribution.
The idea that poverty will right itself if there is accelerated growth is nonsense. We inherited from the previous Tory Government a wider gap between rich and poor than this country has ever seen. That is because the Tories abandoned a recognition that the market has no interest in redistributing to the poor; it becomes self-serving to the rich. A redistributive tax policy is nothing to be ashamed of.
In considering how welfare to work and the working families tax credit might fit into the redistributive process, it is important that the House looks at the lessons that must be learned from Canada and the United States before it adopts any particular structure of a scheme. The equivalent to the working families tax credit in the United States has to be underpinned by food vouchers. I have yet to see a case for embracing the reintroduction of food vouchers in the United Kingdom. In Canada, the costs of going down such a path have been extraordinarily high.
At some point, any Government must ask themselves whether the costs of fundamental change in the welfare system outweigh the specific benefits of that change. The answers are to be found in different variations on this theme: a return to universal benefits and welfare system, tax thresholds that are adjusted to take the working poor out of tax paying rather than in pursuit of a lower rate of tax, and a rise in the initial tax disregard for those entering work.
The Chancellor has been absolutely right to go down the path of raising environmental taxation. He has been absolutely right to raise the amount of support that goes directly to children. He would also have been right if he had followed the same logic and raised the amount of support that goes to pensioners and disabled people. He would also have been right if he had said that we should go down the route of directed public investment, which would be the basis of a planned reflation of the economy.
I expect that, at some point, the Tories will say that all this is unaffordable; that the welfare burden is simply unsustainable in a modern economy. I must concede that there might be one sense in which they are right. Cuts in personal welfare under their Administrations effected a shift towards corporate welfare.
Allowances for and non-taxation of industry must amount to about £30 billion a year—just over £18 billion in capital allowances, £4.5 billion in direct grants, £4.1 billion in export credit guarantees, mainly in export support grants, and a whole series of other packages. 1340 In their own way, they are all forms of welfare dependency. If the Chancellor needs to look for money, and if tough decisions are to be made, we should begin by looking at corporate welfare.
Every day of every week, the Government's spending Ministries are besieged by businesses—mainly big business—saying, "Of course we will come to your country, but we need you to pay us. We need you to put together an incentives package that will make it worth our while. We want you to build the buildings for us, give us the land, train the work force and put in the infrastructure. While you are at it, we would like you to have a word with the local authority and ask them to give us a 10-year exemption from business rates. Don't talk to us about crisis loans; we want grants." If welfare is demeaning, we should try first removing the unaffordable, unsustainable, demeaning burden on business, and allow it to stand on its own two feet.
If we do not want to do that, we should introduce conditions on the use of public money in return for the investment or non-taxation with which they are graced. The idea of a stakeholder economy ought to extend to the notion that the Government, on behalf of the people they represent, take a stake in—or hand a different form of stakeholding to—the industries that are publicly subsidised by being allowed not to pay tax as the rest of us do.
It would be interesting to invite the Home Secretary to consider the behaviour of some corporations. Rather than judging lone-parent families, we should look at the morality of some of the lone-parent corporations and their conduct around the globe. They are terribly flighty. They take money in one place, get into a relationship in one country, spawn offspring, and then do a runner to somewhere else. Someone flashes a wad of cash somewhere else, and they are off. The behaviour of lone-parent companies, which have often had multiple partners, does not make them good parents.
We ought to ask the Home Secretary whether there is a need for lone-parent company classes in parenting. We should ask whether there is a need to curfew capital; whether it should be back in the country by 9 o'clock. There are a series of ways in which we can use the assets that this country still has in abundance to meet all the needs and aspirations that are found in the Chancellor's statement and the new deal.
Nothing is more important than putting the country back to work. To do so in an environmentally sustainable way is certainly our biggest challenge. That is the really exciting agenda of the next century. If we can shift our spending from warfare to welfare, from speculation to environmental repair and reinvestment, we will find that we have all the resources necessary to deliver not only a new deal but a sustainable deal for a new century. The sooner we embrace that in a Budget, the better society will be.
§ Mr. Geoffrey Clifton-Brown (Cotswold)
This was one of the most over-hyped, over-spun, media-spectacle Budgets that I can remember. Indeed, one is not disappointed by the two opening sentences of the Chancellor's Budget speech. It is a good idea to remind the House that he said:Only once in a generation is the tax system fundamentally reformed. The Budget I bring before the House and the country today begins the task not just of modernising taxation but of modernising the entire tax and benefits system of our country."—[Official Report, 17 March 1998; Vol. 308, c. 1097.]1341 The Chancellor gives himself divine status. A previous Chancellor coined the phrase that a Budget celebrated on the day is often regretted at leisure. History will judge today's Chancellor by whether he lives up to the very high expectations that he set himself in his opening remarks.
We know that the Budget is delivered against a macro-economic climate of falling growth, rising inflation, falling unemployment and, the joker in the pack, rising money supply—at some 10 per cent. a year, which is unsustainably high. What did the Budget do? It took me some little while to discover—buried deep in the Red Book in table B.20 on page 118—that it is a fiscally tightening Budget, to the tune of £4.8 billion this year and £2.9 billion next year.
Added to the fiscal tightening in the previous Budget, through the windfall tax and advance corporation tax credits, fiscal tightening amounts this year to £11.8 billion and next year to £9.9 billion. The question is whether that will be sufficient to avoid having to increase interest rates at the next Monetary Policy Committee, bearing in mind the effect that that will have on the value of the pound.
Part of the macro-economic situation is the City's verdict on the Budget. What happened? The pound soared to a nine-year high. The group chief economist of the Hongkong and Shanghai Banking Corporation, Roger Bootle, said:It's a considerable disappointment that will put a lot of pressure on the Monetary Policy Committee to raise rates.So the pound is likely to go still higher. As I predicted in a recent speech on the economy, manufacturing industry is already beginning to go into negative growth. If we are not careful, the economy will go into recession in two or two and a half years.
We delivered one of the brightest economic situations that this country has seen since the war. We left a golden legacy, in which growth exceeded inflation. It is a bitter disappointment that the rate of growth is falling. The Red Book predictions show it falling from 2.5 per cent. to 2 per cent. this year and to 1.75 per cent. next year, which will be unsatisfactory even if it is achieved. On the day that the Budget was delivered, the retail prices index rose disappointingly from 2.5 per cent. to 2.6 per cent.
How is the Budget to be judged? There are some welcome elements, but most of the welcome measures come with a "but". One could welcome the decrease in corporation tax for large and small companies to 30 per cent. and 20 per cent. respectively, but that has to be considered in the context of the overall burden of taxation on business, which has considerably increased because of the withdrawal of associated tax credit in the previous Budget and, perhaps more importantly, the quarterly filing of corporation tax for large companies. That will place a burden on companies.
The Chancellor made much of trying to introduce a climate in which small businesses would thrive. He said that he was trying to reduce bureaucracy, but, nine months into the Government's term of office, I see no sign of them reducing bureaucracy—quite the contrary. As I said in art intervention on my hon. Friend the Member for Maidenhead (Mrs. May) yesterday, the measures that the Government are accepting from the European Commission, particularly in the social chapter, such as the 1342 decision at the recent meeting to allow works councils for small firms with fewer than 50 employees, will add considerably to the burden on small businesses.
The Budget will increase taxation as a proportion of gross domestic product. That can be seen from chart B2 on page 119 of the Red Book. The prediction is that the overall burden of taxation will be 38 per cent. next year. Given that our major economic rival, Germany, with which we compete directly in many markets, has an overall taxation burden of 39 per cent., the situation is serious. The prediction is based on some optimistic assumptions for levels of growth. If those predictions are not sustained, the level of taxation is likely to go over the magic figure of 40 per cent.
The level of Government expenditure as a proportion of GDP is also mentioned in the Red Book. That figure is also likely to go over the magic figure of 40 per cent. in the near future. With our major rivals such as the United States, Japan and Korea all having a ratio well below 40 per cent., it is bizarre that a Government who claim to be sticking to the Conservative expenditure plans are not doing so, as a detailed examination of the Red Book shows.
One of the disappointments is that the Government cannot control social security expenditure, contrary to what they are proclaiming publicly. Table B18 on page 128 shows that the social security budget is likely to rise by £4 billion over the next two years. The Government are predicting that they will not be able to stick to the expenditure plans.
I have already said that the Budget has some welcome measures, but there is always a "but". One could welcome the changes to employers' national insurance contributions. However, the overall rate of national insurance contribution for employers is rising to 12.2 per cent., placing a considerable burden on companies, largely in the high-tech and financial sector, that are the backbone of our economy and are helping our balance of payments. They will be hit by the measure.
National insurance is an odious tax. It would be more intellectually honest to abolish it and put the burden on income tax. That would be a properly progressive tax, with those who earned more paying more of their share of tax, instead of having a vastly complicated tax that takes up a lot of time for accountants and the Contributions Agency. All that could be abolished if the system were simplified. I welcome the Chancellor's decision to merge the Contributions Agency with the Inland Revenue. I also welcome the measures to ask the Inland Revenue to help new firms setting up payroll tax. Those are two positive measures.
The Chancellor largely got away with his Budget last night, and the media were on the whole satisfied with it, because he had hyped in advance that middle England—the middle classes and the opinion formers—would be hit. In the event, they were not—or were they? We might just have to wait for the small print. Those of us who know a little about such matters can already divine some of the measures that will hit the middle classes.
One might welcome the reduction of capital gains tax from 40 per cent. to 24 per cent. for assets that are held for 10 years, but let us think about that. If inflation is 2 per cent., over 10 years the asset will depreciate by 20 per cent. If, as is more likely, the rate of inflation is over 4 per cent., the asset will depreciate by 40 per cent.
1343 In other words, the gain caused by inflation will be more than the reduction of tax that the Chancellor is making. By not allowing indexation of gains, we are going back to the bad old days of the high-inflation Governments of the 1970s, which taxed inflation on gains. That is unfair and unsatisfactory. I hope that, by the time the Finance Bill is published, the Government will have had a re-think.
Another disappointment is that, as the Red Book shows, the savings ratio has declined sharply in the past year—by about 1 per cent. It is predicted to decline again in the coming year. Is that surprising, when a retrospective tax was announced to put a lifetime ceiling on the new individual savings accounts and abolish PEPs and TESSAs? What are small savers to think when they might be taxed later? The Government are breaking faith with small savers.
It is a tribute to my right hon. Friends the Members for Hitchin and Harpenden (Mr. Lilley) and for Richmond, Yorks (Mr. Hague) and all my hon. Friends, who have conducted a vociferous campaign, based on huge numbers of letters, that the Government have been persuaded that a lifetime limit of £50,000 on the new ISAs is discriminatory, particularly against the young, and unworkable. The Government have listened to the savings industry as well. I welcome that very much.
§ Mr. Clifton-Brown
I should like to examine one or two of the largely welcome social measures in the Budget in a little detail. The working families tax credit suffers from a number of defects. The Womens Budget Group, an informal think tank of economists, social policy experts and women's organisations, believes that the replacement of family credit with the working families tax credit will lead to women and their children losing. Because the man is usually the breadwinner, he will get the tax credit, rather than it going to the woman.
The same would apply to taxing child benefit. It is often the low-earning or non-taxpaying wife who obtains the child benefit. Taxation would be calculated on the man's marginal rate. She would suffer. We welcome the increase in child benefit, but we regret that those on even basic rates of tax will suffer.
I wish to comment on the increase in petrol duty. The House of Commons estimates that the Chancellor has raised tax revenue by £1 billion this year, on top of the £695 million he raised in last year's Budget. This is a savage rise, which particularly hurts those people in rural constituencies who depend on the car for a lifeline.
People in my constituency have to use the car to get to the post office to get their benefit, to go to the doctor's surgery, and to do their basic shopping. It is all very well the Government saying that the problem is due to the previous Government's deregulation of the bus system, but there will never be a bus system in a rural area that is convenient for every single person—young, middle-aged and old. That is unrealistic. Those in rural areas need a car, and they are clobbered every time in the name of a so-called environmentally friendly tax.
There are many other more satisfactory ways of producing a green Budget. One is to reduce VAT on insulation materials. This is a so-called welcome benefit, 1344 but it is miserly because it is applied only to Government schemes. Why does it not apply across the spectrum? The Chancellor should talk to our European Community officials in Brussels to see if we can get a derogation to apply the benefit across the spectrum, so that all insulating materials can be free of VAT. In that way, instead of the home energy efficiency scheme insulating 3.5 million homes, it would get to all 10 million homes which need it, and some of the poorest people would benefit.
The real disappointment of the Budget is that it fails to deliver for the health service and for education. The Government claim that they have a wonderfully reducing debt and a strong economy, but they should listen to the figures. Let us look at the health service. The £500 million which was greeted—or was not greeted—with such glee by Government Back Benchers yesterday is 1.2 per cent. extra for the health service. When we were in government, we put in, year on year on year, 3 per cent. extra in real terms.
My constituents in Gloucestershire will see their waiting lists rise because the funding is not being increased at the same rate as for urban areas. We have a bed-blocking problem in Gloucestershire, and 100 people who should not be in hospital are there simply because the funding is not available to provide them with a domiciliary, residential or nursing care package. They are in beds which should be occupied by people who need operations. The doctors are there to perform the operations, but they cannot be carried out, because the money is not there to get the people our of hospital. The waiting lists lengthen, and people who need operations do not get them.
§ Ms Claire Ward (Watford)
The hon. Gentleman has a selective memory of my right hon. Friend the Chancellor's speech. He refers to the increase in petrol duty and its effect upon the rural communities. He forgets that the Chancellor also introduced an extra £50 million for rural transport. He referred to the health service, but he forgets that we have put more money into the health service than the Conservative Government ever intended. We have done likewise in education. I am interested to hear the—
§ Mr. Deputy Speaker (Sir Alan Haselhurst)
Order. The hon. Lady is in danger of making a speech. Interventions must be brief.
§ Mr. Clifton-Brown
I rather wish I had not given way to the hon. Lady, but as I did, I will answer in robust terms.
