AMENDMENT OF THE LAW

HC Deb 09 April 2003 vol 403 cc289-372

Motion made, and Question proposed,

(1) That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance.

(2) This Resolution does not extend to the making of any amendment with respect to value added tax so as to provide—

1. (a) for zero-rating or exempting a supply, acquisition or importation;
2. (b) for refunding an amount of tax;
3. (c) for any relief, other than a relief that—
1. (i) so far as it is applicable to goods, applies to goods of every description, and
2. (ii) so far as it is applicable to services, applies to services of every description.—[Mr. Gorden Brown.]

1.32 pm

Mr. Iain Duncan Smith (Chingford and Woodford Green)

On behalf of the House, I start by congratulating the Chancellor of the Exchequer and his wife, Sarah, on their happy announcement this weekend. I can assure him that children are a great blessing despite some of the trials.

I welcome some of the measures in the right hon. Gentleman's Budget, particularly those to counter terrorism and to combat world poverty and poor education in deprived areas. We shall certainly give them welcome and support in as far as we possibly can.

During the past six years we have come to learn that the Chancellor's Budget speeches are characterised as much by what they conceal as by what they disclose. The right hon. Gentleman has made it clear that he prefers to let the damaging detail—the fine print—leak out over the days and weeks that follow, his Budgets. Today, despite all the Chancellor's bombast and bravado, we learned a great deal.

We learned that the Chancellor has got his forecasts wrong again, we learned from the Red Book that his borrowing is up again, and we learned that taxes are up and will stay up. From this week, a typical family will be another £568 a year worse off. We also learned that the Chancellor has no intention of being candid with the House or with the British people.

Let us consider some of the figures that have been announced already in the Chancellor's Red Book. On page 235, we see that the savings ratio this year is forecast to be even lower than it was last year. On page 241, we see that manufacturing output fell last year by 4 per cent., and that the Chancellor's forecast for this year has been slashed as well. On page 238, we see that business investment, forecast last April by the right hon. Gentleman to grow this year by up to 6 per cent., is now forecast to fall. We did not get any of those details from the right hon. Gentleman's speech today. This is a Chancellor who promised us prudence, but has now given us higher borrowing and higher taxes at the same time.

The Chancellor's message to the British people is clear: higher taxes, which is pain today, and higher borrowing, which is more pain tomorrow. The Chancellor has increased taxes on pay, jobs, homes, home owners, mortgages, marriages, petrol and pensions. The Government are taking an extra £5,500 per household per year. That is an extra £44 per week for every man, woman and child. The Chancellor's great excuse was that this money would make our public services world class. Instead, we have a million people on hospital waiting lists, a crime is committed every five seconds, and thousands of children are leaving school without one GCSE to their name. It is the same old story: more tax, more spend and more waste. That is the sum of the Chancellor's approach.

That is from the Government who promised: "We have no plans to increase tax at all." They added: "Our proposals do not involve raising taxes." They even said: "We want people to pay lower taxes." Now, 53 tax rises later, when people receive their pay packets this week they will find that their take-home pay has fallen for the first time in 20 years. Now they know what the Chancellor really stands for—promises, promises, promises. Every year he makes them and every year he breaks them.

Just as he has broken his promises to individuals, so he has broken his promises to business. In 1998, the Chancellor promised major changes to help business. In 1999, he promised tax cuts for business. In 2000, he promised incentives for business. In 2001, he promised more good news for business. Today, he even promised new help for business.

Today, we also see what the Chancellor's promises are worth. There will be an £8 billion tax on jobs. That is the cost of national insurance, which he has raised. That is hitting business, and it will hit it hard. The British chambers of commerce say that it will hit it so hard that one in five firms will cut jobs directly as a result of the Chancellor's new tax. The Chancellor has been so hard on business that, since 1997, he has taken an extra £47 billion from it in tax. No wonder that the right hon. Gentleman did not tell the House today about the real cost of his policies.

The Chancellor did not say, for example—although the figures are now clear—that insolvencies are at their worst level for a decade, or that analysts say that 70,000 firms will go bust over the next three years. He did not say that manufacturing has lost 300 jobs every day since Labour has been in power, or that manufacturing output and investment are now lower than when he delivered his first Budget in 1997.

Just as the Chancellor has broken his promises to business, so he has broken his promises to hard-working families. Since 1997, council tax has increased by 60 per cent., adding more than £400 to a typical bill. Just look at the Red Book—council tax is up by £8 billion since Labour came to power. Stamp duty increases have added £5,000 to the cost of purchasing an average home in the south-east. The abolition of mortgage tax relief has cost home owners £200 a year. The abolition of the married couples' allowance has cost families £300 a year. Higher petrol taxes have cost the average motorist about £300 extra every year. In short, the Government's tax take has risen by more than 50 per cent. since the right hon. Gentleman became the Chancellor.

Of all those who have been hit by the Chancellor, there is one group that will be hurt more than most. The savers of today are the pensioners of tomorrow. [Interruption.] Labour Members may laugh, but they are laughing at those who are saving for their futures, whom they are damaging. They laugh while the Chancellor is busy blighting those people's old age by damaging their retirement. It is worth reminding all of them who want to laugh that in 1997 he said that he would "encourage personal savings". In 2001, he said that he would reward savers, pensioners and hard-working families".—[Official Report, 7 March 2001; Vol. 364, c. 307.] Again today, he gave us all the same guff that he usually gives about helping them—promises, promises, promises, but under him savings have halved.

When Labour took office in 1997, the savings ratio was 10 per cent. Today, it has fallen to 4¾ per cent. It is all there in the Red Book. The Chancellor is destroying savings, and his so-called pension reforms include a pension tax, worth £5 billion a year, which has hit every single future pensioner. He has also created a pensions crisis. Someone retiring today will retire on half the income that they would have retired on in 1997. He should apologise to all those people whose lives he has damaged.

The Chancellor has not only let down those who wish to retire in the future. He is the man who promised the end to the means test for pensioners, but, under him, the proportion of pensioner households subject to a means test has risen by 50 per cent. Every single one will remember his words. Today, after two years and three consultations, reannouncements and re-reannouncements, the Chancellor decided to announce his child trust fund again. We have more overcomplicated proposals that will do little to help future long-term saving, but they will extend means-testing to even more people. There is only one thing to say about this little scheme of the Chancellor's—[Interruption.]—if the Home Secretary will keep quiet for a second: all the money that the Chancellor is offering to those children will have to go towards paying their tuition fees or their top-up fees.

I come now to the financial impact of the war with Iraq. We support the Government in their waging of this war, and we naturally support its full and proper funding, so, as I said earlier, and I repeat, we welcome the extra money that the Chancellor has announced today. But he should be warned; he cannot get away with using the war to get him off the hook for his long-term mismanagement of the economy. Nor can he get away with blaming Europe for all his problems. He just cannot blame all his flawed forecasts on world events.

Last April, the Chancellor delivered his forecasts to the House for the corning year, and he got them wrong. He got his forecasts for growth wrong. He got his forecasts for tax revenues wrong. He got his forecasts for borrowing wrong. So, in November, he admitted that his central growth forecast for 2002—2¼ per cent.—was wrong. He conceded that tax revenues had failed to meet his projections, and he announced that borrowing would have to rise by £20 billion in just two years. Then, he went on to blame all that on the fact that world trade and world gross domestic product growth had not been as fast as he had forecast.

The Chancellor's excuse, in other words, was not that he had failed Britain, but that the world had failed him. That is a serious charge to make, so I went back to last year's Red Book to check how those figures stack up. We find that when he delivered his pre-Budget report in November, the only forecasts that he got right were those for world trade and world growth. He blames the world, not himself, for getting it wrong, and we heard it again today, although he sits there grimacing. He blamed the world one more time: it is the world's fault that growth is running in such a way.

The Chancellor wants us to believe that the world economy has experienced the most rapid slowdown for 30 years. In the early 1990s, we had three years of world growth averaging just 1 per cent. Last year, according to the European Commission report, in which he places so much credit, world growth was 2.9 per cent. This year, the same group forecasts growth of 3.2 per cent. So, the Chancellor is inventing a series of problems that do not exist.

Today, the Chancellor has to admit one more time that he got his growth forecasts wrong again. They are down by 0.5 per cent., so they are wrong and his assumptions on tax revenues are wrong as well. The result is that his borrowing projections are also wrong. He sprinted through his borrowing figures, so let me recap. Last April, he predicted that he would have to borrow £13 billion this financial year. Today, he admitted that he would have to borrow £27 billion. That takes us only to the end of the financial year.

Just two Budgets ago, the Chancellor told the House that he would need to borrow £35 billion between 2002 and 2006. Today, he admitted that the true figure for borrowing over the period is not £35 billion, but £98 billion. In just two years, his medium-term borrowing requirement has risen by £63 billion. That is not just invented money; it amounts to £2,600 extra for every single household in Britain. He cannot borrow indefinitely, however. Surely even he, with his fiddled figures, understands that. More and more borrowing will mean higher and higher taxes.