The Chancellor has raised £1 billion from the extra petrol duty. The £50 million for special rural schemes transport is peanuts in comparison, and my constituents will feel the harsh economic effects of that increase in petrol tax. The £50 million is welcome, and here I make a special plea to the Chancellor. My constituency has an excellent community bus scheme, which has been going for 15 years. I hope that money will go not only to new schemes but to existing ones.
§ Mr. Shaun Woodward (Witney)
Does my hon. Friend agree that the intervention by the hon. Member for Watford (Ms Ward) showed what we all know—that Labour Members have no understanding whatever of the 1345 needs of rural communities? Does he agree that they are given to the kind of patronising claptrap which suggests that £50 million for rural transport will solve the problems that the Government have created with their Budget?
§ Mr. Clifton-Brown
My hon. Friend is right. He moves in his constituency, and he goes to the local employment service and doctors' surgeries. He knows, as I do—and as every Member who properly represents a rural community knows—the real hardship that the increase in petrol duty will cause.
§ Mr. Paul Keetch (Hereford)
The hon. Gentleman knows my constituency very well, and I must say that I find astonishing what he says about the great things done by the Tory Government. Does he remember the village schools, pubs, shops, postal services and bus services closed under the Tory Government? I have no great support for Labour Members who do not understand rural constituencies, but this is one issue that the Tories—who were thrown out of vast swathes of rural Britain—do not understand, either.
§ Mr. Clifton-Brown
I was the only Conservative Member of Parliament in the country who had a positive swing towards to me at the election. I do not recall a single time when I was trying to defend a rural school or bus service on which I received support from any Liberal Democrats.
The Budget is a wasted opportunity in terms of the amount of resources going to the health service. In terms of education, the position is even worse. I calculate that the increase—even with the extra £250 million yesterday—this year will be less than 1 per cent. That is a disgrace, and experienced teachers in my constituency will continue to leave schools and class sizes will rise. Special needs pupils will not get the statementing they need.
The previous Government were able to provide great public services at the same time as reducing the burden of taxation. I hope that the Government will do better in the rest of their term. Otherwise, when they reach the next election, the electorate will deliver their verdict.
§ Mr. Geraint Davies (Croydon, Central)
This is an amazing exhibition from the Opposition. In today's newspapers—from The Sun to the Financial Times and everything in between—there has been almost universal acclaim for the brilliance of the Chancellor's Budget. [Interruption.] Conservative Members may laugh, but they are in the minority. It is all very well pretending that the media do not really understand the issues—I suggest that they understand the issues much more than Opposition Members.
The centrepiece of the Budget—making work pay—goes alongside a number of other themes on which I will not dwell, as the media and right hon. and hon. Friends will articulate them in detail. I want to combat the somewhat pathetic points made by the Leader of the Opposition and other Opposition Members.
The Budget contains measures for supporting families with children through child benefit rises and encouraging business by lower corporation tax and special concessions 1346 for small business. The Budget provides extra cash for education and health, £500 million for public transport, more support for the environment and—all-importantly—the setting of a long-term economic framework for the prosperity of Britain in a global marketplace.
The Leader of the Opposition said that the initiatives on corporation tax, small business tax, the challenge funds for universities in terms of venture capital, the reduction in national insurance and the reform of capital gains tax were all the idea of the shadow Chancellor of the Exchequer—that they were all your ideas.
§ Mr. Deputy Speaker
Order. The hon. Gentleman must sit down when I am on my feet. I am trying to help him to remember the convention of the House that hon. Members refer to one another in the third person. Remarks must be addressed only through the Chair.
§ Mr. Davies
I apologise, Mr. Deputy Speaker—I was not suggesting that you had claimed those tax policies as your idea. The suggestion was that they were the idea of the Conservative party. If they were—and of course they were not—why were they not implemented in the 18 years of Conservative Government? Why, instead, did we have years of drift that ended in £400 billion of public sector debt?
I come to that well-trodden, pedestrian point that the Prime Minister claimed that there would be no new taxes under Labour. Frankly, no voter believes that a new Government will not reshape the fiscal terrain to deliver their ambitions on poverty, on environmental sustainability, on employment, on security and on building a coherent society and future prosperity. Everybody knew that our pledge was that the lower and higher rates of income tax would not be increased—and they will not be. Indeed, I am confident that the overall tax burden will be less by the time of the next general election.
§ Mr. Woodward
The hon. Gentleman says that the overall tax burden will have come down by the time of the next election. Will he explain the Government figures which suggest that, this year, the burden in terms of net taxes and social security contributions is 37.2 per cent., whereas the projection for 2001–2 is 38.5 per cent.? By using simple mathematics, can he explain by what magical trick the proportion will be reduced in the final week before a general election?
§ Mr. Davies
There is not going to be an election next year. The key point is that the centrepiece of the Budget is making work pay. Our strategy is to translate claimants into taxpayers—we shall create opportunity where there was despair. By creating an economy based on work, we shall establish a virtuous cycle.
The Conservative Government characteristically built an economy of spiralling taxation and low success. Their mismanagement meant that there were hidden taxes—for example, the BSE crisis cost £3.7 billion, and the underpricing of shares in the privatisation programme cost £5.7 billion. Moreover, it took the Labour Government to 1347 give the Bank of England independence, which is saving £6 billion a year in terms of the repayment of Government debt, as long-term borrowing costs are the lowest for 30 years.
Another myth is that the Conservatives are the friends of rural areas—we have just heard that claptrap from the hon. Member for Cotswold (Mr. Clifton-Brown). Tory Members scoff at the £50 million for rural infrastructure, but that is not an insignificant amount. Part of the Tory legacy is the scrapping of rural transport as a result of deregulation, which was a complete disgrace. I am glad that our partners in the business community are responding to the challenge of the new Labour Administration. For example, BP today issued a press release saying that it would reduce relative prices of petrol in rural communities, which is a very welcome step.
§ Mr. Loughton
We have heard that red herring several times this evening, but will the hon. Gentleman acknowledge that the reduction in the oil price may have something to do with the fact that, over the past six months, the price of a barrel of oil has fallen from $20 to less than $13?
§ Mr. Davies
No. I am talking about the urban-rural differential, not the average price. The increases in fuel taxes are broadly in line with those imposed by the previous Administration, yet the Conservative party has now performed a cynical U-turn in an attempt to get more votes.
The Labour Government are introducing an environmental package. There is a policy shift from taxing the vehicle to taxing use. That is a sensible step, not only for people who work in car factories, but for the environment. Moreover, we are spending £500 million extra on public transport—we hope to continue that policy in future Budgets.
§ Mr. Clifton-Brown
Does the hon. Gentleman accept that a shift in taxation from the vehicle to its use is exactly what discriminates against rural dwellers, whom I want to protect?
§ Mr. Davies
That is why we are spending £50 million on rural transport, which the Conservative party destroyed.
On families, child benefit will rise by 20 per cent., which is the biggest ever increase. What is remarkable is that, after the idea of progressive taxation on child benefit had been floated, the Leader of the Opposition called it a betrayal. I cannot believe that the Conservative party, which used to talk about targeting, has changed its policy so cynically—it is outrageous and pathetic.
The Leader of the Opposition then claimed that we were on the brink of recession—that jobs were at risk because of an overvalued pound and high interest rates. However, the figures for February, which have only just been released, show that an extra 13,700 people are in 1348 jobs, and that unemployment is at 4.9 per cent., which is the lowest level for 18 years—since June 1980, in fact, very shortly after Labour were in office.
§ Mr. Woodward
Can the hon. Gentleman say what the sterling-deutschmark exchange rate is this evening as a result of yesterday's Budget? Does he agree that the pound is overvalued?
§ Mr. Davies
At a guess, I think it is about DM3.2 to the pound. [HON. MEMBERS: "Wrong."] Anyway, it is in that area. I understand the rather simplistic point that the hon. Gentleman is trying to make. He is saying that sterling is too high—
§ Mr. Davies
I shall give way to the hon. Gentleman in a moment, as he is wearing a very nice tie.
The Leader of the Opposition said that Britain was on the brink of recession because of the exchange rate, but if the export market is in such a bad way, why do the 1997 figures show that Britain has a trade surplus for the first time since 1985? Moreover, that surplus is the largest since 1982—£4.5 billion for 1997, as opposed to £1.8 billion in 1996. That is hardly an export-driven recession.
§ Mr. Davies
In a second. Please sit down. There is a big queue and I will take you one at a time, if you can contain yourselves in your seats—
§ Mr. Deputy Speaker
Order. I think that I may have to help the hon. Gentleman again. While I am on my feet, I appeal for rather less exuberance on the Opposition Benches.
§ Mr. Davies
In difficult trading conditions, with sterling high, goods have been holding their own and services have been expanding, owing to the quality and productivity improvements in the British economy.
The shadow Chancellor should realise that the exchange rate cannot be explained entirely in terms of relative interest rates. The pound is strong because there is international confidence in the British economy and, not least, in the British Chancellor and his Budget. That is unfortunate in some senses. Everyone realises what a good job we are doing.
There is also great uncertainty over the euro. Will there be a strong independent bank? Will there be political fudges? Did the fact that it was announced on the very day of the Budget that the drachma would be part of the euro have any impact? Of course it did, because some people feel that it might drag down the average value of the euro, increasing uncertainty and making sterling a refuge currency. We understand that.
1349 There is uncertainty in Asia and a recession in Japan, and Europe—I am thinking of Germany in particular—has been depressed by having to fulfil the Maastricht criteria quickly. All that has contributed to the strength of the pound, alongside the fact that we are at the top of our economic cycle. The United States is in a similar situation to ours, and our exchange rate with the dollar has been steady for about 15 months.
The pound is holding up, as a function of the good job that we are doing; markets are up; pension values are up; and things are looking good.
§ Mr. Paterson
I am touched by the gallant comments about my tie, but I am shocked that the hon. Gentleman should dismiss as simplistic a question about the exchange rate. Does not he realise that 20 per cent. of the British economy is based on manufacturing and that tens of thousands of people are worried stiff about the exchange rate, which, for his information, has gone to DM3.05?
§ Mr. Davies
I realise that there is concern, but it is worth looking at the trade figures and at how well we are doing under difficult conditions. The uncertainties that I described are temporary—they may take a year or so to get out of the system—but we are creating conditions, with long-term policies, in which we are doing well despite the strength of the pound. Employment and prosperity prospects will continue to improve.
§ Mr. Ruffley
What reasons can the hon. Gentleman give the House for the downgrading of the gross domestic product forecast for 1998, from 2 per cent. to 2.5 per cent.?
§ Mr. Davies
As I said—[HON. MEMBERS: "Resign."] Unfortunately, I have no job. There has been a modest reduction in growth prospects, and I do not deny that that is partly linked to the prevailing exchange rate, but that does not contradict anything that I have said.
The introduction of working families tax credit is greatly to be commended. As with almost every other measure, we still do not know whether the Opposition support it. The 10p tax rate has not yet been introduced, and Opposition Members may scoff, but we inherited a legacy of a £400 billion deficit, and at the right time we will introduce the lower rate.
The Leader of the Opposition and the shadow Chancellor suggested that everybody loses, but among those who gain are families; the unemployed; the low-paid; small, medium and large businesses; the environment; people in education; and people in health. Almost everybody gains. It is a brilliant Budget: a Budget for jobs and work. After 18 years of drift, uncertainty and U-turns, we have a framework for success. I am proud to be here to support it.
§ Mr. Tim Loughton (East Worthing and Shoreham)
It is always entertaining to follow the hon. Member for Croydon, Central (Mr. Davies), so I shall not take offence at the fact that he failed to comment on my tie, of which I am rather proud. I apologise to you, Mr. Deputy Speaker, for any over-exuberance among Opposition Members, but we have certainly had far better entertainment than anything that is on television this evening.
This is a Budget of prudence and stability. We know that because the Chancellor found it necessary to repeat it 17 times yesterday. It was mirrored in the green Budget and last year's ISA consultation paper, in which the Paymaster General constantly referred to the "prudent and sensible" savers from under whose feet he was so keen until yesterday to pull the rug. As William Blake said:Prudence is a rich, ugly, old maid courted by Incapacity.The trouble is that we are never treated to any clue as to what prudence and stability in the Chancellor's economic dictionary actually amount to. What is a stable and prudent level for the ratio of public debt to national income, for example? What is a stable and prudent level for the public sector borrowing requirement at a time when yesterday's edition of The Sun—on the reverse of a rather fetching picture of Melinda Messenger—was briefed to say:The Iron Chancellor, Gordon Brown, will use today's Budget to raise a fortune in taxes to start paying off the £420 billion national debt"?Of course, that did not happen. The complete failure of that to happen as The Sunhad been briefed did not deter it from printing a picture of a dwarf Chancellor today under the headline,Hi-ho, Hi-ho, it's off to work we go".
§ Mr. Loughton
It could be Gordon Messenger. I do not know whether it is Dopey or Grumpy; it certainly is not Bashful. The article refers toa revolutionary Budget designed to get every jobless person in Britain back to work.Perhaps it has something to do with the lapdog nature of certain elements of the press that they should be completely misled on one day and be perfectly happy to go along with what they are told the day after.
In not reducing the national debt, the Chancellor missed a golden opportunity to go into public sector surplus. Instead of any explanation, we were treated to additional alliterative variations on prudence, with the glorious phrase:prudence for a purpose: to meet the people's priorities."—[Official Report, 17 March 1998; Vol. 308, c. 1112.]Despite the hype, the soundbite frenzy and the alliteration, the Budget will more accurately go down as the transvestite Budget, for it is not what it seems: it has undergone an unprecedented tarting up by the spin doctors.
Yesterday, we heard an implicit threat to tax child benefit. Child benefit has had a bit of a makeover: a little blusher here, a lot of lip gloss there, and it is known as modernisation of the welfare state, dependent on that old 1351 favourite, the children's review, which we were promised yesterday, to add to the 150-odd reviews that are already in the pipeline.
The Budget was hailed originally as a triumph for businesses, but by the end of the day, when the foundation and mascara had started to crack and run, many burdens on business were revealed, not least the working families tax credit, the assessment and verification of which will be down to the companies themselves.
A major reason why that Conservative idea was dropped in 1985 concerned the additional burdens on small businesses, in particular. In addition, there are bad employers who will deliberately hold down wages now that they have a greater knowledge of their employees' entitlements.
Yesterday, we also had a variation on the nanny state—it has become the subsidised nanny state, quite literally, and the proposals for generous child care put far greater reliance on anyone other than the parents looking after children.
We also saw some tokenism on museum charges. I greatly welcome free admission to museums, but what were we treated to? Just £2 million, which is a drop in the ocean and, in any case, does not apply to all national museums. The National Art Collections Fund said that it is more like a stop gap than a long-term solution. It is a betrayal of another Labour election manifesto pledge, when only last week it was hyped that we would need at least £40 million to guarantee free admission to our national museums.
Of course, we had the prospect of the 10p starting rate of tax dangled alluringly in front of us yet again, but not today. Again, it is jam tomorrow, or in this case, jam tart.
I could go on, but I want to mention three main features of the Budget that are seriously flawed. The first is tax and in particular the changes to capital gains tax. The second is ISAs and the third is another example of the soundbite and presentation triumphing over reality and substance, in the form of the supposed environmental measures.
§ Mr. Geraint Davies
I know that hon. Members bring to this Chamber personal experiences, which they weave into their words. I wonder where the references to transvestites and tarts and so forth come from in the hon. Gentleman's past.
§ Mr. Deputy Speaker
Order. That is an unworthy comment, which the hon. Member would do better to withdraw.
§ Mr. Loughton
I should like to declare a rather relevant interest, Mr. Deputy Speaker, as I have worked in a merchant bank for the past 14 years, dealing in particular with personal equity plans and managing private clients' funds.
On CGT and tax, it was a watchword of successive Conservative Chancellors on tax to "keep it low, keep it simple". Indeed, when the noble Lord Lawson was Chancellor, he made a virtue out of abolishing a tax in every year that he delivered a Budget. The proposed changes to CGT represent a minefield of confusion and 1352 complication, which can be welcomed only by the accountancy profession and those engaged in producing new computer software for the finance industry.
By my calculations, before yesterday's Budget, we already faced the prospect of five different income tax rates: 20, 23 and 40 per cent. for most incomes, and 10 and 32.5 per cent. for dividends. If that were not complex enough, under yesterday's proposals for CGT tapering, there will be no fewer than 18 new different rates of CGT for private individuals, on non-business assets alone. That makes 23 different rates of tax for dividends and CGT alone—hardly, "keep it simple."
The indexation system may not have been perfect, but it was certainly straightforward and workable. Now it is to be replaced by a far more complicated system. As my hon. Friend the Member for Cotswold (Mr. Clifton-Brown) said, it is a swiz. The freezing of indexation for the next 10 years will amount to much more than the reduction of 16 per cent. in CGT rates for higher rate taxpayers and 9.2 per cent. for basic rate taxpayers, for those who are prepared to lock away their equities in a cupboard for the next 10 years and leave them untouched.
The changes are a nightmare for fund managers, who already face the prospect of spending millions on new computer systems to deal with ISAs and will now have to adapt their computer systems for a far more complicated taxation system than I have ever experienced. They will have three weeks in which to do it before the proposal starts on 6 April. I know of no other country that has such a complicated system. I cannot believe that it will survive the full rigours of the Finance Bill Standing Committee—I certainly hope that it will not. It represents a major flaw in the Budget, and other implications stem from it.
Taxation considerations will now wag the tail of the dog of investment prudence. People will hang on to shares for all the wrong reasons. What is the problem with holding shares in one blue-chip pharmaceutical company, for example, or even a food producer—the hon. Member for Croydon, Central had great and detailed knowledge of that industry before he left its employ some while ago—for the space of two years? If the value has gone up a lot, one takes a profit and reinvests it and the capital in another United Kingdom blue-chip company, such as engineering. That is what managed fund managers do all the time, but under these proposals, people will be clobbered for the full extent of CGT, at the 40 per cent. rate.
I am also greatly concerned about the confusion that will be caused and the extra expense that will fall on shareholders, let alone the fund managers running their funds, with the ending of pooling. One would have to work out the exact date on which each stock, scrip dividend or whatever it might be was acquired and which level of the tapering CGT rate applied to it. That will be a field day for accountants.
Also, the proposal gives no incentive for badly performing companies to perform better if they know that shareholders are locked in, fearful of taking a higher capital gains tax rate. If there is no threat of selling, why need a managing director get his act together?
I am also concerned about the ending of bed and breakfasts. Bed and breakfasting has been legitimate for the ordinary investors of middle Britain, so that they can take advantage of an annual CGT allowance without 1353 having to dispose of decent blue-chip investments. The impact on smaller shareholders with pooled funds would be that, if they were investing in a good, performing blue-chip unit trust and they wanted to take advantage of their annual CGT allowance, they would not be able to bed-and-breakfast it and buy it back the following day, but would have to sell it and look for an alternative investment, regardless of how well the fund was performing and how much they would like to stay with that fund manager. Otherwise, they would risk facing a much bigger CGT bill when they sold a larger holding at a later date. All that was done yesterday with no warning, and the sum total of the proposals will be severely to limit people's ability to manage their assets.
On ISAs we saw the biggest U-turn of all. I cannot recall a time when so big a U-turn has been conceded by so few in the face of such a tremendously bad reception by so many discontented investors. Let us be charitable. We welcome the Damascene conversion in the wake of a concerted and professional campaign by the finance industry and Conservative Members. However, it is more than a touch ironic that the Government have caved in to the campaign by the City, or that self-regulatory trade body in the City to which the Chief Secretary referred just two weeks ago in regard to putting an end to the nonsense of self-regulation, which was too often more a matter of self-interest than of public interest.
Certainly the self-regulatory organisations have won the day over the Chief Secretary and the Paymaster General in this case. I hope that that sets a good precedent for listening to the professionals and climbing down accordingly in the future, on other highly flawed measures contained in the Budget. It will be good to see a repentant Paymaster General when he reveals himself from behind the Speaker's Chair later in the Budget proceedings.
What a climbdown it has been. Alongside ISAs, PEPs and TESSA holdings will keep their tax-free status, and in the light of their success, people will be able to add an extra £9,000 full contribution to them in the next tax year. There will be no lifetime limit, and the £6,000 general PEP contribution that we have been able to make in the past 11 years will simply be replaced by a £5,000 contribution into ISAs over the next 10 years, and one's capital will be fully accessible. ISAs will be free of CGT and income tax.
What I have just described is little different from the PEP regime, which still prevails under a different acronym and has done so well for the past 11 years. In other words, we could have avoided all this upheaval and all the costs of the consultation process—I shall be interested to learn how much the Government have had to spend on the farrago that it has turned out to be. We could have avoided all the uncertainty caused to investors, who, as my hon. Friends have said, have been a major factor in the drastic slippage in the savings ratio from 11 per cent. to the 9 per cent. forecast in the Red Book.
We could also have avoided all the hassle among PEP providers, who are faced with little time and a big bill to install new systems, and at the same time face competition in Germany, Luxembourg and Dublin, which has been hotting up and taking advantage of the vacuum in the savings market in this country. We could have avoided all that by amending and simplifying the current, successful PEP system. 1 would have liked modifications on merging 1354 single-company PEPs with general PEPs, and improving their attractions and accessibility to cash. It could have been done by a little adjustment without the cost, upheaval and hassle that we have had.
Not content with substituting acronyms—the term ISA was always a sign of hope for divine intervention, because it is the Muslim word for the prophet Jesus—the Paymaster General made the new system much more complicated. There are many unanswered details for the Standing Committee to consider. How will the separate elements that will comprise the ISA be regulated? How can people get the best advice in the hurly-burly of the Tesco queue while paying for their frozen peas and totting up their discount vouchers on this week's star yoghurt bargain buys?
Will uninvested equity cash in ISAs be liable for interest or will it not attract any, as promised in the consultation document? If the latter, does the interest go to the stockbroker, who obviously needs it? What best advice will be available for fledgling investors, to deter them from staking all on, for example, a Thailand single-country fund or an Australian uranium mine? That can happen now, and it may happen in future unless best advice is available at an affordable cost, particularly to new savers.
There is also the problem of benchmarking and kitemarking, which were flagged up by the Chief Secretary and have apparently been outlawed by the European Union because they represent pre-authorising financial products.
The Budget has left little time for providers to get new computer systems for ISAs up and running by April 1999. Most of the Investment Management Regulatory Organisation cases, and the fines that resulted from them, came about because of bad, inadequate administration. The proposals will be a bonanza for computer software manufacturers. I welcome that; it is a recommendation to buy shares in companies involved in that part of the market.
Only two weeks ago, the Government were arguing that the major problem with PEPs and TESSAs was the tax relief lost to the Treasury, which amounted to some £1.5 billion. As the Chief Secretary said, there is no point in continuing to give tax relief to people who can already afford to have significant sums locked up for long periods.
In several long-winded contributions, Labour Members have railed against the fat cats who had as much as £50,000 invested in their PEPs. What has changed in the past two weeks? The proposals now allow PEPs and TESSAs to continue and allow holders to take out ISAs as well. As well as attracting new ISA investors, that will result in a rather greater loss of tax relief to the Treasury. What is new? What has happened in the past two weeks? I do not understand it, but I welcome it. I am glad that the Government now admit that, if they are to achieve the necessary objective of deepening everyone's savings pot, they must forgo tax relief on savings, because that is the major incentive to save.
Even the new proposals are a major missed opportunity. There is still no real incentive to attract this elusive band of new savers. The Prime Minister said on 3 December:There will be 6 million extra savers as a result—6 million people who will be able to save but at present cannot."—[Official Report, 3 December 1997; Vol. 302, c. 349.]1355 That was not refuted in yesterday's Budget speech. I trust that it still holds good, but why? Who are the heaving horde of 6 million awaiting the Paymaster General's signal to throw their money at new Labour's new savings plan? Where are they? Are they too shy to show themselves? Perhaps they are the people who will inhabit the spurious 4.4 million new dwellings that are supposed to be needed.
§ Mr. Clifton-Brown
My hon. Friend makes a serious point. Does he agree that there are considerable dangers in the supermarket selling of ISAs? Customers will be encouraged to invest in ISAs by someone without any financial experience. They could be an unsuitable form of investment for them.
§ Mr. Loughton
My hon. Friend makes an apposite point. Even if the mechanism is more sophisticated than the potential investor struggling through the checkout queue, good advice may be available at the point of entry, but what guarantees that good advice will prevail thereafter? Who will give best advice, especially to new investors, when it is time to switch out of that supermarket's financial product into that of a rival? There is no guarantee of continuity of best advice. As people in the financial industry know, best advice costs. The proposals take no account of such costs.
I am keen to identify the elusive horde of 6 million. Are they the 6 million crowd that will queue up to explore the internal organs of the millennium dome's androgynous figure? It is a mystery greater than Loch Ness or anything on "The X Files".
For the less well-off, there is no attraction in replacing a capital gains tax allowance of £6,800 with an ISA with no CGT implications. Most such people get nowhere near capital gains like that. The income on a £5,000 portfolio of equities at a yield of 3.2 per cent.—an average market yield currently—would be £128 in net dividends plus a £14 tax credit for the next five years only. That is highly likely to be wiped out by charges alone. Instead, it is likely that most new savers will use ISAs as tax-free bank accounts, to transfer existing cash from non-tax-free bank accounts. They will use them as a short-term savings plan to save for Christmas or summer holidays, and thereby not add a penny of new money to savings—and especially not to long-term savings.
The absence of a bonus credit system or a link to the benefit system means that there are no incentives in the ISA proposals for new savers. It is a lost opportunity. The Paymaster General has failed, although he has considerably redeemed himself by not putting the PEPs and TESSAs system to the torch, as he had proposed. The whole exercise has been a shambles, a lesson in how not to rush into things dogmatically; if it ain't bust, don't fix it. The industry has been left with a more complicated system, and the consumer is left confused and disoriented without even the compensation of the thrill of the promised monthly prize draw, which has now, alas, been dropped.
I am a member of the Environmental Audit Select Committee. When it was set up, it was described by the Deputy Prime Minister as a terrier to snap at the heels of Government, but only last week it turned into a savage rottweiler, with the report that it issued. I am glad that the Financial Secretary is here, because she was dragged 1356 kicking and screaming to give evidence to us and has had to reverse her opinion of us. The Budget's environmental content, contrary to some of the spurious claims made in verbose terms by Labour Members earlier, is purely tinkering, and has already been given the thumbs down by the environmental groups. Their summary was that Brown is going green only at the edges.
The Budget is not what it seems. Of the £500 million extra of public transport money, at least £290 million will be gobbled up to patch up the London underground. The VAT reduction on energy-saving materials applies only to people claiming grants under existing Government efficiency schemes. Again, I am glad that the Financial Secretary is here because, ironically, she led the vote to try to get VAT exemption for all energy-efficiency products. Of course, the Government have not done it; it is not even a halfway house, but is a token measure.
§ The Financial Secretary to the Treasury (Dawn Primarolo)
I shall return to the subject of energy-saving materials and the campaign against the Conservative Government later, but, as Conservative Members have commented on the fuel escalator, will the hon. Gentleman tell the House whether he supports the recommendation of the Environmental Audit Select Committee that the escalator should be set higher than the Government have set it?
§ Mr. Loughton
The Select Committee's report was a joint effort, when many of us made representations, but the report as a whole has been endorsed by all of us on the Committee. However, I am happy to speak on the subject of fuel. As the Royal Automobile Club has pointed out, the Budget has brought in £2.75 billion extra from motorists, which is 14 times the enhanced sum that is to be given to public transport. Motorists pay £30 billion a year in taxes, yet less than a third of that comes back to transport. The Budget was described by one environmental group as not much better than a smog alert.