Independent forecasters have long been warning the Chancellor that he was being far too optimistic. They questioned his revised predictions. Some called them "overly optimistic" and "rose tinted". We know what the independent experts think now: 78 per cent. think that by 2006 the Chancellor will have to raise taxes by between £5 billion and £8 billion, and those are the experts who sit on his own Treasury panel, although we do not hear any of that from the Chancellor.

The point is that the Chancellor's broken promises and missed forecasts might have been palatable if we were seeing real reform of our public services, but the facts speak for themselves. Take health: 1 million people are on NHS waiting lists, hospital admissions are down, not up, and last year 300,000 people were forced to pay for their own operations—a figure that has trebled since 1997.

On education, 50,000 children play truant every day, one in four leaves primary school unable to read, write or count properly, and every year more than 30,000 children leave school without a single qualification. This Government have tested to destruction the theory that more and more money alone can transform our public services. They have talked about reform, but delivered none. Six years of spin and spending cannot hide the fact that our public services are just not good enough. They need not simply more money, which is the Chancellor's prescription, but a new approach altogether. Our public services need an approach based on giving power back to people so that they are in control of their own lives, whether they are nurses, doctors, teachers, patients or parents.

The Chancellor has delivered his seventh Budget: six years, seven speeches and all promises, promises, promises. He promised prudent Budgets, fair Budgets, Budgets for enterprise and Budgets for the public services, but he has not delivered any of it. He has got it wrong, because he puts systems and initiatives, targets and schemes, in which he has great faith, before real people and real results. He has got it wrong because he thinks that he knows better than the British people how they should be living their lives. He has also got it wrong because he is driven not by the facts, which are staring him in the face, but by an ideology that has gripped him and will not let go. His sole mission in this Parliament is to prove that the old ways still work—never mind the evidence, never mind the consequences, just more failing policies and more downgraded forecasts from a discredited Chancellor.

Last week, before it was too late, the Chancellor could have scrapped his tax on jobs and pay. He could have stopped punishing people who work hard and save hard. Today, he could have delivered security and independence for the young, for the old, for hard-working families and individuals, for those who create jobs and those who need them, for those who pay for public services and those who rely on them. He could have delivered a fair deal for all those people, but he did not and he never will. It is the British people who will pay the price: more taxes, more spending and public services that simply are not good enough. The message of the Budget is clear for the British people—it is pain today from the Chancellor and, as borrowing spirals and he blocks any real reform, more pain tomorrow.

1.51 pm

Mr. Charles Kennedy (Ross, Skye and Inverness, West)

I begin by extending my personal congratulations to the Chancellor and to his wife Sarah and wish them good luck. Their news is very good indeed.

This has been an example of not only a buck-passing Budget but a cross your fingers and hope for the best Budget. That is the reality of what the Chancellor has been up to. When we look at all the problems that we all encounter as constituency MPs, the jobs that are being lost and the sectors of the economy that are in difficulty, not least manufacturing, there is a sense of denial in the Chancellor's amazing account of how every indicator puts us well ahead of the pack internationally. He should stop blaming the rest of the world and feel chastened this year, because the British people are paying the price for mistakes and they deserve more than excuses. The current problems are not simply due to the inevitable downturn that has taken place in the world economy, because the British economy has been doing significantly worse than those of many of our principal competitors. That is proved by some key facts.

Business investment has fallen at record rates. In 2002 it fell faster than in any major economy, unless one counts Iceland as a major economy. All the other countries have faced the same economic downturn as we have, but all are investing more than the UK in their long-term recovery. One cannot pay for the future if one does not invest now. That has to be a central criticism of the Chancellor's approach.

Manufacturing employment has fallen by more than 500,000 since 1997. Manufacturing has been in the longest recession since the second world war and output has fallen in seven of the past eight quarters. The Chancellor is now presiding over the biggest deficit and lowest growth rate since the Conservative Government lost office.

The Chancellor has announced some measures that may help, not least the reductions in red tape and bureaucracy for the business sector. We have all had serious and sustained representations to that effect. We welcome those proposals and will obviously study them in detail as the Finance Bill progresses. We certainly want to see greater simplification in tax. This is the Chancellor's seventh Budget and, as in each of the other six, more and more complication and detail is being built into the system as he unveils the various schemes and initiatives. That will have to be examined carefully, too.

As a country, we should be doing more to prepare our way for entry into the euro. We certainly look forward with considerable interest to the statement at the beginning of June to see whether white smoke emanates from No. 10 or No. 11, depending on what is going to happen—

Lembit Öpik (Montgomeryshire)

Or both.

Mr. Kennedy

Indeed.

The Chancellor is right to press ahead with his spending plans, which, as he knows, we support. We were critical of the Government in the earlier years for not investing more sooner. There is much to be done and no time to waste. It is sound to borrow more when there is a downturn, so long as the economy remains in balance over an entire economic cycle. On that, we are with the Government in the broad parameters. We certainly reject the Conservative alternative, whatever it proves to be. It is difficult to have a debate with the Conservatives at the moment because we do not know the basis for their plans.

The Government's pension credit comes in this autumn. It may be well intentioned but it is something of a bureaucratic nightmare. It is estimated that 1 million older people who are eligible will end up not claiming. That is not good enough. It would be better to scrap that and rely instead on a £5 increase in the basic pension, plus big increases in the age additions: £10 for the over-75s and £15 more for the over-80s. All the indicators demonstrate that the poorest pensioners are inevitably the oldest pensioners. That is where we should be front-loading our support with a view to the future.

What about council tax rises? It is now estimated, on the basis of figures that have come out today, that this year the overall increase in council tax that families pay will be £2 billion. That is a gigantic increase to spread across the economy at a time like this.

Matthew Taylor (Truro and St. Austell)

A stealth tax.

Mr. Kennedy

As my hon. Friend points out, it is a stealth tax.

Mr. Jon Owen Jones (Cardiff, Central)

Can the right hon. Gentleman confirm that the cost of getting rid of council tax would, on average, be a 3 per cent. rise in income tax—at least that is what it says in an internal Liberal Democrat document that has come into my hands? Will he refute the section of that document that says: However, we don't want to be drawn extensively into this"?

Mr. Kennedy

My answer is that what we have proposed at the time of this Budget is—[Interruption.] I will answer the point directly. It was a fair question and I will give a fair and full answer. We are proposing for this Budget that our priority would be for the top rate of tax to go from 40p to 50p for every pound earned above £100,000 per year. That would generate—these are the official figures—£4.5 billion, which one could put into the economy as a whole. What could one do with that money? One could do a number of socially progressive things. First and foremost, one could introduce a flat-rate reduction of £100 for each and every council tax payer in the country. That is a fairer, more egalitarian approach. With the additional resources, one could also, as we have already achieved in Scotland, abolish tuition fees and not go down the route of introducing top-up fees.

The best of those costed policies contributes that bit more. After all, that group of earners constitutes only 1 per cent. of the tax-paying public. One could have a fairer system of local government funding and greater student opportunity than we have at the moment. Those will find a positive echo with people between now and 1 May.

Mr. John McFall (Dumbarton)

The right hon. Gentleman mentions tuition fees in Scotland, but he knows as well as I that tuition fees are delayed in Scotland. Indeed, in my household this week, we had a notice for the tuition fees for two years' education for my youngest son, so let the right hon. Gentleman talk on the real planet.

Mr. Kennedy

I do not agree with the hon. Gentleman's interpretation of the policy to which his own party has been a signatory in Scotland. If this is the argument that the Labour party in the House of Commons is advancing, I suggest that the hon. Gentleman have a word with someone called Jack McConnell, because that is certainly not what he is arguing in Scotland. [Interruption.]

Mr. Deputy Speaker

Order. I hope that the debate can be conducted in a more orderly manner than this.

Mr. Kennedy

I shall try to behave, Mr. Deputy Speaker.

This is a disappointing Budget on four counts. It is a buck-passing Budget, and it is a Budget that invites unfavourable comparisons with the past and will undermine many people's hopes for the future. People want a more transparent system of fair taxation. They want it to be devoted—properly and efficiently, through more local accountability—to vital public services, and they want less of the smoke and mirrors that has been such a defining feature of the last six years.

That is the approach taken by the Liberal Democrats. We are willing to confront people with the fact that one cannot get something for nothing in life, and that the days of the apotheosis of Thatcherism are over. The idea that it is possible to reduce taxation steadily while magically delivering improved public services just does not add up. We have continued to present that argument, but the Government have yet to respond to it—and they certainly have not done so adequately in what we have heard today.

Several hon. Members

rose—

Mr. Deputy Speaker

Order. I must inform the House that Budget resolution No. 28, entitled "Employment income (provision of services through intermediary)", is incorrectly printed. The correct version will shortly be available in the Vote Office, and will appear in tomorrow's order of business.

2.1 pm

Mr. John McFall (Dumbarton)

I congratulate the Chancellor on presenting his Budget against a delicate international and national background—a background of which Opposition speeches have made no mention. The real problem internationally is a weakening of demand in both the United States and Asia. We are mindful of the fact that the US has been the leading world economy since the early 1990s, but already the labour market statistics for February and March show a big fall in not just employment but consumer confidence and industrial output expectations. As for Asia, a severe lack of confidence has been caused by both the stand-off with North Korea and the severe acute respiratory syndrome affecting Hong Kong and other areas.