Nothing in the Budget backs up in any way the speeches made by the Deputy Prime Minister, about the need to move to greater use of brown-field sites for housing development. Rhetoric is one thing, but nothing will happen unless it is backed up by tax incentives for developers to take advantage of that form of land for future house-building requirements. Nothing in yesterday's Budget advanced that policy at all. All that is a long way from the Select Committee's recommendation that environmental taxes should be recycled into incentivising environmental improvements. It is a con: the Government are unashamedly using the environmental concern tag to justify increasing taxes on general consumption.
The real test of the Budget will be the impact on the pound and on interest rates. The hon. Member for Croydon, Central failed to understand that the Budget has caused the continuation of the relentless rise in the value of sterling. It now stands at more than DM3.05, which is a nine-year high; and it is up against the euro and the dollar. The value of sterling is crucifying manufacturing exports: in the three months to November, exports to non-EU countries fell by 1.6 per cent. and imports rose by 3.8 per cent. If that trend continues, it will be absolutely disastrous for this country's manufacturing industry.
The Chancellor displays an attitude of, "Not me, guv—it's not my fault; it's all down to the Bank of England. It is responsible for the sterling rate and for interest 1357 rates—they are nothing to do with me." It is a disgraceful indictment of the Government that the Chancellor is prepared to stand by and do nothing as industry is squeezed by the pound. The Budget also makes interest rate rises far more likely, as several Labour Members mentioned. The gilt market fell heavily after hours last night and fell again this morning. Consumer spending is likely to rise by more than 4 per cent., as the Government's figures showed yesterday.
I started by saying that the Budget should go down as the transvestite Budget. I trust that, by the end of the Committee stage on the Finance Bill, the Chancellor will have allowed us to amend it, so that it is a more palatable bedfellow for those on both sides of the House and for all parts of the United Kingdom.
§ 8.2 pm
§ Mr. David Prior (North Norfolk)
No Chancellor since the war could have come to the Dispatch Box with a better economic background, consisting of the most successful economy in Europe, low inflation, falling unemployment and strong public finances. Judged by the Maastricht criteria, we probably have the only economy in Europe that could have passed without smoke and mirrors. As the Chancellor—perhaps we should now call him "the guardian of the people's money"—said, this is a "once in a generation" opportunity for radical change, and it is against that background that the Budget must be judged.
There are parts of the Budget that I welcome, but the macro-judgment will ultimately overwhelm the micro-parts. If the Chancellor has read the economy wrongly, the resulting recession will overwhelm his policies on trying to get people back to work. I fear that he has it wrong. He seems utterly unaware that manufacturing industry, which employs about 4 million people directly and 8 million indirectly, and which is responsible for two thirds of total exports, has been suffering for several months.
As Graham Mackenzie, the director general of the Engineering Employers Federation, said:The key issue for engineering and manufacturing remains the exchange rate.There is a growing weight of evidence that UK manufacturing companies are now reviewing their investment plans. Jack Smith, the chairman of General Motors said only a week ago:sterling's strength has turned the UK into a high-cost economy for inward investments".The same has recently been stated by Honda.
Many companies that have struggled to export over the past year and have taken lower margins on their exports so as to retain markets are now concluding that at DM3-plus to the pound, they will have to review their activities. We shall soon see companies such as British Steel making a final decision on capacity in the UK. British Steel's view is:The undue emphasis currently placed on UK interest rates to combat inflation is resulting in the UK manufacturing sector—and within it the UK steel industry—bearing the brunt of the anti-inflation medicine…yet the manufacturing sector is itself exhibiting few signs of inflationary pressures.1358 The problem of the high pound has been aggravated by two policy mistakes by the Government. The first is that interest rates, which have gone up five times since Labour came into office, are too high and the inflation target of 2.5 per cent. is too rigid, failing to take into account the fact that inflation is running at about 0.5 per cent. in the manufacturing sector, as compared with 4.5 per cent. in the service sector. The great risk that, in the process of trying to stamp out that 4.5 per cent., a large part of British industry will be condemned to death. That is exactly what happened in the early part of the 1980s, as Labour Members may remember.
Interest rates alone are not a satisfactory way of addressing the problem, and the Chancellor, by failing even to mention that during his Budget statement, has missed an opportunity to tackle it. It is widely accepted that Britain currently has a two-speed economy; why are the Government persisting with a policy that is unnecessarily damaging British manufacturing industry?
The second policy mistake was to tax pensions and savings heavily and put pressure on companies' cash flow through the abolition of ACT. The tax on pensions will cost about £5 billion per annum. Corporate cash flows will be hit to the tune of £20 billion over the lifetime of this Parliament despite the welcome reduction in corporation tax and some alleviation for small and medium companies.
My fear is that we are about to enter an unnecessary recession with rising unemployment, rising imports and falling exports and that, for all the Chancellor's exhortations about ending the stop-go cycle, he is contributing to it. We need a better balance between fiscal and monetary policy to allow a progressive reduction of UK interest rates, which would lead to a more competitive and realistic exchange rate. If we do not do that, export order intake will continue to weaken as it has for more than a year now. Imports will rise and unemployment will stop falling. All that will be compounded by the problems in south-east Asia and stagnant growth in Japan.
I shall now deal with some of the micro-aspects to the Budget. I have already said that I am concerned that unemployment will start to rise at the end of this year. Despite that, I welcome the Chancellor's attempts to remove the poverty trap and to make employment more attractive, but how does that square with the minimum wage and the adoption of the social chapter—two measures which will, over time, push up the cost of employment to employers and counteract the policies to remove the poverty trap?
I am also concerned that those measures—especially the increase in national insurance contributions over £81 a week—will work against skilled higher-paid people. Against a background of tuition fees and loans for student maintenance, it is vital that the labour market provides real incentives for the individual to learn skills through higher education.
I am disappointed that there is no change to business rates. Of all the taxes raised from small businesses, business rates are the most damaging, because they are a fixed charge unrelated to profitability. A reduction in business rates for small companies is long overdue, and I am sad that the Chancellor has not taken the opportunity to alter the rates in this Budget.
I am particularly concerned about rural transport as I represent a rural constituency. Many poor people in the country have no access to public transport and no 1359 reasonable prospect of securing such access. They already find it extremely difficult to run a motor car. The increase in the tax on petrol of 4.4p per litre is a real blow to many of my constituents, who will not view the £50 million rural transport fund, spread over three years, as any solution to their problems. That fund is a triumph of presentation over substance—and it also says something about the Government's obsession with presentation.
The Budget does not mention the most unkind tax hike of all—the increase in council tax bills, especially in rural areas. Council tax has increased by an average of about 8.5 per cent. this year. In many rural areas, including my constituency, it has risen by more than 14 per cent. at a time when services—especially social services and education services—are being cut. The increase in the landfill tax from £7 to £70 per tonne will have another knock-on effect for local government.
What should I say to the pensioner in my constituency who wrote to me last week? He will now pay an extra 4.4p per litre for his petrol, higher council tax and more for a pint of beer. In April, he received an extra £1.96 on his basic pension. He told me not to take any political hogwash from this Government—although he supported them at the last election. After this Budget, it will be difficult to give an answer.
I support some aspects of the Budget. For example, I support the reduction in corporation tax rates and the Government's genuine efforts to reduce the poverty trap and to get people back to work. I am pleased that the Government have ended the retrospective tax on PEPs and TESS As. However, judged against the economic background and the opportunities that the Government had in this Budget, it is disappointing and uninspiring.
The Budget does not begin to recognise what is happening in the real manufacturing economy of this country. It does not do enough for small businesses and it continues to discriminate against rural areas. Perhaps above all, the Government have missed an opportunity to take a real, radical look at the tax and benefit system.
§ Mr. Shaun Woodward (Witney)
Rarely has the House been subjected to a Budget that has been so highly trailed, so widely leaked and based on so much rhetoric and so little substance. As my right hon. Friend the Leader of the Opposition said yesterday, the Budget makes many claims but is ultimately a step-by-step betrayal both of the Labour party's election promises and of the British people.
The Government have produced a Budget that I believe will be viewed as an abdication of responsibility. It will go down as a Budget delivered by a Chancellor who ducked the real challenges of the British economy and confused opportunity with opportunism. It will go down as a Budget of which the magician Paul Daniels would have been proud.
Yesterday the Chancellor made much of the fact that this is a once-in-a-generation Budget. Yet, if we examine the Chancellor's claims, something appears to be missing—perhaps the Budget's centrepiece has been left out. One can only conclude that the right hon. Gentleman and the Prime Minister had conversations at Chequers last weekend that led to some distortions of the Budget statement.
1360 The Chancellor told us yesterday that the Budget would end the unemployment and poverty traps—indeed, much has been made of the working families tax credit. However, it is difficult to see how, at a cost of just a few billion, it will be possible to wipe out poverty. That is a laudable aim with which all hon. Members agree, but it is difficult to see how it will be achieved with that sort of money. How will it be funded? Funding this year will be provided largely by the road fuel escalator. We must consider that many of those at whom the working families tax credit will be directed will also be hit hardest by the increase in fuel duty.
I know that that is the case in my constituency. I have received many letters today from constituents describing their real worries about how they will get around in rural areas. Those worries are not alleviated one jot by the promise of an extra £50 million spread over three years. I am afraid that that simply shows that the Labour Government do not understand the real needs of the countryside and the rural areas of our country.
This Budget has ducked the true challenges of our country. It has exercised opportunism at every turn. The Government could have taken many opportunities to help this country, but they did not do so—undoubtedly because the focus groups did not reveal to the Chancellor and the Prime Minister that the time was right.
I take the example of the proposed reforms to capital gains tax. The report entitled "Budget 98 Alert" produced by Ernst and Young and released this morning states:The taper does not encourage risk taking since it benefits success but offers no relief for losses. In fact, losses on investment become less valuable, as they reduce gains before tapering.The devil is always in the detail, and I suspect that, as the details emerge, we shall identify many faults with this Budget—just as we did with the last Budget.
The Chancellor announced yesterday a cut in corporation tax—a move welcomed by all Conservative Members. Yet, as my right hon. Friend the Leader of the Opposition revealed this afternoon, if one looks closely at the figures, one can see that, while the Chancellor gives with one hand, he uses the hands of every Minister on the Treasury Bench to grab back. Business will lose as a consequence.
This Budget does nothing to address the imbalances built up in the economy as a result of the appreciation of sterling—imbalances that have worsened significantly since July. It appears that the Chancellor thinks that he has washed his hands of short-term macro-economic policy since last June. Ernst and Young describes that as "benign neglect". The Opposition will hold the Chancellor to account for that benign neglect because it is an abrogation of his responsibility as Chancellor.
Yesterday the Chancellor had nothing substantial to offer manufacturing. The figures for the fourth quarter of 1997 show that manufacturing grew last year by 0.9 per cent.—less than 1 per cent. Next year, it is estimated that output growth will be between zero and 0.5 per cent. Last November—just four months ago—the Treasury issued the optimistic projection that manufacturing output would grow by 1.5 per cent. to 1.75 per cent. There has been a pretty dramatic revision in just four months, and that is a serious problem for manufacturing in Britain. What hope did the Chancellor hold out in his Budget to those in manufacturing?
1361 The Prime Minister this afternoon made much of how business welcomed the Budget. Perhaps it would be better if he stopped reading the newspapers and went out of his bunker in Downing street and his anaesthetised road shows, and met some of the people whose incomes he is clobbering so hard. What would he see, if he went out? The hundreds of thousands of people who do not have subsidised jobs but real jobs, and who are facing the prospect of real unemployment.
Those are the kind of people throughout the country who know that sterling is overvalued. Labour Members were unable to tell us this evening what sterling closed at against the deutschmark, such is their disregard for the consequences of their Budget. Those people face the prospect of a life on the dole. It is all very well for the Government to invent wonderful schemes such as the welfare-to-work scheme, but at the same time they must guarantee the jobs of the people who are in work at present. The Budget will not do that.
If the Chancellor and the Prime Minister had taken the time to read the releases from the Engineering Employers Federation, they would see that it gives a cautious welcome for the cuts in corporation tax, but the real issue for the EEF is the exchange rate. Export orders have been severely declining over recent months and matters are expected to get worse over the coming year.
Last night, as Ministers were offering soundbites all over the media, the Chief Secretary was pressed repeatedly by Jeremy Paxman on "Newsnight" to say whether he believed that sterling was overvalued. Could he give an answer? No. Five times he was pressed for a simple yes or no, and five times we were subjected to paragraphs of verbose effusion but no simple answer.
If the Chief Secretary spent a little more time out of the television studio and travelling round the country, he would see the damage that the Government's terrible policy is doing to our country.
We do not have to take hon. Members' word for it. Numerous firms today produced their reports of the consequences of the Budget, and it is very bad news for manufacturing. Goldman Sachs expects at least two quarter point rises in the coming weeks. Charterhouse expects the same. The Hongkong and Shanghai Banking Corporation describes the Budget as a "considerable disappointment" in its approach to macro-economic policy. As KPMG say, unless the Budget is quickly followed by interest rate falls, the problems of manufacturing industry will remain and the prospects for economic activity this year and next may end up looking even more pessimistic than the Chancellor's own forecast.
That means that there is the prospect of recession. Manufacturing output is at record lows. Alongside that, we have the problems of managing a dual economy, with the service sector output up almost 4.5 per cent. last year.
Co-ordination of monetary and fiscal policy in the medium term is a matter for a Chancellor, yet yesterday we saw the Chancellor abdicate that responsibility because he believes that, since last June he no longer has responsibility. He gave it away. The problem is not for him now, but for those in manufacturing. The Chancellor had the opportunity, but he threw it away, leaving the prospect of a hard landing.
1362 The Chancellor said that he wanted stability, but what sort of stability is there for those in manufacturing who face the prospect of a return to boom and bust—the stop-go policy that the Chancellor claimed yesterday he intended to eschew?
What sort of stability is it, when the Government revise their figures in just four months, from a growth of manufacturing at almost 2 per cent. to zero. Even on their own figures, a recession is in sight, but what did the Chancellor do?
We must look at other challenges, not least the challenge of controlling a consumer boom. It still exists in the high street, although the figures are marginally declining. The Chancellor again ducked the issue, because he wants to be the iron Chancellor, and he has his eye on the house next door. Consumer spending this year is forecast to grow between 3.75 per cent. and 4 per cent. That is higher than previous estimates, and the Budget has done nothing to restrain demand.
The combination of strong consumer demand and low industrial output is projected to lead to a deterioration in current account balance. After a surplus of £4.5 billion in 1997, the current account is now projected to fall to a deficit of £6.5 billion this year and £6.75 billion in 1999. The glossy book entitled "New Ambitions for Britain" will all too soon become for many people an ambition to survive in Britain. [Interruption.]
Hon. Members may laugh, but the laugh will be removed from their faces when they must answer the questions from those in manufacturing whose jobs they will have destroyed through the Budget. Betrayal is the hallmark of the Budget. Step by step the Government are betraying each of their promises. Step by step they betray the British people.
Labour Members make much of what the Government are doing with taxation. The hon. Member for Croydon, Central (Mr. Davies) was unable to understand from the Red Book that not only is the tax burden going up next year, 1998–99, but that it goes up in 1999–2000 and 2001. Unless I am wrong and the hon. Gentleman expects the quinquennial Act to be repealed, at the next election we will see that the figures have gone up and up. Under Labour, as sure as eggs is eggs, taxes go up. The tax burden of the United Kingdom will go up with this Government.
People were led to believe that there would be no new taxes under Labour and that the tax burden would fall, but the reality is quite different. Over the next few years, measures will be announced whereby the personal sector will be hit by tax increases of at least £4 billion in 1998–99, which is equivalent to 2p on the basic rate of tax. What kind of way is that to honour a pledge? The Government are putting taxes up and pretending to the public that they are doing nothing of the kind.
Despite the smoke and mirrors of the Budget, taxes are going up as a percentage of GDP. Even before the Chancellor stood up yesterday, taxes had gone up by £790 a year for the average family. It will not stop there. On 1 April, mortgage interest relief will be cut from 15 per cent. to 10 per cent.—another hit at middle Britain. Furthermore, there is the not too thinly veiled promise of child benefit being taxed in the future.
The British people should be warned that the Chancellor is after their money. He has only one ambition—to use his office to move to the house next 1363 door. [Interruption.] Hon. Members want me to sit down. They do not like hearing the truth. They do not like hearing that yesterday they tried to persuade the country that they were being generous on the health service. What did you do on the health service? You promised—
§ Mr. Deputy Speaker
Order. The hon. Gentleman may have to join the same class in procedure as the hon. Member for Croydon, Central (Mr. Davies).
§ Mr. Woodward
I am grateful for the correction, Mr. Deputy Speaker.
Hon. Members may like to know that the £500 million that they were promised yesterday for the health service will do little to get near the annual increase of 3 per cent. that the health service received under the Conservative Government. What will happen to hospitals such as Burford and Witney community hospitals in my constituency? They will be closed. Hon. Members may not like to know that, under their Government, that is what will happen. The reality is that the community health trust budget in Oxfordshire has been cut by £1.5 million. The county has been told to find the savings, and community hospitals will be closed. The proposal is an attempt to hoodwink the public, as is the Government's paltry promise of £50 million to deal with rural transport.
It is sad that so many people in this country will be disappointed by the Budget. Many in this country will see that this step-by-step betrayal of the people will result in unemployment, hospital closures, and closures of more village schools. The Government have misled the people. Sooner or later, the people will reject the Government.
§ Mr. Owen Paterson (North Shropshire)
Thank you, Mr. Deputy Speaker, for calling me to speak in the debate on the Budget.
I speak as someone who, until 1 May, spent his whole career in manufacturing industry, travelling the world in a business that exports 95 per cent. of its production. I also speak for North Shropshire, which is a hard-working part of the country that depends on agriculture and small industry.
The Government do not bring credit on the House in their approach to the current economic situation. The people of this country are not stupid; they know perfectly well that it was Conservative policies that brought 23 consecutive quarters of growth, that created 1.4 million jobs and that halved the number of unemployed 18-to-24-year-old males—down to 40,000 in the last year. It is childish of the Government to make out that the great economic revolution has occurred since 1 May. Doing so does not bring credit on the House or the Government.
We are in our present position because hideously difficult decisions were taken from 1979 onwards by four Conservative Governments. Most of those decisions were taken in the teeth of the bitterest opposition from Labour Members—and from Liberal Democrats, represented at the moment by a solitary soul.
We heard a splendid speech this evening from the hon. Member for Nottingham, South (Mr. Simpson), which showed that the Novosibirsk tendency is still there. In my experience, a country prospers if it has fewer politicians, 1364 fewer bureaucrats, less Government interference and, ultimately, less taxation, but there are still some glorious old dinosaurs in the Labour party who would regard me as hell on wheels.
We have to recognise that the Government have made some of the right noises and that there are elements in the Budget that free-market capitalists such as me might welcome. One of the most interesting innovations is amalgamating the Contributions Agency with the Inland Revenue. As one who would like government reduced and costs reduced, I think that that may be an interesting, innovative measure. It will be desperately complicated for the Government to bring about, but if they do, well and good. If the Government want to be really radical, I suggest that they study the possibility of amalgamating national insurance contributions and income tax. As someone who has been in business, I know that the complication of filling in forms and serving Government takes an inordinate time.
I do not want to be churlish. There are elements in the Budget that show that the Government have learnt a little, but they still do not understand how a business and a capitalist economy work. Everything in the glorious Red Book may come to naught. Someone has gone to tremendous trouble to produce these figures, which, sadly, may all be absolute rubbish because of two desperate blunders made by the Government soon after they came to office. Handing over independence of the Bank of England to a small group of advisers has deprived the Chancellor of one of the vital tools in controlling the speed of the economy. Every week the Prime Minister gets in the phrase "boom and bust". It is a good phrase and it goes down well with the focus groups, but he has taken away one of the most crucial brakes on the economy—the ability to handle interest rates.
We also had the quite unnecessary Budget after the Government came to power which, according to the Confederation of British Industry, lobbed £22 billion-worth of extra taxation on the country, including the iniquitous £5 billion on pension funds. When consumer spending is running ahead, it was ludicrous to load the extra taxation on the productive sector—the savings sector—and not to try to reduce consumer activity. Those two blunders have come to a most dreadful head in the exchange rate.
It has been interesting to listen to Labour Members, particularly the hon. Member for Croydon, Central (Mr. Davies), who quite obviously do not understand the impact that the exchange rate is having. It is extraordinary that they did not know that the pound has today gone to DM3.05, the highest figure for nine years. To turn up to a Budget debate and dismiss as childish the intervention made by my hon. Friend the Member for Witney (Mr. Woodward) is bizarre. Manufacturing industry is on the brink of a serious recession. I hope that the Minister is listening carefully.
We heard eloquent speeches from my hon. Friends the Members for North Norfolk (Mr. Prior) and for Witney, with figures from the Engineering Employers Confederation. In my industry, plants are closing and jobs are being lost. The potteries in neighbouring constituencies are suffering badly. Orders are down as much as 40 per cent.
There is an extraordinarily naive passage in the Red Book that says, in effect, that the Government are not quite sure why orders have been holding up. That is not 1365 surprising from a Government who have never been in business. There is a run-over. These are long-run contracts, but that period is coming to an end and the Government must understand the impact that the exchange rate is having on manufacturing industry.
Agriculture has hardly been mentioned. I represent a rural seat and am on the Welsh Affairs Committee. Every time I go to the market, farmers tell me that they are desperately worried about the exchange rate. That was when the pound was under DM3. There are now 3.05 deutschmarks to the pound. In agriculture, it is simply not possible to switch production when producing one product. There is no flexibility of production. Farmers are tied into a world market and are going bust.
There are knock-on costs and a multiplier effect. What about feed merchants? What about agricultural implement suppliers? I know some who have not sold a tractor or plough for six months. They are in desperate trouble, yet the hon. Member for Croydon, Central turns up to the Budget debate and does not understand the impact of exchange rates. It is disgraceful. That was the main topic of conversation in Oswestry market today. I rang the local National Farmers Union representative and I have talked to farmers. They are frantic because they believe that the Budget does nothing to lower the exchange rate.
On television last night, the Chief Secretary refused five times to say whether the pound is at the right level. That is pathetic and totally unacceptable. His boss, the Chancellor, when prodded by Mr. Humphrys on the "Today" programme, also refused to give an opinion on the exchange rate. The Red Book is worthless if the man in charge does not have control of or some influence over the exchange rate.
The Red Book presumes that manufacturing will continue to grow at a stable rate, but it casts a horrible shadow. Growth is forecast to go down from between 2 and 2.5 per cent. to between 1.75 and 2.25 per cent. next year. There is a huge question mark over the stability of manufacturing. I have no doubt that manufacturing will go into recession. According to the Red Book, inflation is still stubbornly high at 2.75 per cent. That will have a further impact and it will bite into the figures.
The minimum wage and the social chapter, both of which are inflationary, will have a huge impact on businesses. If employers are forced by the Government to pay people more to produce the same amount of product, that is inflation on wheels. If they are forced to make employees redundant, the state will have to pick up the tab, and that is inflationary.
The Red Book does not mention the sharply inflationary impact of the minimum wage and its impact on differentials and social spending. The horrific indication is that the Government, who planned to cut social spending, will increase it. That is clear in the Red Book, but we know full well that Labour Members, from the Prime Minister down, have not bothered to read it properly.
Other elements will also drive up social spending. The Budget introduced the flagship innovation of the working families tax credit. Similar schemes have been tried in Australia and Canada, have proved extremely expensive and have not worked. When the Conservative Government considering such a measure, the Minister for 1366 Welfare Reform and the Chancellor dismissed it out of hand. If the Minister were here tonight, it would be interesting to hear why they have now changed their mind.
I want less Government involvement in business. The working families tax credit will put a huge burden on the personnel and finance management of relatively small businesses. I rang up a business that employs about 100 people. The finance director was extremely concerned. He will be required to have detailed figures on the circumstances not just of his employees but of their spouses, other members of their household, or their partners. Do we really expect finance managers, who have budgets to meet, bank managers to deal, with, customers to talk to and suppliers to visit, to ring round and find out the circumstances of each new employee?
§ Mr. Paterson
I am delighted that the Minister says no; I should be grateful if she would explain the measure. Labour Members were quick to criticise the Child Support Agency: hon. Members have daily received a flood of correspondence on the problems thrown up by the CSA. The Budget requires finance directors in small businesses to take on a burden similar to that of the CSA.
I come from a rural constituency where transport is a key provision. Nothing in the Budget will be good for North Shropshire. My constituency contains 98 villages. The car, the van and the lorry are basic to the functioning of the economy, and without them it does not work. It is inconceivable that a comprehensive scheme of public transport could be created in an area such as North Shropshire, where there is economic activity in every one of those 98 villages.
Lobbing a huge increase on fuel tax will not make North Shropshire businesses competitive. The Chancellor's humbug words about competitiveness come at a time when there has been a dramatic fall in the price of crude oil from $20 to $13 a barrel. It is ridiculous to impose increases to the tune of 23p a gallon: unleaded petrol is now £3.08 a gallon. We should talk in gallons, because litre is a weasel word and conceals any increase. The increase on diesel is 29p a gallon, which is even worse. Labour Members made polite reference to my tie. This tie was transported in a van burning diesel. All hon. Members are wearing goods that were carried by road. This ludicrous prejudice against motor transport is unacceptable to me as a representative of a rural constituency.
The Budget will jack up motorists' costs by £2.75 billion. To take £30 billion a year from motorists and claim that a pathetic £50 million for rural transport will help is childish. Each bus that may be aided by that little £50 million fund should bear a memorial sticker reading, "Funded thanks to the countryside march." This is clearly a panic measure introduced as a desperate attempt to obtain a press release in rural areas. It simply will not wash.
The other big issue in Oswestry market this morning was the cost of fuel. It is a crippling tax on farmers and small businesses in my constituency, and I strongly oppose it.
Finally, I want to say something about taxation. It was clear in Prime Minister's Question Time today—revealingly—that the Prime Minister has not read his own Red Book. I remind him of the words of Lord Dunrossil, 1367 who said in the 1955 Budget debate, with admirable clarity, "all taxation is bad." We in North Shropshire have had to suffer a 13 per cent. hike in council tax because Labour Members voted for a Bill that has grossly switched funds from rural areas to northern and inner-city areas. I consider it iniquitous that Sedgefield received a 13 per cent. increase in standard spending assessment while Shropshire received only a 3 per cent. increase.
I know that others wish to speak but, before I finish my speech, I invite Labour Members who have not read it to turn to page 116 of the Red Book, which features the real bite in the Budget. There, tragically, we see taxation rising from 38.1 per cent. of gross domestic product to 40.1 per cent. in 2002–3.
In all my experience, I have never visited a country that has been over-governed, interfered with or taxed to prosperity. This is a thoroughly bad Budget for North Shropshire, and a thoroughly bad Budget for Great Britain.
§ Mr. Andrew Lansley (South Cambridgeshire)
I am grateful for the opportunity to speak towards the end of a debate in which forceful points have been made. I am pleased to follow my hon. Friend the Member for North Shropshire (Mr. Paterson), who has experience of the manufacturing industry—as has my hon. Friend the Member for North Norfolk (Mr. Prior).
There are Conservative Members with direct experience of manufacturing who speak with feeling and conviction about the circumstances in which industry is now being placed by the rise in interest rates, and, more particularly, the level of the exchange rate. I think that it would be wrong for us to debate the Budget without dwelling not only on the measures in it, but on the consequences for industry, particularly manufacturing industry.