As the Chancellor suggested, the background in Europe is sclerotic. Europe is lagging behind Japan for the second year running, Germany has the worst unemployment on record, and the economic reforms required by the Lisbon agenda have made little progress. In the eurozone, economic growth rates are now down to 1 per cent. There is cause for alarm, because the eurozone is the largest market for the United Kingdom: 60 per cent. of our manufacturing exports go to those countries, and just over 40 per cent. of our total trade is with Europe. The European Union forecasts a fall in eurozone growth from 1.7 to 1 per cent., which would reduce gross domestic product in the United Kingdom by a quarter of 1 per cent. and add £2 billion or £3 billion to next year's public sector net borrowing.

There are also a number of domestic threats. Retail sales have been weakening, and are now at their weakest for 10 years. Industrial investment is nearing a 20-year low, and the finance industry is still recovering from the dotcom crash famously described by Alan Greenspan as "infectious greed".

That, however, must be balanced against the macroeconomic essentials, which are sound: the UK has the lowest inflation for 50 years and the lowest interest rates. It is also comforting that we have the lowest unemployment among the G7 countries. It is forecast that next year the United Kingdom will be the top country, possibly overtaking America.

Notwithstanding the criticisms levelled at the Government, this is the time for fiscal loosening. There is a sound economic case for extra borrowing when the risks are all on the downside. When interest rates are low, inflationary pressures are almost non-existent and the national debt is, as the Chancellor pointed out, very modest, we do not want the imposition of a fiscal straitjacket on a cyclically depressed economy. We need the Budget deficit announced by the Chancellor for investment, and for general support for the economy. Let us take advantage of automatic stabilisers, which ensure that borrowing takes the strain when the economy weakens and we need not raise taxes or cut public spending. The Chancellor has remained faithful to that idea.

There are a number of things about which we can be optimistic. We have cheap money, and we have the lowest interest rates. Interest rates are negative in the United States, and barely positive in the eurozone and the UK. We have cheaper oil. One positive aspect of the conflict over the past few weeks—not much is positive in terms of damage and injuries—is the fact that the oil price has not zoomed up. I think that its highest level has been about $30 a barrel. The link between oil and GDP, and economic growth, is important.

Lynne Jones (Birmingham, Selly Oak)

My hon. Friend has mentioned investment. Is there not a case for additional borrowing for investment in infrastructure, especially housing and transport infrastructure, to help get the economy moving? Is my hon. Friend disappointed that the Chancellor did not do more in that direction, and also omitted to make capital available in lieu of private finance initiative credits in order to speed capital expenditure?

Mr. McFall

I agree that it is important for us to stick to our public spending targets, but, as I have said, the international background is fragile. In the last Budget we committed ourselves to an extra £61 billion of public expenditure. If we can spend all that, and spend it wisely, we will do a service. I think the civil service has yet to learn how to spend it: I believe that the undershoot this year is about £2 billion. I want the measures on public services to be implemented, but they must be realistic given the background.

In the last 11 months of the financial year, total central Government receipts were 1.5 per cent. higher than in the corresponding months last year. That is less than the 2.2 per cent. increase implied in the pre-Budget report, and well below the 4.2 per cent. anticipated in the April 2002 Budget. In the context of the medium-term financial forecasts, we are not meeting the targets that we have set ourselves in a number of areas, which is worrying. Corporation tax forecasts have been cut on three consecutive occasions, but the Treasury is confident that its forecasts are correct. I hope that in this instance they are.

Martin Weale of the National Institute of Economic and Social Research has said: My worry is not about deficits in the short term. The problems arise in two or three years' time". Although I accept what the Chancellor said: namely that, over the Treasury's estimated economic cycle from 1999 to 2005, there will be a £46 billion surplus, serious questions about our borrowing and our commitments to public expenditure will have to be answered at the end of that economic cycle.

The Chancellor mentioned productivity. We are still disappointed about that. In the next few months, my Committee will look at productivity. Every year since 1996, productivity has increased by 1.25 per cent., compared with the historical average of 2.25 per cent. The latest Bank of England inflation report states: The growth of labour productivity per person has been below its long-run average". In its annual assessment, the International Monetary Fund states: Raising productivity remains a key challenge". We are well behind the United States in output per worker—some 45 per cent. behind. Even if we factor out the longer hours worked in the US, there remains an output gap of 25 per cent., and we are still below France and Germany. That is the big issue. Those countries have sclerotic growth, yet their productivity remains higher. We have yet to crack that issue in this country.

Lembit Öpik

The hon. Gentleman mentioned tuition fees and, by implication, top-up fees. Given that, as we know, education makes a big difference to productivity, and given that the Welsh Liberal Democrats—should they get back in government in Wales—will promise to try to abolish tuition fees and not to introduce top-up fees, what advice would the hon. Gentleman give to his Labour colleagues in the Welsh Assembly? Would he advise them to seek a partnership with the Liberal Democrats in order to find that solution?

Mr. McFall

If I spoke to my Labour colleagues in Wales, they would tell me to take with a pinch of salt anything that the Liberal Democrats in Wales say about that. However, we are at one on productivity. My intervention on the leader of the Liberal Democrats was for the sake of honesty and clarity, which are important in terms of economic issues.

Rev. Martin Smyth (Belfast, South)

It is argued that education improves productivity, but is it not a fact that productivity in India and China is even better than ours in some respects, despite our level of education?

Mr. McFall

Yes, but I accept the basic point that education and skills are extremely important. One reason given for the disappointing productivity results is that an extra 1.5 million people have been employed in this country since 1997. Generally speaking, such people have less skills and no work ethic, so it is a matter of training them. Raising productivity is a long-term objective, not a short-term one.

Mr. John Redwood (Wokingham):

Has the hon. Gentleman noticed the terrible trend of productivity in the public services? We have put 25 per cent. more real resources into the health service, and got nothing more out. Is not the core of the problem the fact that too much is going into public services without getting the benefits?

Mr. McFall

I cannot accept what the right hon. Gentleman says on face value, without looking into the figures; however, the biggest growth has occurred in the public services. In terms of investment in the past year in the general international environment, where the economy is in decline, jobs in the public services have been very important. I agree with the right hon. Gentleman that there are reasons for concern in the public services, wage costs being an example. Last year, wage costs in the public services were 5 per cent., whereas in the private sector they were 3.5 per cent. So there are issues that we need to address, and I think that we can have an intelligent debate on them across the divide.

Mr. John Bercow (Buckingham)

It has become clear in recent minutes that the stance of the leader of the Liberal Democrats is that, on receiving a bill, he will in each case simply say that he disagrees with the interpretation of it. On the subject of the euro, and given the Government's clear, if mistaken, commitment in principle to joining the single currency, is the position of the hon. Gentleman that this country should do so at exchange rate mechanism mid-rates?

Mr. McFall

The hon. Gentleman anticipates my speech—I shall come to that point in due time. In any event, he is too disparaging of the leader of the Liberal Democrats. The right hon. Member for Ross, Skye and Inverness, West (Mr. Kennedy) and I have been friends for many years, and I respect his integrity. His politics are wonky, but he is a good guy.

The Chancellor has come up with productivity-related initiatives every year since 1997. He has focused on competition, capital gains, tax credits for research and development, raising corporation tax and dividend payments, and on skills training. In addition, new enterprise legislation will be enacted in June. However, we still have a long way to go on productivity, and I give the Chancellor and the Treasury notice that my Committee will be looking at this issue.

The National Institute of Economic and Social Research has suggested that we try something new by joining the euro. It suggests that removing the exchange rate and interest rate volatility through the eurozone could, in the long run, raise UK capital stock by 10 per cent., adding 4 per cent. to the gross domestic product. In addition, trade competition would help productivity.

That leads me to the wider aspect of the euro. Throughout the Chancellor's speech, references were made to labour market flexibility, convergence and other related issues. The decision that the Government must take before the first week in June will be extremely important. During the past three months, my Committee has taken evidence on the UK and the euro; in fact, we have had two evidence sessions every week since the beginning of January. I think that ours is the only body in the country that is making such a fundamental examination of the UK and the euro. To date, the debate in the country has been superficial, irrelevant to people's lives and largely arcane. Ask any member of the public —or even of the Government—to name the five tests, and one would struggle to get the answer; in fact, the question would probably be met with a blank look.

The Chancellor says that the economic case must be "clear and unambiguous", but can that be the case? During our Committee hearing, I asked the Chancellor whether he had ever met an economist who thought that any such case was clear and unambiguous, but he declined to answer. In my view, a clear and unambiguous case cannot be made. People will not be convinced by the Chancellor or his advisers' saying that the economic tests have been met, so we are going in. All that can be made in respect of the economic tests is an economic judgment, but the real judgment is political.

I applaud the Chancellor for the thoroughness with which he has approached this economic analysis. The history of sterling through the 20th century, as far back as 1924, when we re-joined the gold standard, shows that there was no such economic analysis. The history books show that when Winston Churchill was sitting at the table in No. 10 Downing street with Montagu Norman, the then Governor of the Bank of England, he was offered a cursory appreciation of what was happening. He then turned to Montague Norman and said, "Well, will we go in, Montagu?" Montagu replied "Yes". We were back in the gold standard, and disaster followed as a result. So we must have a thorough economic analysis.