Many of my hon. Friends have referred to the Chancellor's opening remarks. He said that Chancellors had a once-in-a-generation opportunity to reform tax law. The right hon. Gentleman might have referred to a once-in-a-cycle opportunity; once in a generation might be stating it a bit too strongly. This Budget, however, was characterised, both before and during its presentation, by what is colloquially known as hype—much of which was not subsequently found to be justified.
In so far as the Chancellor had a once-in-a-cycle opportunity to reform tax law, I fear that he did not take it. He took only part of the opportunity, in relation to welfare reform. I shall say more about that later. I feel, however, that, at this stage in the economic cycle—with the benefit of the dramatic increases in tax receipts that occurred both last year and this—he had a once-in-a-cycle opportunity to achieve a one-off downward shift in the proportion of gross domestic product taken in tax.
Alternatively, if it was to be taken in tax, it could have been used in a way that, in the longer term, would reduce the extent to which the public sector had to meet future obligations. Damagingly, however, there was no evidence of that—quite the reverse.
As my right hon. Friend the Member for Richmond, Yorks (Mr. Hague) forcefully mentioned at Prime Minister's Question Time, table 3.3 of the Red Book, on page 48, tells us that an increase of a quarter of a 1368 million in the number of families with high marginal deduction rates occurred as a consequence of the Budget. I know that the Prime Minister was told the best figure to offer, and talked about the marginal deduction rate of 70 per cent. or more, where two thirds of people have the effective marginal deduction rate reduced. None the less, paying 60 per cent. or more as an effective tax rate is a high figure for 1 million-plus families, an increase of 250,000 families. As a consequence of the Budget and of the withdrawal of benefit, they are brought into a situation, effectively, of welfare dependency and relatively high marginal tax rates.
§ Dawn Primarolo
Does the hon. Gentleman accept that he is missing the point, because all those families will be better off as a result of the working families tax credit and child care tax credit? He has not made any reference to that at all.
§ Mr. Lansley
The Financial Secretary is being uncharacteristically ungenerous to me, in that I had only started, and was certainly planning to come on to the working families tax credit.
I make no bones about it: it has to be proven whether the working families tax credit is an improvement on family credit, but, when one makes the comparison, one has to take into account the fact that the working families tax credit and the child care credit in particular, which goes alongside it, are going to consume—well, the Financial Secretary will know the numbers, I hope, better than me, as the Red Book is in her name. I will not do her the injustice of suggesting that she did not read it before she published it.
We are talking of £2.5 billion extra in total costs, including tax credits, going through this system. There is every possibility that, if £2.5 billion were expended even through the family credit system, it would have lifted many of those families out of some of the poverty trap consequences of the interaction between family credit and housing benefit. I do not dispute her point that those families will be better off. However, I hope that she will not dispute the fact that many of them will, as a consequence of the withdrawal threshold and the withdrawal of credit over £90, effectively pay quite a high marginal rate of tax as their earnings increase.
§ Dawn Primarolo
There have been many references by Conservative Members to the Institute for Fiscal Studies. Will the hon. Gentleman welcome the fact that the institute agrees with the Treasury, and that the Chancellor's Budget proposals have reduced the number of people who face very high marginal rates of tax—that is, above 70 per cent.—by over two thirds, reducing the worst effects of the poverty trap?
§ Mr. Lansley
I am sorry that I did not explain myself. I thought that I had made precisely that point. Far from missing that point, I had acknowledged that, as table 3.3 shows, the number of families affected by 70 per cent.-plus marginal rates of tax has been reduced by two thirds.
However, I also make the point, which is made in the same table—which the Financial Secretary published—that, at the 60 per cent. rate of withdrawal, the figure goes up from 750,000 to more than 1 million. Therefore, one has to take those two points together and balance them. It would not be reasonable to take one without the other.
1369 May I characterise the Budget overall? When I had an exchange with the right hon. Member for Bishop Auckland (Mr. Foster)—he will forgive me if I have got his constituency wrong—
§ Mr. Lansley
Good. I would not like to commit an indiscretion and get the constituency wrong.
When the right hon. Gentleman was speaking, he was kind enough to give way to me. The impression I gained from his answer was that he felt that the Budget had gone well.
When talking about the work of Finance Ministers, a French Finance Minister said that the art was to pluck the goose with the least amount of hissing. The impression I got from the right hon. Gentleman was that he felt that the Chancellor had got away with plucking the goose with relatively little hissing. I must remind him that all past evidence suggests that the goose does not hiss straight away; it can take time. The right hon. Gentleman ought to consider the Budget carefully and remember the old saying, which is a bit of a cliché, that the Budget that is cheered on the day is the Budget that people are sorry about some time later.
I shall trespass on the patience of the House further, if I may, and refer again to table B8 on page 116, which my hon. Friend the Member for North Shropshire (Mr. Paterson) also mentioned. It is significant that the tax burden will rise, and the table shows an increase from 38.1 per cent. of GDP to 40.1 per cent. by 2002–03.
Two other rather more significant political facts are also to be gleaned from that table. First, the bulk of the increase occurs between 1996–97 and 1998–99. We are now in the throes of a substantial increase, by more than 1.5 percentage points, in the amount of GDP taken in tax, at a time when total GDP has been growing relatively strongly—certainly in the early part of that period, although less so now.
That implies that the Budgets of last July and of yesterday are impacting in the short term to increase taxes substantially, yet there is no offsetting reduction in the tax burden that will come later. As successive Budgets come along, and the Chancellor feels that he has to assuage the demands, not least by Labour Members, for public expenditure, we shall find that the tax burden continues to rise beyond the figures in the table.
There is a second interesting point in the table. When we look at the disaggregation between different kinds of taxes, we see that the biggest increases are not in corporation tax. As we know, there have been changes in corporation tax and large cash flows out of industry in tax because of the consequences of changes in ACT, but also some offset through the reduction in the main rate.
The biggest increases as a proportion of GDP are in income tax, which increases from 9.5 per cent. at the beginning of the period to 11.1 per cent. at the end, and in excise duties, which rise from 4.1 per cent. to 4.8 per cent. That is pretty significant, because for the poor benighted goose—that is, in this context, the personal sector that pays taxes—it is through income tax and excise duties that the pain of taxation is felt.
1370 Over the next two or three years, we shall find that it is in precisely those areas of personal taxation and excise duties that the public will begin to feel the costs beginning to flow through to them, and they will not be remotely sanguine about the Chancellor's Budgets.
The Chancellor has gone for a Budget designed in the main to make everybody feel good. It is a "feel-good Budget", because it would be difficult to object to help for families as the centrepiece of a Budget. However, over time, that feel-good factor will be translated, in the individual personal circumstances of families, into a judgment about whether they will lose in the long run, and whether they blame the Chancellor for the changes in their personal disposable income. Labour Members will learn painfully, as the Conservative party learned in government, that it is not the spin doctors who get one into or out of trouble, but performance, economic management and outturns.
At the heart of the Budget is the problem that such things will turn out badly for the Chancellor, not least in that people's net disposable income will not in future reach the levels they had hoped for.
The Chancellor talks of suppressing wage inflation and trying to hold down increases in wages. No doubt that will happen, as many people will be chasing fewer jobs when the jobs market is depressed by the recession in manufacturing, the impact of the national minimum wage and other factors. Moreover, the Chancellor will take a greater proportion of whatever money they earn.
It might be interesting to consider the Labour party manifesto, as Labour Members have so much to say about it. The manifesto states:How and what governments tax sends clear signals about the economic activities they believe should be encouraged or discouraged.The Chancellor's past two Budgets have sent us a very clear message: he wants to discourage profits. Profits will take the pain of the Budget, because of the disadvantages of the ACT change to cash flow, which will be hit hard. Presumably, because of his reduction in the married couples' allowance, the Chancellor wants also to discourage marriage. By his own admission, if he wants to tax something, he wants to discourage it.
Like many Opposition Members, I was worried that the Chancellor seemed to take it for granted that, in the long run, taxing child benefit for higher earners would be the right thing to do. A strong point was made earlier in the debate about the character of child benefit and the fact that it was introduced to replace a tax allowance. Therefore, by extension, the idea is illogical that child benefit received by higher-rate taxpayers should be taxed away, as the benefit was designed to replace a tax allowance that recognised, in the benefit system, the cost of looking after children. The benefit also reflected the value that all stratums of society place on bringing up children.
Undermining the universality of those benefits would be regrettable. There are few instances in which a single benefit can so readily and generally be targeted against those sections in society where costs fall, where poverty or financial hardship arise, and where, very often, child benefit plays a particularly valuable part in family incomes and in ensuring that sometimes relatively low-earning wives of high-earning husbands have an addition to their income that is expressly available to them, for spending on their children.
1371 The shift from family credit to working families tax credit has already been dealt with in the debate, so I shall not dwell on it. However, if it is the centrepiece of the Budget and a key welfare-to-work policy, two questions arise.
First, how can the Government present a Budget containing such a major measure, but not present that measure within the context of the Government's overall welfare reforms? Why has not the Government's Green Paper on welfare reform been presented either before or with the Budget, so that we might understand whether—somewhere in the structure of their welfare reform—there are elements to off-set significantly increased welfare expenditure and extension of dependency to higher-earning families? If the measure falls within the context—as I should certainly hope that it does—of wider welfare reforms promoting self-provision and acting to stem otherwise longer-term growth in liabilities in the welfare budget, we were not told about it. That is a pity.
Secondly, how will the measure—particularly the child care tax credit—impact on demand for work? As has already been briefly mentioned in the debate, it is not at all obvious that the measure's consequence will be to enable many women to look for work who were previously unable to do so for financial reasons. There are several reasons for that consequence.
First, a substantial part of the measure's impact may be to persuade currently working mothers that it is better to take part-time rather than full-time employment because of the extent to which additional earnings will be clawed back with withdrawal of the credit.
Secondly, the measure may create circularity within communities, in which substantial benefit is derived from looking after one another' s children rather than one's own children. Everyone registers as a child minder; everyone receives their £150; and everyone claims back their £105. We might create some rather closed circles of people taking in, as it were, each other's washing, but not create any net external benefit to the economy.
I do not dispute that families with children will derive financial benefits from the process by virtue of the taxpayer subsidy, but that does not mean that some of the claimed benefits for the wider economy will necessarily be achieved. Even if, as a consequence, a larger active population seeks work, it does not follow that the number of jobs available in the economy and the number of people entering work will increase.
Let us remember how the process works. If labour supply in the marketplace increases, demand is normally stimulated by a reduction in the price of labour. Yet we know that, by the time the measure is introduced, the Labour Government will have introduced a national minimum wage. Thus the price of labour will not be able to adjust downwards in order to encourage employers' demand for it. Employers may find that more people are seeking work, but that it is not necessarily in their economic interest to take those people into work. The net consequence will be rises in unemployment, not necessarily rises in employment.
I shall quote again from the Labour manifesto, just to see whether I can keep irritating the Labour party:An explicit objective of a Labour government will be to raise the trend rate of growth".It struck me that, when the right hon. Member for Dunfermline, East (Mr. Brown) was responding to the Budget in the debate on 30 October 1996, he criticised 1372 the then recovery because it was not investment-led or manufacturing-led, but was too much consumption-led. Yet we have the same now. There is a failure in investment, and a failure to support manufacturing so that it can lead the recovery on the part of the Government.
The right hon. Member for Dunfermline, East has reduced his expectations for the trend rate of growth. I shall not bore the House with the figures—suffice it to say that the rate is predicted to go down to 2 per cent. or below in 1999, compared with well over 3 per cent. in the early part of 1997.
A whole page of the Red Book is devoted to an apologia for the Government not achieving the investment-led growth they were anticipating. Business investment is predicted to fall from a 7.75 per cent. increase in 1997 to 4.5 per cent. to 5 per cent. in 1998, to 3 per cent. to 3.5 per cent. in 1999 and to 2.5 per cent to 3 per cent. in 2000. Far from investment driving forward, it will not sustain the economic cycle. The Treasury is making its excuses for the trend rate of growth not being higher. It says that the level of investment in capital productivity is not sufficient to achieve it.
I conclude with two specific points. The first relates to health spending; it is something of a pedant's point. It is very strange that the Government have found that, towards the end of the financial year, principally as a result of demand-led expenditure not coming up to predictions, £1.5 billion will be left over.
The proper way for the Government to proceed would be to reduce public borrowing in this financial year by £1.5 billion. Then, if they wanted, they could raise public spending next year above the pre-existing control total by £1.5 billion. It is a bogus manoeuvre to carry forward the money from 1997–98 to 1998–99. All they are doing is pretending that there will be less public spending next year and more public borrowing this year—which they will be able to reduce next year. It is a device to massage the figures for the Government's benefit—a bogus device.
I am pleased to see an Education Minister on the Government Front Bench. Yesterday afternoon, not exactly under cover of darkness but under cover of the Budget, the Government pushed out an announcement on Oxford and Cambridge college fees. I have the honour to represent two Cambridge colleges. The Government's decision was regrettable. From 1999, it could take more than 8 per cent. of the value of the addition to college fees, year by year, from the additional grant.
The Government talk about excellence, and announce a university challenge based on research excellence, but they hit at part of the independence of colleges in Cambridge and Oxford that has been at the heart of the maintenance of standards and excellence in those two fine institutions. It is a disappointment to Cambridge university. It will also be a disappointment to many in the House and beyond. It is a pity that the Government chose so transparently to push the measure out at a time that suggested that they were ashamed of their plan.
The measure was in the character of the Budget, which is more redistributive and egalitarian than the Government would have people believe. Sometimes, the net result of egalitarianism is not to benefit those whom it is intended to make prosper, but to diminish us all—and to diminish our economic prospects.
1373 That brings me back to my goose. The Chancellor was able to call on many golden eggs that have been laid by the goose of economic prosperity created by the previous Conservative Administration. He has set about strangling that goose, after having gently plucked it.
§ Mr. David Heath (Somerton and Frome)
I recall an amusing book written by Jane Austen in her early days, called something along the lines of, "A Partial and Prejudiced History of England". The subtitle promises that the history will contain very few dates. I hope to make a partial—but, I hope, not prejudiced—speech on the Budget that will contain very few statistics. It is more important to concentrate on the outcomes of the Budget statement than to bandy about figures in the sterile way that is so often evident in such debates.