Malcolm Bruce (Gordon):

I agree very much with the hon. Gentleman's approach, but does he accept that, even in an economic sense, common sense tells us that, with 10 new members about to join the EU, all of which are committed to joining the euro, both British and foreign investors are likely to consider the idea of investing in low-cost areas inside the eurozone more attractive than risking investing in the UK, given that there is no clear idea of whether we will be in or out?

Mr. McFall

Inward investment and the window of opportunity are very important issues, and our Committee has heard witnesses from the UK and elsewhere in Europe comment on them. Our debates and inquiries to date show that Europe is a complex issue, not a simple one, and that the economic case cannot be clear and unambiguous. The Government could put their best judgment, in economic terms, on the line; then, the decision will be a political one. Hopefully, our report will indicate the complexity of the argument and point out to people that there are dangers if we go in and dangers if we stay out; there are arguments on both sides. We want to establish the core issues, and inward investment is one of them for people such as the hon. Member for Gordon (Malcolm Bruce), who is on the pro-side. However, there are other core issues, such as interest rates and the one-size-fits-all approach, for those on the anti-side.

Mr. Andrew Love (Edmonton)

Does my hon. Friend agree that if the previous Conservative Government had set five economic tests before joining the exchange rate mechanism, they might have made a better job of it?

Mr. McFall

That comment stands for itself and I have no need to add to it. We can pay a heavy price for the absence of proper economic analysis.

The tests and the core issues are important. If I were to read out all the tests, it would bore us all, but they point to the importance of certain issues—for example, on convergence, whether the business cycles and economic structures are compatible so that we can live comfortably with euro interest rates. Is our economy similar to the economies in economic and monetary union? Does it have the same underlying behaviour, and does it move in harmony with them?

One of the issues that the Chancellor tackled was the housing market. We are told that the UK housing market is vastly different from that in the rest of Europe, particularly in respect of the variable-interest mortgages in this country. The Chancellor will assess whether fixed-interest mortgage rates would help to bring about greater stability in this country and also whether that would be beneficial if we decided to join the euro at a later date.

The second test is flexibility: how rapidly prices and wages adjust to changes in demand, particularly in view of our one-size-fits-all interest rates. I accept that there could be dangers in that, and that our current macro-economic model—with the Bank of England and the Monetary Policy Committee—is good. Opponents of the euro will be asking the serious question of whether we should trade in the superior model of the Monetary Policy Committee for the inferior model of the European Central Bank. That is a big issue.

The third test is whether euro membership will improve conditions for long-term investment. That is hotly debated. As an observer, I believe that business does not like risks and joining might mean fewer risks.

The fourth aspect is the competitive position of the UK financial services industry. I believe that, irrespective of where it is based, it will prosper because it is twice the size of anything else in Europe—Frankfurt is the next largest. Some people ask why the test involves the state of our financial services industry, rather than manufacturing or other industries. It is not the most important test, but I am sure that it will be passed.

Lastly, there is a catch-all question that summarises the others: will our membership promote higher growth, stability and jobs? Will UK investment dry up if we are not in the euro? With the candidate countries joining the eurozone over the next couple of years, what about the window of opportunity to influence the governance of the European Central Bank? What about changing the stability and growth pact? On our visits to Frankfurt, Paris and elsewhere, some people have suggested that it is almost all about stability, and only a little about growth. What we need in the eurozone and elsewhere is growth. The Chancellor's fiscal loosening is important, but it does not apply to the same extent in the rest of Europe due to the stability and growth pact. If we do not join, will we sacrifice our leadership role in Europe?

Lembit mpik

I am sorry to intervene twice, but does the hon. Gentleman agree that we have a great opportunity to be proactive partners in business with potential new members? Obviously, I know Estonia particularly well. If we take the strategic approach along the lines that he describes, by being in at the start, we could help our own economy by investing in those developing economies.

Mr. McFall

I would like to relate the hon. Gentleman's point to my account of the Treasury Committee's inquiry. We visited the Republic of Ireland, Poland and Hungary, the latter two being among the candidate countries. They see Britain as one of the large countries with a leadership role, they like how we do things and they want to increase business links with us. It is an important issue to go into the main pot for discussion. There is no doubt that the smaller countries look to Britain as a leader.

One issue that the Chancellor did not much touch on is pensions. The hon. Member for Roxburgh and Berwickshire (Sir A. Kirkwood) and myself are considering the issue, which is a long-term problem that should be examined on a cross-party basis. When interest rates are low and equity markets are tumbling, an enormous gap develops—currently estimated at £85 billion—between the value of UK pension fund assets and liabilities. In some cases, the deficits are almost as large as the company itself. For example, Rolls-Royce has a deficit of £1.12 billion, whereas its market capitalisation is £1.24 billion. That presents a real danger to the firm and to its employees.

If we want to, we can get involved in the blame game: we can blame the actuaries for an optimistic forecast and for keeping us in equities for too long; we can blame FRS 17, the new accounting practice standard; and we can blame the Government for removing tax reliefs on dividends and for imposing legislation. However, we must sort the problem out on a consensual, cross-party basis. Only this week, I met the chief executive of a major United Kingdom company, who said that the private sector must get more involved in the problem. We see little coming from the private sector, but we really need some initiatives from that direction. As I said, the hon. Member for Roxburgh and Berwickshire and I will work on the problem during the recess.

One example from the private sector is Sainsbury's, which has a final salary scheme and has increased the contributions of its employees from 4.25 per cent. to 7 per cent.—that amounts to a pay cut. The employees have a choice: they can pay the extra, or stay at the 4.25 per cent. rate and end up with a career average salary pension. Employees and employers have a choice. One of the biggest problems with pensions is that young people up to the age of 35 or 40 simply do not think about them, believing that there is no tomorrow. We have to educate younger people to start saving money at an earlier age.

I shall say this sotto voce: perhaps the problems will become so considerable that we will have to think about introducing a form of compulsion. I know that the Government do not want to know about that, but it must be on the medium and long-term agenda for the pensions industry. I certainly do not want companies to follow the Boots' route. I have nothing against Boots, but it had a 100 per cent. flight from equities into bonds. When the stock market is fragile, we do not want a further flight from equities, which would make things even more problematic.

I put the call out today, on a cross-party basis, that we must all—not just the Government, who have not taken it as seriously as they should have—do something about the problem. We all have responsibilities in that respect.

Lynne Jones

Is it not vital for the Government to examine more carefully the interaction between state benefits and personal and private pensions? My hon. Friend commends Sainsbury's, but it effectively charged its workers more for a less generous pension. That may not necessarily be wrong, but it is difficult for low-income workers who, if they make contributions only to be penalised by their state benefits, will be little better off. The interaction between the two is vital.

Mr. McFall

I do not commend Sainsbury's; I simply highlight it as an example because the company is trying to deal with the problem. The public-private divide has not been adequately debated and we need more clarity on the issue. The Government are attempting to deal with the problem partly through pension credit. My hon. Friend may disagree, but Sainsbury's is making an effort. We have a long way to go on the issue.

I shall finish by referring to something that the Chancellor mentioned at the beginning of his speech: international development, which he cited as one of the three long-term challenges. I commend the Government for tabling, this Saturday in Washington, a $50 billion international financial facility initiative to deal with the 115 million young people around the developing world who do not have primary education, and also the health needs of people in Africa and elsewhere who are suffering from AIDS, tuberculosis and malaria. Against that background, the real disgrace is the continued protection of farmers by almost the entire developed world. The EU, Japan, and the United States are in the dock.

On 31 March, the Doha trade agreement on agricultural subsidies collapsed. That followed the collapse of the agreement on pharmaceuticals, which followed the collapse of the trade terms of developing countries. From a multilateral point of view, that is extremely worrying. It is important that we get the WTO on track at the September ministerial meeting in Cancun.

We must also request early agriculture reforms in the EU. It is vital for the EU to initiate a process of eliminating its export subsidies. The world economy is facing the first synchronised downturn since the 1970s, and we will not achieve the worthy aims of debt relief if that is not resolved. Rich countries are subsidising their agriculture to the tune of £365 billion a year, putting farmers in developing countries out of business and creating a dependence on imports to survive. In the next month, along with one of the development charities, I shall be visiting Zambia to look at development issues. Two million people are going hungry in that country and some 300,000 Africans live on less than 65p a day. We all make a great fuss, rightly, about Comic Relief, which raised £40 million for Africa through its last initiative, yet every day Africa pays more than £26 million in debt repayments. There is something grotesquely wrong in that relationship and I suggest to the Government that debt must be cancelled without preconditions such as trade liberalisation measures. Debt cancellation would release funds to tackle mass poverty and meet the millennium development goals. We must look at what the rich countries are doing because, daily, we are punishing the poorer countries.

For years I have suggested that the Government work towards the 0.7 per cent. target for international development. I commend the Chancellor and the Secretary of State for International Development for their work in this area. but meeting the target would be hugely symbolic around the world. An additional £50 billion a year could be given to the international community if we met that target, because others would follow. This country contributes and we have all-party support for doing so, but it is against a background of impoverishment of the developing nations.

Norman Lamb (North Norfolk)

Does the hon. Gentleman agree that it is essential that the US ends its block on TRIPS—trade-related aspects of intellectual property rights—reform, so that countries such as Zambia and others in sub-Saharan Africa can get low-cost drugs to address the awful plague of HIV/AIDS?

Mr. McFall

I agree entirely, and I mentioned that the Doha round collapsed on the issue of pharmaceuticals. That needs to be revived. We will not make progress against such a background.

We are kidding ourselves if we feel that what we will put on the table on Saturday will complete our task. It will not, and I know that the Chancellor and others are aware of that. The big issue is the EU subsidies. We must ensure that multilateral organisations are put back on track after the disasters of the past few months. That is extremely important for us all. It is important for us economically, but also for our brothers and sisters in developing countries.

2.34 pm

Mr. John Redwood (Wokingham)

I have declared my interests in the register.

This Budget takes the breath away in terms of the things that the Chancellor did not admit to and the things that he would not say. This was a Budget by a Chancellor of tax and waste who has perfected the techniques of taxing, taxing and taxing again. He taxes when you are not watching and when you are. He taxes money that many people did not know they had and taxes the money that they desperately need.

If only the money were being well spent; if only hospitals were suddenly full of beds and waiting lists were suddenly reduced; if only all schools offered places of high quality that parents would wish their children to go to; if only we had a transport system of which we could be proud. If so, some of us might say that although we would not have raised as much tax ourselves, at least we have something worthwhile.

We know that our transport system is a disgrace by international standards and by the standards of the past in this country. We know that the health service is groaning, with too many managers, middle-ranking executives, spin doctors and others. It does not have enough real doctors and is short of beds by a large margin. We know that our education service is extremely patchy and is still letting down many children in the most deprived areas of the country, as the Government remain wedded to intervening on local government and sending out directives and circulars by the dozen, the hundred and the thousand over its years in office so far.

The Government still have not learnt that one cannot teach children by circular from Whitehall. They still have not learnt that the system needs the power of better management, better direction and more parental choice, district by district and borough by borough.

The Budget is also a demonstration that we have a Chancellor of fiddled figures and failed forecasts. He tried to disguise the enormous surge in borrowing that he will impose on the long-suffering taxpayers of this country over the next few years. Had he been more honest and spelt out the figures—as he had to do in the Red Book today—he would have told us that there is to be a £166 billion surge in borrowing between 2001–02 and 2007–08, a relatively short period. My guess is that just as his forecasts last year went lamentably astray, these forecasts are again going to err. The error will be on the side of the Chancellor disguising the true extent of the black hole in his Budget figures, and underestimating the true extent of the borrowing that he will have to incur.

Mr. James Plaskitt (Warwick and Leamington)

On the subject of borrowing, does the right hon. Gentleman recall that the total borrowed under the previous Conservative Government surged, to use his word, by £304 billion?

Mr. Redwood

I remember a policy called the exchange rate mechanism; it was warmly recommended by the Labour and Liberal Democrat parties and was the only consensus economic policy that the Conservatives ever followed. I remember that that caused high borrowing. The hon. Gentleman obviously thinks that high borrowing was a bad thing at that time. I hope that he will join me in condemning the Chancellor's wish to try to emulate that surge in borrowing over the next few years. Just as surely as that borrowing did damage in the early 1990s, so will this borrowing damage our economy today.

Borrowing is not a cheap or easy option; it is not a cop out. The borrowing all has to be repaid with interest. It means that one pays not just once, but twice, because the law of compound arithmetic is very cruel on those who do the borrowing and need to do the repaying. It is not the Chancellor who will repay all that money, but my constituents and his. Very often it is the poorest of this country who get sandbagged by the Chancellor's taxes.

Lembit Öpik

By implication, the right hon. Gentleman criticises the Government for not putting more money into public services. Is he for or against an increase in finance for Welsh public services, including free social care, bearing in mind that he gave money back to the Treasury from the Welsh budget when he was Secretary of State for Wales?

Mr. Redwood

I remember increasing the things that mattered in Wales and keeping open hospitals that others might well have closed. My case is not that I want more spending, but that I want the money properly spent. I do not want it spent on the army of spin doctors, quangos, middle managers, pen-pushers and directive-seekers. I want it spent on nurses, doctors and beds, with some left over so that we have less borrowing and less taxation. What this Government have also got to learn is that the higher the tax, the worse the economy performs. The bigger the increases in taxes, the more businesses are damaged. As the businesses are damaged, the revenues go down and the spending goes up. The Chancellor is in danger of being locked in a vicious cycle. As happened last year, he could discover that his revenues fall short and that his expenditures surge. That is the price and penalty of a bad economic policy.

Mr. Love

The right hon. Gentleman mentioned earlier that there would be some money left over. The hon. Member for Arundel and South Downs (Mr. Flight) has suggested that that might be as much as 20 per cent. Does the right hon. Gentleman agree with that figure? If not, what figure would he supply?

Mr. Redwood

I seem to remember my hon. Friend the Member for Arundel and South Downs (Mr. Flight) saying that elements of the overhead could be cut by 20 per cent. I thought that that was a very modest estimate of what could be done. I should like to cut 100 per cent. of the overhead of regional government in England. On cue, my right hon. Friend the Member for Haltemprice and Howden (David Davis) has arrived in the Chamber. He knows about these matters, and I wish him every success in his campaign.

We want regional government to be taken from the map of England. I do not want England balkanised, and I do not want the bill for balkanisation sent to me. I want to be represented locally by councillors in a unitary council—as I am now—and I want to be represented nationally through the high court of Parliament. I believe that there should be direct communication between the leaders of major councils and Ministers, and between senior council officers and officials in Whitehall. There is no need for the hundreds and thousands of people in regional offices tucked away in towns and cities. Many people have never even heard of them, but they cost us far too much money.

I am afraid that the hon. Member for Edmonton (Mr. Love) walked right into a massive trap, because 20 per cent. off the overhead is not enough. That proposal shows the modesty of my hon. Friend the Member for Arundel and South Downs and my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard), the shadow Chancellor, who supervises such matters. I would urge them to be even bolder, and to identify those overheads where we can sweep the whole lot away. However, the hon. Gentleman is leading me down tempting paths not central to my case today.

The Chancellor is also the Chancellor of boom and bust. It was interesting to note that he did not even have the gall today to mention boom and bust. This is a Chancellor with a record, who now stands arraigned in the high court of Parliament for having created too many busts after all those booms. He is a man who knows all too much about the bust.

We have only to look at what has happened to the stock market under this Chancellor. It soared in the first three years. Why? It was because the Chancellor stuck to Conservative economic plans—lower taxes and lighter regulation. What has happened to the stock market since the Chancellor's policies were truly unrolled? Of course, it plunged.

Labour Members are giggling away, and they would probably ask whether I had noticed that other stock markets around the world had fallen as well. I have noticed that, but the London market fell further and faster and harder than many of its competitor stock markets. The difference in the rate and extent of the fall is the price of the Chancellor.

Mr. Plaskitt

I appreciate the right hon. Gentleman giving way a second time. It is kind of him, but I think that I should correct his view of stock markets. The UK stock market is down 44 per cent. from its high point, but the French market is down 58 per cent., the German 65 per cent. and the Japanese 61 per cent. The right hon. Gentleman is not right.

Mr. Redwood

The problem with the hon. Gentleman's figures is that he is not taking the right time periods or markets. If he compares London with New York, he will see that my case is entirely made—that the American economy is run with lower levels of taxation and regulation. If he takes the time period that I mentioned, beginning from the point when the Chancellor's policies started to take effect in this country, he will see that the rate of fall is faster in Britain than in the other major markets.

Rob Marris (Wolverhampton, South-West)

Will the right hon. Gentleman give way?

Mr. Redwood

I want to make a little progress before taking more meaningless interventions, which are great fun to shoot down.

The Chancellor of the Exchequer seems to believe that there can be taxes that do not do damage. Let us look at his great experiment with the telecoms tax—the £22 thousand million that was taken out of the pockets of the telecoms industry in this country. He told us that he was proud of it, and I shall give him this—he certainly found a way to maximise the take. He had a very senior mathematician advising him, and he got the sums absolutely right. He found the perfect way to mug the telecoms industry for a huge sum of money.

However, we must look at the damage that tax did, especially when the Germans followed it up with a very similar system based on the same idea. The fallout in telecoms and high tech that was beginning in Wall street and the US was multiplied many fold in Europe because the Chancellor had led the way by taking far too much money out of the lead sector that was powering the growth, generating the productivity gains and transforming the economy. The Chancellor did the most damaging thing possible at the most damaging time. The result was carnage—cancelled investment programmes and bankruptcies, with people fighting for their lives even in great companies such as BT.

Rob Marris

I am grateful to the right hon. Gentleman for giving way. I shall not be drawn into commenting on the telecommunications licences. They were bought by private companies, and were not taxation. However, the right hon. Gentleman rather pooh-poohed the point made by my hon. Friend the Member for Warwick and Leamington (Mr. Plaskitt). As I recall, the American stock market fell about 41 per cent. It is a bit less than the UK fall, but only a little bit.