As we have already said, the Liberal Democrats applaud many of the measures in the Budget. Many of the policies are moving in the right direction, although some are not moving far enough and others are not quite in the right direction, but veering off to one side. However, there is much to recommend and many policies that we have advocated over many years. I hope that the moves on child care are as successful as the Government intend. The reforms to national insurance, the long-overdue support for carers, the also overdue change of heart on the ISA—on which many of us have argued with Treasury Ministers—and the help for the unemployed are welcome.
The outcomes are what counts. My constituency is a genuinely rural constituency—not green welly rural, but black welly with mud on rural. The Budget will not have all the effects that the Government desire in my constituency, simply because so much is not applicable to the area. To borrow a phrase from my hon. Friend the Member for Torbay (Mr. Sanders), the Budget seems to have bypassed Somerset in many ways.
There is nothing for pensioners. I have more pensioners in my constituency than the average. Nothing in the Budget commends itself to them or makes their lives easier. Instead, measures such as increases in petrol costs, which affect people on fixed incomes more than others, work in the opposite direction.
I see nothing in the Budget on housing. Housing in rural areas has been a problem for a long time. The right-to-buy policy denuded many of our villages of any social housing for ordinary people, and the housing stock tends to be older, in more exposed positions, and damp. We should have seen a Government initiative to change the structure of VAT on home insulation—not just for specific schemes, but on a wider basis—to make a real difference to the lives of many people.
Farming communities in my constituency have never had it so bad as they do now. The strong pound is a major influence on the difficulties that farmers face, yet the Budget has been judged in such a way that the pound has risen to a more unsupportable level than previously. That will make life more difficult, yet we have received no satisfaction from the Minister of Agriculture, on the specific help that he will give to the dairy or beef sectors in areas such as Somerset.
The Budget will not help the smallest businesses, although there was welcome help for smallish companies. It is hard to see where help is coming from, for the small 1374 companies in the non-incorporated sector. Some measures should not have formed part of the Budget, but should, of necessity, have formed part of the Government's overall programme—for example, the major reform of the uniform business rate, which is positively inimical to small business.
§ Mr. John M. Taylor (Solihull)
The concept of a small business is one that we are all fond of, but it may have a plurality of definitions. What does the hon. Gentleman think is a small business?
§ Mr. Heath
The hon. Gentleman is right to say that there is a plurality of definitions. It depends on the context and the sector that we are talking about. I am talking about small, non-incorporated businesses, such as a lone trader, a partnership or a small retail business that has been crucified in recent years and to which the Budget is of little assistance.
I wish to refer to car tax. It is absolutely right that we should stress the difficulty in the Government's proposals. As is common knowledge, we have campaigned for a long time for a shift in taxation, so that we increase the proportion on fuel, and balance that by a substantial reduction in vehicle excise duty. That is not only environmentally friendly, but means that for many people in rural areas who depend on their cars as the principal means of transport, there is a neutrality or even a benefit because of the typical mileage done in a year.
Many households in isolated villages have to have more than one car to allow people to live a life at all. The cars tend to be older, and the people will not be helped by the speculative Government suggestion about changes in excise duty. Most important, they will not be helped by the fact that the Government have gone ahead with an increase on petrol duty immediately, but are not prepared to change vehicle excise duty for another two to three years, if at all. That is the crux of the proposals.
§ Mr. Adrian Sanders (Torbay)
My hon. Friend mentioned farmers, small business men and the problem of increased petrol duty, which affects tourism. He has not mentioned pensioners, but I am sure he will. [HON. MEMBERS: "Yes, he has."' Does my hon. Friend agree that, from a west country perspective, this is not a good Budget for the south-west?
§ Mr. Heath
I agree. My hon. Friend may have missed the passage of my speech in which I mentioned pensioners, but Ministers on the Treasury Bench have noticed that I mentioned them once or twice. He is absolutely right, however, in saying that the Budget is not good for the south-west.
I commend the Government for at least making a start on the important issue of public transport. It is extraordinary to hear Conservative Members talk about the iniquity of providing only £50 million for rural transport. Rural transport is so atrocious because of deregulation, which the Conservative Government introduced, and because they starved local authorities of money for years, so that public transport could not receive the necessary support. Nevertheless, £50 million will not go far in providing adequate support to meet the needs of people in rural areas.
The additional expenditure on the health service is welcome but, again, it does not go far enough. I am worried that, because of their pledges, the Government 1375 will concentrate on waiting lists to such an extent that there will be a reduction in primary health care and in the number of community hospitals in rural areas. Moreover, there seems to be nothing to improve policing in rural areas, which is another major issue.
My prime concern, however, is education, in which I have been involved for the past 12 years, as leader of a county council and chairman of a local education authority—it is something about which I care passionately. I welcome the extra money for education, but once the various elements—the effects of inflation and the adjustment to the deflator—have been taken into account, that money is whittled away and little benefit remains.
Setting aside the total amounts and the general picture, I must ask about the distribution of the money that will be made available. In this respect, I shall be openly parochial about Somerset. Recently, the Under-Secretary of State for Education and Employment, the hon. Member for Pontypridd (Dr. Howells), visited schools in my constituency—I hope that he liked what he saw—but those schools are working against a background of a starvation of funds that has continued year after year.
We hear the Government's rhetoric and their promises of additional money for education, but that money does not come to Somerset schools. Last year, the council tried to spend more on the education service, but it was capped—by a Labour Government applying Conservative policy. We looked to this year's local government settlement for extra expenditure, but we found a real-terms reduction. We applied for money that was released as a result of the scrapping of the assisted places scheme, but we were given nothing.
The effect is that teachers are being lost and class sizes are becoming larger. Children, including my own, in Somerset schools have seen no benefit from the change of Government; indeed, things have got worse. Until people start to notice a difference in our schools, why should they believe the Government's rhetoric?
People see that the local education authority is spending massively above its standard spending assessment—they do not doubt its commitment to education—but also that the expenditure per child is low. They also see that, on any register, the authority's efficiency is high—in Somerset, the number of vacant places is among the lowest in the country, and the administration costs per child are, by a long way, the lowest in the country. They ask why Somerset and the west country are not receiving the benefits that the Government have promised.
I make a plea to the Government. Things can only get better in Somerset. Because of the Government's commitment to Conservative spending limits, we have had 19 years of Conservative government. That is long enough, and we want a change. The Budget should have provided the opportunity to make that change—my regret is that it has failed that test.
§ Mr. David Willetts (Havant)
I begin by commiserating with the Financial Secretary, who seems to be rather light on support this evening. Three Labour Back Benchers have spoken in this debate, and two of them criticised the central macro-economic judgment of the Budget.
1376 I have just had the pleasure of listening to five successive speeches by Conservative Members. I did not expect such a pleasure when we returned on 1 May in rather depleted numbers. There are enough Labour Members to go round, and they have just been told by the Chancellor that this is the biggest, most exciting and significant Budget for a generation, yet his performance seems to have emptied the stalls.
I cannot believe that that is because the Financial Secretary is in any way unpopular with her colleagues, so I can only conclude that it is because the Budget is unpopular with them. That is the only remaining explanation.
§ Mr. Willetts
The Secretary of State says rather discourteously that it is because they did not want to listen to me, but it is not as if they were in earlier and left when I arrived: they have not been around all day, and have not spoken up for the Budget.
The right hon. Member for Bishop Auckland (Mr. Foster) made it clear that he was worried about a Budget that had led to an expectation of interest rates having to rise further, leading in turn to upward pressure on the exchange rate and to a threat to manufacturing industry. That was also the central argument of the hon. Member for Nottingham, South (Mr. Simpson). Of the three Labour Back Benchers who have made speeches today, two criticised the Budget, which was meant to be a once-in-a-generation affair.
By contrast, my hon. Friends the Members for Cotswold (Mr. Clifton-Brown), for East Worthing and Shoreham (Mr. Loughton), for North Norfolk (Mr. Prior), for Witney (Mr. Woodward), for North Shropshire (Mr. Paterson) and for South Cambridgeshire (Mr. Lansley) all made effective contributions.
I want to ask the Financial Secretary about the Government's commitment to what they rather pompously call "best accountancy standards" in the presentation of financial information. I want to find out to what extent she will live up to that grandiose commitment and whether she can explain the Chancellor's rather baffling passages on national insurance contributions.
The Chancellor said:I am abolishing the perverse entry fee that every employee pays to be part of the national insurance system and, in doing so, I am cutting national insurance for every employee in the country.We understand that, but he went on to say:Further reforms will also ensure that no one pays national insurance for the first £81 of their weekly earnings. All employees earning between £64 and.£81 will have their right to benefits protected.He then said:So, from next April, 20 million employees in Britain will benefit by paying £1.28 a week, or £66 a year, less in national insurance."—[Official Report, 17 March 1998; Vol. 308, c. 1106.]Because of those remarks, many newspapers claimed today that the Budget involves the lower earning limit for employees' national insurance contributions being increased from £64 to £81, but I cannot find that anywhere in the Budget arithmetic. Indeed, the paragraph about the saving of £1.28 a week refers solely to the entry fee.
1377 The Financial Secretary has put her name to a Red Book that is supposed to be committed to high standards. Where will we find in it the costing of increasing the employee's lower earnings limit from £64 a week to £81 a week? If it is not there, how will it be included in future Budget arithmetic—if, indeed, the Chancellor intends to deliver the measure?
I have some questions about the working families tax credit. The other week, I had the pleasure of listening to the Financial Secretary giving a speech on that very subject to the Fawcett Society. Unfortunately, she was not able to stay to answer detailed questions. We understand that—she was in Budget purdah and could not be drawn further. It was a desperate attempt to show that the Treasury was not being run by the lads and that people were fighting the women's corner. Now that she has the Budget out of the way, she can tell us a bit more.
My first question concerns wallet versus purse. When I was a single male policy wonk in the policy unit—probably the sort of person who is the bane of the Financial Secretary's life—I was rather keen on the earned income tax credit. One of the reasons why it did not happen was wallet versus purse. If the money was paid to the man—it still normally is the man—through the pay packet, what would be the chances of women in certain circumstances receiving the money to spend on the children?
The Government claim to have solved that problem, but it is clear from statements in the "Financial Statement and Budget Report" and elsewhere that only if both partners in the marriage agree will the money be paid to the wife, whereas, under the current arrangement, it is specified in law that the wife is the claimant, and the family credit is therefore paid to the wife unless she specifies otherwise. That is a significant change, and it is not one that is good for family life.
§ Mr. Blunkett
The right hon. Gentleman has had several hours to think about the question that I put to the shadow Chancellor earlier: if the Conservative party invented joint and several liability, why are Conservative Members so exercised about finding a way forward under the working families tax credit scheme, which allows us to ensure that that situation is reversed, so that we have the mirror image of it?
§ Mr. Willetts
That is a complete diversion from the central issue. I was raising the problem raised by the present Minister of State, Department of Social Security. As the shadow Chancellor explained, when these measures were debated last time, the Minister of State said that of course, for most families this would not be an issue—I accept that, because for most families it is not—butwe are concerned with that minority—it may or may not be substantial—of families in which money for the children is not paid over".That is the point on which we have not had a clear response from the Government. It concerned the Minister of State 10 years ago, and it should concern the Financial Secretary now.
What about marginal rates and the notorious table 3.3 on page 48 of the FSBR, which shows that the number of families facing marginal deduction rates of 60 per cent. 1378 or more has increased from 760,000 to 1,010,000— an increase of about 250,000—under the Government's new proposals? The gain that the Government make under these proposals is that they will have got rid of the high marginal rates—those over 90 per cent.—which would largely disappear. However, the Minister must recognise that the Government are paying a high price for that.
Many families that have an income which means that they are beyond entitlement to family credit will now face withdrawal of working families tax credit combined with income tax and national insurance contributions that mean that their marginal rates will go up. Rather conveniently, the table stops at the 60 per cent. figure, when the working families tax credit taper is 55 per cent. It would be interesting if the Minister would add another line to the table and give the deduction rate at 50 per cent. or more, and give the figures both under the current and her proposed system. I fear that there will be a massive increase in the number of families facing the combined deduction rates of more than 50 per cent. That would have a serious impact on the labour market, and the Minister should deal with it in her reply.
Thirdly, on two-earner couples, family credit goes to two distinct family types at present. The first type is the married couple where the wife normally does not work; the second is the single parent. As a result of the big extension of working families tax credit, this type of assistance will for the first time go to two-earner couples. We know that working wives—it is normally the wives—are particularly sensitive to changes in marginal rates. We want some assurance from the Minister that the Government have considered seriously the implications for patterns of labour force participation of extending high marginal rates, particularly to a pattern of two-earner couples who previously did not experience such rates.
Finally, let us hear about the burdens on business—a point so ably put by my hon. Friend the Member for North Shropshire (Mr. Paterson)—because it is a very significant issue indeed. That is the other reason why the earned income tax credit was not implemented in 1986; it was partly the feminists worried about wallet versus purse and partly businesses worried about being unpaid benefit payers as well as tax collectors for the Government.
Some curious things will happen as a result of the tax credit. Those wives who succeed in getting the credit paid directly to them will find that great, bold innovation, an Inland Revenue order book. The Inland Revenue will pay cash direct to non-working wives. I will be interested to hear how that is supposed to be delivered in practice.
I have a few questions about the Budget's child care provisions. I recognise that the child care disregard in family credit has not had a high take-up. We might expect single parent take-up to be high, but I understand that only 25 per cent. of them have taken it up, and then only for a modest amount. The Minister could go on and on about the low rate of take-up of child care disregard for family credit, but will she try to explain why she thinks it is so low? It is easy to say that it is because of the way that the system has been constructed, but is that the whole story?