Mr. Redwood

Again, the hon. Gentleman is not looking at the time period that I am talking about, when the Chancellor exacted a price. I can give the sums. The Chancellor decided to take £5 billion out of pension funds at a time when the market was trading on a multiple of 20. Simple arithmetic shows that stocks would fall by £100 billion as a result of the £5 billion taken in tax. That money was taken from companies, pensions and savers. It was put somewhere else, and quite a lot was wasted.

David Davis (Haltemprice and Howden)

There was also the cost of regulation.

Mr. Redwood

From a sedentary position, my right hon. Friend the Member for Haltemprice and Howden says that there was also the cost of regulation. In addition, the costs of the specific taxes and of the general business taxes came to around £50 billion. Even Labour must understand that taking £50 billion away from productive and enterprising companies means that there will be fewer jobs, less investment and a big fall in the stock values of the companies losing the money. One cannot take all that money away and expect it to have no impact.

That brings me to the pensions disaster. The Chancellor thought his second most clever tax was the pensions tax. For a year or two, it did its stealthy business and the money came in. Many Labour Members really believed the Chancellor and the Prime Minister when they said, "It won't have any impact. The stock market will go on up, there will be magic money, and you needn't worry."

However, the stock market did adjust as the money went out of pension funds. Moreover, the problem compounded: the capital collapse in share values led to the collapse in the values of pension funds, and the pension funds had less income to reinvest. As a result, the black holes in the pension funds got bigger and bigger.

I was delighted that the hon. Member for Dumbarton (Mr. McFall), the Chairman of the Treasury Select Committee, was a big enough man to admit that there is a very serious problem in pension funds in this country. The £5 billion pensions tax is at the bottom of it.

It is not the only cause. The international collapse in stock markets, which happened in parallel with the process that I have described, has done damage as well, but there is a very big "made in Britain" component in the pensions crash. One of the most obvious solutions is to try and find a way to reduce spending without damaging public services, so that some of the money can be given back to the pension funds. Unless that happens, it will be almost impossible for the funds to narrow the gap between assets and liabilities, and for the stock market to make the full recovery that we desperately need it to make if our great pensions success is to be preserved for another generation.

I should have thought that the Chancellor of the Exchequer would be deeply ashamed of the single fact that my right hon. Friend the Member for Chingford and Woodford Green (Mr. Duncan Smith), the Leader of the Opposition, brought forward on this issue. That is, that many people will now retire on half the pension that they expected, and on half the pension that they would have earned from their pension fund if they had retired in the final year of a Conservative Government.

That too is the price of this Chancellor of the Exchequer. He has been on watch for almost six years, and in the latter part of that period the pensions funds have collapsed. That has the real and immediate consequence that many people retiring now are not getting as much pension as previously. The even worse consequence for members of many of the schemes that continue is that they are being told that they will either have to pay a higher contribution or get smaller benefits. However, in probably as many as half the total number of cases, people are being told that their pension fund is being shut down, and that they no longer have the opportunity afforded to the previous generation to make a contribution, to receive an employer's contribution, and to look forward to a decent pension in the future.

After the two disasters of the telecoms tax and the telecoms boom and bust, and the pensions tax and the pensions boom and bust, it is heroic of the Chancellor to settle this time on a tax on jobs. Labour Members must understand that the imposition of a very large tax on jobs in the form of the increases in employer and employee contributions, hitting this month, will have a serious impact on the number of surviving jobs. One would have thought that the 300 jobs a day that have gone in manufacturing for every day of this Government so far would have warned the Chancellor, but no. The jobs that are most vulnerable to the Chancellor's jobs tax are those in companies that are not earning good margins, are struggling, are loss-making, or do not pay particularly good wages. Those companies cannot afford such an imposition. The biggest danger of the tax on jobs is that it will destroy many more jobs in manufacturing. I hope that jobs will be created elsewhere to offset some of that impact, as has happened in recent months. However, most of the jobs that are being generated at the moment are in the public sector. The Government are destroying the productive jobs in companies that used to pay their way and pay taxes, and creating jobs in the public sector that unfortunately do not reach the right areas or deliver the improved services that we all desperately want.

The hon. Member for Dumbarton rightly said that we have a big productivity problem. The Chancellor has spent six years lecturing the private sector on how it should raise productivity. He has spent six years imposing targets, interventions, directives, warm words and cold words on the public service, but he has not yet got anywhere near to creating higher productivity in the public service. We have a productivity-destroying machine called taxation and public spending. We take money away from the productive sectors that could invest and create new jobs if they kept it, and tip it down the drain on the wrong kind of public service spending, even succeeding in lowering productivity there in the process. On both sides of the account, we are doing damage to our productivity record at a time when the Chancellor rightly points out that we are still well behind some of our leading competitors, particularly the United States of America, and when we should be reinforcing success by leaving the money to a greater extent in the private sector, which could invest in the new technologies and new jobs that we need.

Mr. Bercow

My right hon. Friend referred to the inadequacy and deterioration of public services. Does he agree that for the Government to fail to meet targets for the public services that were set by independent experts would be disappointing, but for them to fail to meet their own targets—notably, but not exclusively, on literacy, numeracy and truancy—requires incompetence on a truly spectacular scale?

Mr. Redwood

My hon. Friend is absolutely right. Meeting targets for numeracy clearly challenges the Chancellor himself, because practically all the numbers that he put into last year's Budget documents were works of fiction. He will need a refresher course in numeracy, and I hope that the Education Secretary is working on that as a priority. Having had a quick look at the Chancellor's Red Book today, I suspect that he still has not learnt to be as numerate as he should be, and I have a nasty feeling that his productivity figures and growth figures will prove too optimistic, and that therefore his borrowing figures and tax revenue figures will prove too optimistic. This Chancellor of 53 tax increases will prove that the more one taxes, the less one raises.

Mr. Stephen O'Brien (Eddisbury)

My right hon. Friend may not have had a chance to see all the associated documents that go with the Red Book, which include a so-called discussion document entitled "Public services: meeting the productivity challenge". It seems that the Chancellor has just woken up to the fact that he has spent the money, but did not get the reform, and that no wonder productivity is collapsing.

Mr. Redwood

My hon. Friend moves me on to the penultimate section of my speech. What should be done about the dilemma in which the Chancellor finds himself? The vital issue is that of public service reform. My right hon. Friend the Leader of the Opposition is right: we do not begrudge money if it is well spent in the public services, but we think that it is absurd to take so much money and tip it into the wrong areas without first reforming the services to ensure that it is likely to be well spent.

Hon. Members will be pleased to know that I cannot go into detail on all the services today. However, the general theme that I would recommend to the Chancellor is one that is more beloved of the Prime Minister than of his own Treasury—that is, that he should trust local management and the choices made by users of services rather more, and that he should start to dismantle the huge bureaucracy that he has created nationally, regionally and in the principal councils to try to monitor, regulate, overrule and interfere in public service management on the ground. Extra money needs to be spent in hospitals on nurses and doctors and in schools on teachers and the equipment that they need to teach; far less needs to be spent on all the intermediate levels between Ministers and those operating units; and we need to trust patients and parents far more by giving them real choice.

If I could sum it up in a single phrase that should certainly appeal to Blairites in the Labour party, if not to other members, we need to back choices for people who cannot afford choices. I do not want to live in a world where those who are very rich can buy themselves all the best possible health care, when they need it and of the kind that they want, and can pay for a really superb school at a very high price out of their taxed income, but where everyone else has nothing like that degree of choice in getting the health care that they need, when they need it, or schooling of the quality that they want.

I want people in my constituency who are on more modest incomes than those who send their sons to Eton or go to the best private hospital to have a real chance of access to a high-quality school of their choice, where all or most of the money is supplied by the state—all of it if they want a free place, or most of it if they are prepared to pay a top-up fee. I want real choice, and I want it to give those who live in the middle of London or the middle of Birmingham the same life chances as those who live in the better suburbs and shires where there are really good schools and hospitals—they do exist in some places.

We all need that greater choice and we all need far more capacity in the health and transport systems. Transport is a good example of where we could achieve a great deal in expanding rail capacity and road capacity if we really used the private sector. People are used to paying for their transport, and it can be financed entirely privately. We do not want expensive public-private partnerships and private finance initiatives, which deliver too much risk to the taxpayer and too little money to the service itself. The Government should have the courage of some of their convictions and let the private sector do far more to relieve the taxpayer of the enormous burden of tipping huge sums of money down the drain on to Network Rail and finding that the railway system is worse a year after the partial renationalisation than it was before.

My final point is that the Government's overall economic strategy is going disastrously wrong. The course that they must adopt is one that reins in wasteful spending so that they have to borrow less, and starts to deal with the very damaging tax rises that they have imposed, which are now reaching the point whereby they will stop the growth in revenue that the country so desperately needs. It will be difficult, because the well-managed and strongly performing economy of the late 1990s has been badly gummed up by too much tax, too much regulation and some very foolish public spending priorities, but not impossible. Billions of pounds are being wasted on areas such as Network Rail, the quango world and regional government. A civil service of 500,000-plus is far too big. The Government should get a grip and start to reduce those expenditures so that they have some leeway.

If the Government decide not to bother about that and to believe the bizarre and over-optimistic forecasts and figures in the Chancellor's Budget documents, we will get into a difficult pickle. Productivity will not grow in the way that is wanted; public services will not respond to the patient or the parent, because they will not be allowed to; there will not be the improvements that we want; and there will be no real choice. Public services will get a lot dearer, but will not deliver. The private sector will be starved of more and more cash and will not be able to make the investment that is required, which will limit the growth of the productive economy. That, in turn, will cut the tax base in future. "Fifty-three tax rises" will be written on the tomb of this Chancellor unless he stays in office for long enough to impose the extra ones that his Budget will require when the money runs out in the not-too-distant future. This is a Chancellor of tax and waste; a Chancellor of boom and bust; a Chancellor of fiddled figures. This is a Budget that we should vote against.

2.59 pm

Mr. James Plaskitt (Warwick and Leamington)

It all sounds very woeful in Wokingham; the situation feels very different in my constituency.

In the run-up to the Budget I have spent a fair amount of time taking the pulse of the Warwick, Leamington and south Warwickshire area. In the past three months, I have visited more than 20 companies in my constituency. I have spoken at length with the chambers of commerce, the Federation of Small Businesses, the Engineering Employers Federation and some of the intermediate bodies that the right hon. Member for Wokingham (Mr. Redwood) mentioned and disparaged so much—for example, Advantage West Midlands, our regional development agency, and the local learning and skills council. Between them, I have been sounding out a good cross-section of business opinion.

I have spoken to sole traders, small and medium-sized enterprises, medium-sized firms and local firms that are part of global companies. I have also spoken to a mix of manufacturing and service companies. Within manufacturing, I have spoken to different types of businesses—lower as well as higher technology. In my constituency, the car industry is a strong presence—both design and build and also component supply. By taking all that on board, I have had a good opportunity to take the pulse of the economy in the west midlands. It has given me a platform from which to assess whether the Chancellor's handling of the economy in general and the particular measures he described today are responding to the needs of the business sector as I hear them in my constituency.

In my discussions with those companies, three main issues have emerged as important to them. First, they stress the importance of maintaining underlying economic stability. They made an extensive number of points on the tax and red-tape issues that are of great importance to Conservative Members—they are also important to companies in my constituency and I shall deal with them in a moment. All the companies said, however, that tax and red-tape grumbles and issues pale into insignificance when set alongside the damage that would be done if the economy turned into recession. They recall previous recessions and the damage that they did to their companies. Recessions drove companies out of existence in my constituency and caused unemployment to soar—today, it is running at 1.5 per cent. which is a different story from what it was 10, 15 or 20 years ago.

All my companies say that the most important thing that the Government can do is to maintain economic stability. They say that they will have arguments with us about other things that are happening, but above all, they tell us to maintain economic stability. So they are impressed with the Government's record on that central point—the fact that we have had positive gross domestic product growth for every quarter since the Labour Government have been responsible for managing the economy.

Last year, our growth was bettered only by the United States and Canada. Our growth forecasts are now running well ahead of those in Euroland. As an economy, we are well placed to cope with the global slowdown. We have low interest rates, low inflation and stable public finance. Given that background and in those circumstances, it is prudent and sensible now to borrow to support economic activity; not to borrow at irrational or dangerous levels—we are not going anywhere near the 8 per cent. of GDP recorded under the Conservative Government—and the borrowing levels envisaged in the Chancellor's statement do not even reach 3 per cent. of GDP.

Businesses recognise that that is a sensible way to manage public finances. It is the right posture to adopt towards public finances during this global dip. They are telling me and the Government, "Maintain that economic stability." It is crucial for maintaining the United Kingdom's favourable performance against so many other countries—many of the crucial investment decisions made for companies in my constituency, which affect my constituents, are made abroad, not in this country, by the foreign owners of those companies. The United Kingdom as a place for investment is judged against rival locations and capital is now highly mobile. Therefore maintaining the competitiveness and strength of our economy is important.

Norman Lamb

I wonder whether those companies have said anything to the hon. Gentleman about why the United Kingdom's share of inward investment into Europe has fallen so substantially as compared with the rest of Europe.

Mr. Plaskitt

Of course, we have had extensive discussions on that subject, but as I think the hon. Gentleman knows from our examinations of it on the Treasury Committee, those figures are largely influenced by the flows of merger and acquisition activity, which can be very volatile. He is right to say that there has been a dip in the proportion of foreign development investment that has come to the United Kingdom in the past two years. The figures change erratically from year to year. It would not be wise to draw inferences from two years' figures; we should look at the wider picture.

It is worth reminding the House of the recent report published by the Society of Motor Manufacturers and Traders Limited, "Strengthening the Supply Chain", which reminds us of the importance of the auto supply chain to the economy: 7,000 businesses, 140,000 jobs and half the businesses are small and medium-sized enterprises. The report points out that that sector is going through tough trading conditions at the moment because of the global downturn. It also emphasises the strength of the car industry in the United Kingdom. Each year during the 1980s, 1 million cars were built here on average, 1.5 million were built here in 2001, and the industry confidently expects that 2 million will be constructed here by 2005. It is worth quoting the report, which says: The comparatively strong performance of the UK economy and its relative stability provide an advantage for UK based operations and continues to offer an attractive proposition for potential inward investors. That statement is also backed up by the latest KPMG study, "Competitive Alternatives", which ranks the United Kingdom as the second lowest cost base after Canada and 13 per cent. better than the United States of America. That study is based on labour costs, business taxes and transport, energy, land, construction and leasing costs. It is the most comprehensive assessment of all the costs that business faces. KPMG is pointing out that the United Kingdom is the second best country among all those that it has surveyed. That is extremely important for the auto component industry.

The report also mentions some significant challenges that the industry faces. It looks to Government for a response on three challenges in particular: the need to do more to support apprenticeships; a single entry port for Government business support programmes; and more progress in achieving a low-carbon economy. I shall deal with all those in a moment, but the report also places great emphasis on, and calls the Government to do something about, ending the uncertainty over the euro. When I discussed that subject with businesses in my constituency, I found that their opinions were mixed. Some are not particularly interested in being in or out, some are desperately keen for us to get in, and some are opposed to entry. Irrespective of their position, however, they are all saying, "For goodness' sake, let's know where we are going on this." The SMMT report has this to say on the subject: uncertainty about UK entry into the single currency also increases the risks associated with new investment. The government must move speedily towards a decision on membership of the single currency". So I was pleased to hear the Chancellor say that he will be pronouncing on the five tests before the beginning of June. For many companies in my constituency, that statement may be more important than anything else he said in his Budget speech. I look forward to hearing that announcement.

The second important area that companies in my constituency have been raising with me is the need to drive up productivity and close the skills gap. The Chancellor mentioned that in his statement today. There are disappointing factors in the UK's productivity performance, but it is encouraging to hear that the gaps are narrowing between us and some of our competitors, although there is still a significant gap between us and the United States.

I have asked many of my local companies for their views on productivity. Interestingly, many of them feel that their own company is doing all right and that there is no problem. They think that the fundamentals for eventual productivity improvement are in place. As my hon. Friend the Member for Dumbarton (Mr. McFall) said earlier, there is no doubt that our success in bringing more people into economic activity and in reaching historically high levels of such activity means that the improvement in productivity will be delayed. When the labour force is enlarged, increased productivity tends to follow. That was the experience in the United States and it is likely to be the same in this country.

There are also significant productivity gaps between the UK regions. The Treasury Committee, on which I serve, is investigating that and I hope that we can contribute to a fuller understanding of why those regional variations exist and why they have been so persistent. However, those variations confirm the need for an adaptive policy response in the regions, so I welcome what the Chancellor said about devolving some decisions on the local economy further down the scale and giving regional development agencies more freedoms. Those agencies are themselves devolving some matters to sub-regions, which is an important development.

I welcome the Chancellor's statement that there will be greater access to capital, new investment vehicles for small companies and further improvements to the research and development tax credit. Devolving employment policies to local job centres is also extremely good news.

Some of my local companies mentioned the skills problem. Many local firms have considerable difficulty with recruitment. The labour market is tight throughout Warwickshire; unemployment is 1.5 per cent. in my constituency so, unsurprisingly, recruitment is a problem. That is especially true for manufacturing companies where, to some extent, there is an image problem. School leavers and people in further and higher education tend not to be drawn to engineering careers.

Schools and further and higher education institutions should strengthen their links with engineering and manufacturing companies. Both sides should come together to make young people aware of the exciting and innovative things that are happening in our many successful manufacturing and engineering enterprises. Young people are not aware of them, so it is not surprising that they are not drawn to a career in that sector. The introduction of entrepreneurship in the curriculum is welcome and I hope that it will include advocacy of our remarkable engineering successes and the stimulating career opportunities that exist.

Companies want an expansion of modern apprenticeships. I am pleased that the Chancellor envisages that 320,000 of them will be up and running by 2006. Strong links with universities are important for manufacturing companies. They work well in my area, where many local companies have good links with both Warwick and Coventry universities. There is strong collaboration in terms of courses run by the universities and in the products manufactured by the companies.