Is it perhaps that families might prefer informal arrangements for child care rather than formalised ones? Many families do not want the pattern of child care which is eligible for the disregard under family credit, and which will be eligible for assistance under the new child care credit. Many families prefer the neighbours, the 1379 grandparents, the mothers-in-law or a network of people on the same estate. Either the Government will face continuing very low take-up rates or they will increase the financial pressures on such informal networks to be converted into institutional arrangements, which may not go with the grain of what many families want.
Another reason for the low take-up is that it is easy to focus on the demand side, to come to the House with ingenious ideas on vouchers, credits, benefits or tax credits that are supposed to help child care, but what about the supply side? It is difficult to set up a child care facility through a local authority planning system. What about the regulatory burden that some local authorities impose on people trying to set up such facilities? What about the way that VAT affects people who provide child care?
I will be interested to hear whether the Government have any proposals to make it easier to supply child care. If supply of child care remains restricted while demand for it is encouraged through these further incentives, the Minister will find only that the price goes up and that hefty profits are made by the small number of regulated providers who meet the requirements of her child care credit. The benefits will not go to families but will be passed on to the small number of people providing the services.
I do not want go on too long, but perhaps I can make one or two wider points. There is an old Treasury story, which I think is told of Lord Healey, although I cannot believe it is true of him.
§ Mr. Willetts
Who knows? Lord Healey was said to treat his speech writer rather badly. He delivered one of those speeches that we used to hear from Chancellors of the Exchequer in which he read out an account of how the British economy faced the most appalling problems and the rate of inflation, the balance of payments deficit and the public sector borrowing requirement were too high. He continued, "But this Government has a set of policies which will solve these problems." As he turned over the page, there was a note from the speech writer saying, "From now on, you are on your own".
The point is that this Government are now on their own, but it is the other way around. They have inherited a strong economy, with low unemployment and declining PSBR. They have, thank heavens, left my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) as Chancellor of the Exchequer for a while in control of public expenditure.
What do the Government get up to as soon as they are on their own? They get up to introducing expensive measures, which are carefully planned so as to avoid being counted as public expenditure. We heard how the entire new deal and welfare to work do not fall within the control total. We are told that people participating in the scheme will receive not a benefit, but an allowance equivalent to the benefit, which means that, helpfully, they do not count as unemployed for the purposes of the claimant count. Perhaps that is one of the reasons why the Government lost their nerve and decided not to change the definition of the claimant count after all.
When and if unemployment starts to rise, Ministers will discover one of the uncomfortable consequences of those expensive measures. That is what has blown apart similar 1380 schemes in Scandinavian countries where they have been tried before. When unemployment is low, it looks fine to spend large sums on a relatively small number of unemployed people and a number which, thank heavens, is falling—but wait until the cycle turns and the number of unemployed people starts to rise. Wait until the Government suddenly find that their commitments of thousands of pounds per person have to be delivered to rising numbers of unemployed people. Wait and see what the business sector will say when the corporation tax increases, which are so blatantly revealed on page 16 of the Red Book, start to bite—the transitional measures just happen to involve an extra £15 billion in corporation tax payment over the next four years.
If the economy slows down and the Government find their welfare-to-work measures costing even more and the corporate sector being squeezed between a high exchange rate and an increasing burden of corporate taxation, at that point the picture will look rather different. At that point, the Chancellor's mettle will really be tested.
§ The Financial Secretary to the Treasury (Dawn Primarolo)
I shall try to deal specifically with the questions asked by the hon. Member for Havant (Mr. Willetts) in the short time left in the debate.
§ Dawn Primarolo
I do not need prompting by Conservative Members.
Those questions involved, first, purse-to-wallet transfers; secondly, marginal rates; thirdly, what happens to two-earner couples; fourthly, the burden on business; and fifthly, take-up of child credit.
It is noticeable that, for all their concerns about the independence of women, no Conservative Member has mentioned the fact that it was a Conservative Government who introduced joint and several liability for the poll tax. Despite being repeatedly asked by my right hon. Friend—[Interruption.] I am happy to discuss at any time the poll tax and the £14 billion that the Conservatives wasted on it. I paid my poll tax and I am sure that Conservative Members pay all their taxes—at least, I sincerely hope they do.
However, to return to the debate, I shall try to answer the questions asked by the hon. Member for Havant. There will be no compulsory transfer from purse to wallet. That has been made clear. Partners will be able to choose who receives the payment and we shall adapt the family credit rules. I know that the hon. Gentleman is knowledgeable about family credit, so I shall not read out the fact that couples on family credit can already choose the person to whom it should be paid. We are already looking at the family credit rules to ensure that there is no compulsory transfer from purse to wallet.
§ Dawn Primarolo
I shall answer the five questions asked by the hon. Member for Havant and then take interventions. On the question of marginal rates, the hon. Gentleman fundamentally misunderstands—or chooses to misunderstand—that the working families tax credit and the child care tax credit will mean that more people will 1381 gain and will be better off. That means that more people will have support from the child care credit, particularly women who do not currently receive such assistance. There was little reference during the debate to their experiences. The hon. Gentleman also asked what would happen to two-earner couples. Clearly, they can choose to whom the credit is paid.
The hon. Gentleman also asked about the burden on business. The Government are very good at consulting with business, as we have clearly shown in a number of areas—particularly regarding proposals in this Budget. We shall consult extensively with business, as we did in extending the pay-as-you-earn advice and support that business will receive from the Inland Revenue regarding the merger of the Contributions Agency into the Inland Revenue, which will reduce burdens on business.
As regards the take-up of child tax credit, the hon. Gentleman speculated about the child care strategies that families adopt. He should remember that the new deal allocates money to assist with the provision of 50,000 training places for child minders. My right hon. Friend the Secretary of State for Education and Employment will make announcements in the next few weeks about the national child care strategy on which his Department is working extremely hard. It will deliver on women's desires for a comprehensive child care strategy.
Let us look at the comments in support of the Budget. The Kids Club Network says that it is very pleased with the amount that the Chancellor has announced. It says:We think it is very realistic and very generous. He has listened to parents.The Parents at Work organisation says:This is a major breakthrough. For the first time, the Government has recognised the high costs of child care and that they have been a real obstacle to the opportunities for women and will keep millions of children out of poverty.The Government's proposals are widely supported and welcomed by millions of women in this country, yet no Opposition Member—with the exception of the hon. Member for South Cambridgeshire (Mr. Lansley)—commented on that. It speaks volumes about the lack of women on the Opposition Benches that the Opposition have failed to understand the importance of our contribution to women's lives.
§ Mr. Don Foster
The Minister will recall that I welcomed the Government's child care proposals—as did my hon. Friend the Member for Somerton and Frome (Mr. Heath).
The Minister referred to the Kids Club Network. Does she acknowledge that, in its remarks on the Budget, it also points out that, in order to meet the Government's aspirations, there must be an additional 90,000 qualified child minders or people in similar positions? How do the Government plan to ensure that training courses will be provided to meet that need? Under their current plans, it will take 36 years to find 90,000 additional child minders.
§ Dawn Primarolo
The Government are aware of the scale of the problem that we are facing as a result of the neglect by the previous Government in making any investment in child care. We clearly need a longer-term strategy. This is only one Budget, which simply lays 1382 the foundations for our policy. My right hon. Friend the Secretary of State for Education and Employment has made it clear that we must develop a five-year strategy. He will set out that strategy and how it will be achieved.
In spite of all their scoffing, Conservative Front-Bench Members when in government failed absolutely to put in place any training or provide any child care places. They did not give any support to women who were excluded from the work force because of the lack of available child care places—and now they laugh at us.
§ Mr. Willetts
I ask the Minister to clarify one point. She repeated one sentence from the Government's document on the working families tax credit and said that there will be no compulsory transfer of resources from women to men. The next sentence says that couples will have the right to elect to whom the credit is paid—the man or the woman. Is the Minister saying that the woman who is currently the claimant of family credit has the right of veto—yes or no?
§ Dawn Primarolo
I made it clear that couples can elect to do either. The payment can go to the woman. The transfer of the rules from family credit into the working families tax credit will need to be fine-tuned.
The Government have laid down the principles for the operation of the working families tax credit. I will take no lectures from Conservative Members about the benefits for women. For 18 years, they forced women back into the home unpaid, drove down their wages, created an insecure labour market, made no investment in child care and left women on their own struggling; yet they now claim to be the guardians of women. That will not wash, and that is why the reports in the press today welcome the Government's proposals.
Various other issues were raised in the debate. For all that Conservative Members have said, small business reaction to the Budget has been favourable.
§ Dawn Primarolo
I will give way in a moment.
Small businesses welcomed the Budget. They said:The Chancellor has delivered a Budget for both employers, employees and consumers. Small businesses with long-term investment will benefit. More people will be encouraged into the jobs market and at the same time consumers will have more money in their pocket.Those were presumably not the small businesses in the hon. Gentleman's constituency to which he spoke on the telephone this morning. Perhaps he could tell us what his party's policies are to help business, if he does not support what the Government have done.
§ Mr. Paterson
I can inform the Minister that the Federation of Small Businesses, to which I spoke this morning, is extremely concerned about the cost and difficulty of administering the new scheme. Will she please give me an answer to my question, which was posed by the financial director I mentioned, who reckons that he will have to take on one extra person purely to administer all the extra paper required by the new scheme? From a sedentary position, the Minister said no. I should be grateful if she would answer in detail from a standing position, so that I can tell the financial director tomorrow morning.
§ Dawn Primarolo
The hon. Gentleman can tell the financial director tomorrow morning that the Government 1383 will be consulting business on the administration of the working families tax credit, and that the Government's track record is to reduce the burdens on business, not to increase them.
I urge the hon. Gentleman to read the press release put out today by the Federation of Small Businesses. It welcomed the merger of the Contributions Agency and the Inland Revenue as a help to business. It welcomed the inheritance tax threshold being raised to £223,000, and the employers' start to national insurance contributions being raised to £81.
The Federation of Small Businesses welcomed the 40 per cent. first-year capital allowances; the Inland Revenue's new role to assist businesses in setting up payrolls for their employees; and the downward taper on charging capital gains tax. It welcomed the review of national insurance contributions paid by the self-employed; the review of industrial and commercial use of energy to gauge the method of taxation; and the £50 million venture capital fund to invest in small businesses.
§ Dawn Primarolo
While I am on the subject of what was welcomed—the hon. Gentleman can address himself to this, from a standing position—today the UK's bus and coach industry welcomed the Chancellor's decision to give an immediate cash injection of £50 million to rural transport. In a second press release entitled "Tax break joy for buses and coaches", the industry welcomed the Government's restoration of the bus fuel duty rebate. Perhaps the hon. Gentleman wishes to reply to that point.
§ Mr. Paterson
I am grateful to the Minister for giving way a second time. Will she please tell us who will analyse the status and the affairs of the relations of employees in small businesses?
§ Dawn Primarolo
I advise the hon. Gentleman to go and lie down in a dark room, rest for a little bit and then familiarise himself with the current family credit scheme. If he then re-reads the proposals in the Budget, he will be suitably embarrassed by the ridiculousness of his proposition. He would do well to take lessons from the shadow Chancellor, who, when asked to comment on why he would not be putting forward any alternatives to the Budget, particularly on employment creation, told The Independent on Sunday that that would be difficult at the moment because itwould be bad for our party.He said that it would divide them, and would only reopen discussions about what their policy should have been at the last election.
The Budget that my right hon. Friend put before the House yesterday cut taxes for all employees and helped families with business. It particularly assisted the 20 per cent. of the poorest families with children, who will gain on average £490 a year. Over the next two years, families with children will gain up to £1,500. No family earning less than £220 a week will pay income tax. Any family with a full-time worker is now guaranteed a take-home pay of at least £180 a week. Couples with two children, on an income below £17,000 a year, will receive 70 per cent. of their eligible child care costs. That is a first, and it will improve 1384 the opportunities for parents, particularly women, to return to the labour market, and ensure that people are lifted out of the poverty trap.
§ Mr. Lansley
Will the Financial Secretary now answer this question? The Chancellor of the Exchequer said yesterday:Further reforms will…ensure that no one pays national insurance for the first £81 of their weekly earnings."—[Official Report, 17 March 1998; Vol. 308, c. 1106.]The Red Book, at paragraph 3.31, says:The lower earnings limit for employees will remain unchanged (at £64 in 1998–99).Which is accurate?
§ Dawn Primarolo
I have just covered that point. I am not sure that the hon. Gentleman was listening, so I shall repeat it. There is a tax cut for all employees who pay national insurance contributions—a gain of more than £65 a year.
The hon. Member for East Yorkshire (Mr. Townend) referred to smuggling. The Government announced a wide-ranging review in the Budget last July, to look at smuggling and fraud involving alcohol and tobacco. The Government take the effects of smuggling and fraud extremely seriously, which is why the review was set up. We continue to take action to crack down on smuggling and on the criminals who take part in this pernicious activity. We will not let up in our efforts to stop smuggling and smugglers, and our efforts are increasingly successful. The House can rest assured that we will act to make life even more uncomfortable for those who flout the law and defraud the honest taxpayer.
I am disappointed that the comments from the trade today appear to condone smuggling. Mr. David Swan of the Tobacco Manufacturers Association said:We estimate that more than a million smokers are already buying black market cigarettes and tobacco.Gallaher said:This is a green light for bootleggers.The Wine and Spirits Association said that this is a "crime-boosting Budget." The Brewers and Licensed Retailers Association said that the Budgetsends a clear signal to criminals that crime really pays.Those comments are irresponsible. There is no change in tobacco duty until 1 December, no change in alcohol duty until 1 January, and no change in spirit duty at all. It is unacceptable for those organisations to encourage people to believe that duty has already been increased.
This is a Budget for stability, for reform of the tax system and for a modern welfare state that lifts people out of poverty rather than trapping them in it. We want a modern economy, modern schools and modern hospitals in an environment where investment and reform go hand in hand. It is a Budget for enterprise, for families and for a safer environment. It is a Budget for the future, and casts off the doubts, insecurities and the poverty of the past that were created by the Conservative party in government.
§ It being Ten o'clock, the debate stood adjourned.
§ Debate to be resumed tomorrow.