Tax and red tape issues are certainly raised by companies in my constituency, but the particular points they make are of interest. Of course, no one would expect companies to be enthusiastic about the increase in national insurance that they faced and which is now in place, but they recognise that the overall corporate tax burden is reasonable. It is instructive to note the latest figures from the Organisation for Economic Co-operation and Development on that point. Total business taxes as a percentage of UK gross domestic product are 7.2 per cent.—the third best in the European Union. The comparable figure for Germany is 9.1 per cent. and in France it is 14.5 per cent. Total business taxes as a percentage of total taxation are 19.2 per cent. in the UK, making us the second best in the EU. Furthermore, the figure is lower than that for the United States of America.

Mr. Andrew Tyrie (Chichester)

Does the hon. Gentleman agree that it is more important to look at the total tax burden? After all, directly or indirectly, firms end up paying for that and it is reflected in labour costs.

Mr. Plaskitt

But the firms I talked to look at the overall picture, as the hon. Gentleman encourages me to do. I talked to them about the impact of national insurance and the overall level of business tax in the economy and the comparisons with our competitor countries—the comparisons are favourable. They point out that although there are some tax increases for business there are also some offsetting benefits owing to our success in managing the economy. They enjoy the benefits of lower interest rates and of the reforms that we introduced to VAT and accounting. Indeed, today, my right hon. Friend the Chancellor has added more benefits and more cost reductions for small firms.

Most companies were prepared to accept that the higher level of national insurance would be okay provided it was spent well—a point that we heard from the Opposition. Firms realise that the costs to employers of either private or social insurance-based systems are rising much more steeply elsewhere; for example, the cost burden imposed on French or German companies as they grapple with their public service problems is rising much faster than in this country. Firms that are part of a global operation are very aware of that.

I am pleased that firms do not consider only the tax bill; they are also asking what they are getting for their taxes—rightly so. Firms which have problems with recruitment and the skills base welcome the fact that we are investing extra money in the education system as that will help them to address the skills shortfall. They welcome the extra investment in transport. The right hon. Member for Wokingham denounced our transport system, but there have been significant improvements in the local transport network in and around my constituency. There are major road schemes and distinct improvements have been made to the rail link with London. Those significant investments are all welcomed by businesses in my constituency. They realise that there can be no extra funding for the transport system unless they contribute through taxation.

Companies also acknowledge the benefits to them of higher Government capital investment under the Labour Administration. Many of them have won contracts related to that investment. They are watching how the Government spend the money and assessing the degree to which it benefits industry, and they see that it does.

Companies frequently raise the issue of red tape—frequently. [Interruption.] I am not surprised to hear approving murmurs from the Opposition Benches. When companies raise the issue of red tape, however, they are not talking about the 4,000 or 5,000 new regulations introduced each year to which Opposition Members often refer. In fact, only 3 per cent. of those regulations attract any business costs; most of them are local transport or electoral measures and have nothing to do with companies.

What are the red tape issues that firms raise with me? At the top of the list are employment tribunals. Companies face increasing costs and time commitments and sharply increased lawyers' bills as they wrestle with increased numbers of tribunal cases. They want reform of the employment tribunal system and are anxious to know what will result from the Government's recent statements on the matter. They agree with the thrust of the reforms that the Government are trying to initiate: encouraging the resolution of disputes within firms before they even reach a tribunal; trying to spread the cost of liabilities so that they do not fall exclusively on companies; and discouraging frivolous claims. I believe that we should expect further Government announcements on the current investigations into the reform of tribunals, and the companies in my constituency are anxious to find out whether that reform will be the sort that they would like to see.

Another red tape issue raised is the regulations coming from the Financial Services Authority. Many of the companies in my constituency take the view that the FSA is now producing over-elaborate regulations, and they want us to get the balance right. Again, we will be happy to take up that challenge in the Treasury Committee, and we look forward to putting some of those points to the FSA's new chief executive to find out whether the response is the one that business would like to hear.

The difficulty of gaining access to Government business support schemes also appears under the heading of red tape. Undoubtedly, business would very much welcome it if we could evolve a single port of entry for the array of schemes that exist. Companies that have managed to gain access to the schemes have greatly appreciated them. They have done a number of very good things for a large number of companies in my constituency, but the time commitment in gaining access to them and understanding their criteria and complexity has deterred many businesses from coming forward and taking up the advantages that undoubtedly exist. So I urge the Government to consider creating a single access port for many of those schemes.

Finally, insurance costs come under the red tape heading. There is no doubt at all that many companies face a very steep increase in insurance costs, especially for liability insurance. Again, they are pleased that the Office of Fair Trading and the Department for Work and Pensions are looking into the workings of the insurance industry, and they eagerly await the outcome of those investigations. Those costs are undoubtedly rising sharply, and companies are looking to us to respond and to try to help them.

In summary, that survey of businesses in my constituency shows that they very much welcome the way that the economy has been managed and the Government's responsiveness. They have additional needs and problems, which they are putting to us, and I look forward to the Government's response to those issues in due course. As I say, top of their list is their appreciation of the fact that we remain one of the best performing economies in the G7. They appreciate the fact that we are managing public finances very soundly. They, along with my constituents, appreciate that we are on track to deliver both a strong economy and social justice; and they, as companies, have just as much interest in that as any of my constituents, so I commend the Budget statement.

3.22 pm

Mr. Stephen Dorrell (Charnwood)

I begin by declaring an interest as a director and shareholder of a manufacturing business—a subject that has cropped up during the debate.

The big story about the Budget and the Chancellor's record in office is that he has been an almost unprecedentedly lucky Chancellor whose luck is now clearly and demonstrably running out. The reason why I think that he was lucky is that he inherited a set of circumstances in 1997 that he himself described today as being a key element in the record for which he is responsible. After all, he stressed in his Budget statement today the importance of the fact that he has been able to build his record as Chancellor on—to use his words—the foundation of low inflation.

I concede, of course, that the establishment of the independent MPC was a decision taken by Labour in 1997, but what the MPC has done is to consolidate the essential discipline of low inflation that was put in place despite huge opposition from Labour during the Conservative years. So the Chancellor was right to stress the importance of low inflation as the essential foundation on which economic success can be built.

Later in the Budget statement, the Chancellor also stressed the importance of flexible markets. He lovingly went through the importance of flexible labour markets, flexible markets for goods, flexible markets for services and markets able to respond to customers. He made the point that our markets in this country are more flexible than most equivalent markets elsewhere in Europe, and he made the point further that we are still less flexible than the United States.

I look forward to the day when a British Chancellor and his supporters, instead of saying, "Well, of course we are not as good as the United States, but we're better than Europe", will start to say, "We're well ahead of Europe and our objective is to make our markets as flexible, as competitive and as successful as the American domestic and international markets." All of that was clear in the Chancellor's rhetoric today. If we are to build a successful economy in this country, we have to recognise the importance of those essential disciplines—sound money and flexible markets.

The problem with the Chancellor's record and the reason why I believe that his luck is now demonstrably running out is that, whereas the importance of those messages is increasingly understood elsewhere in Europe, where the drive is to lower taxes and to make markets more flexible, we in this country are marching resolutely in the other direction. The Government use the rhetoric of the importance of flexible markets, but they make decisions at every step to introduce new elements of red tape and new regulatory burdens, furring up the flexible markets to which they claim to attach importance.

Furthermore, the central problem with the Budget is that the Government are not only re-imposing regulation on the economy when our European competitors are looking for ways to remove it, but increasing the tax burden when our European competitors are understanding the importance of the excessive tax burden that they suffer, which is holding back their economies. So the core problem with the Budget as the Chancellor presented it today is that the public finances that he is asking the House to endorse for the years ahead demonstrate the fact that, although he recognises all the stuff about flexible markets, disciplined public finances and so forth, he is undermining by his actions precisely the thing to which he says he attaches great importance.

To highlight the central problem of the public finances, I want to draw the attention of the House to two aspects of the borrowing figures that the Chancellor announced today. First, I remind the House that, two years ago, when the Chancellor projected borrowing for the financial year just started, he said that it would be £10 billion. Since then, he has imposed an extra £8 billion in tax this year, so the equivalent figure should have been £2 billion. He was projecting that the figure for this year would be £10 billion, but he has since put an extra £8 billion into the revenue side of the account for this year. So. everything else unchanged, his projected borrowing for the current year would have been £2 billion. His actual figure is £27 billion—so two years and £25 billion out. That is material mistake.

Mr. Howard Flight (Arundel and South Downs)

£35 billion.

Mr. Dorrell

Sorry, £35 billion. That is also a material mistake. The Chancellor is £35 billion out.

Mr. Redwood

My right hon. Friend was right first time.

Mr. Peter Luff (Mid-Worcestershire)

I think that he was, too.

Mr. Dorrell

Yes, I was right first time.

I want to draw the attention of the House to a second set of figures. The House will remember that the Chancellor read out a string of numbers that he clearly did not want us to understand the significance of. The string of numbers was for projected borrowing over the next five years. I am not absolutely certain of the numbers because he read them so fast that I could not write them down—I do not do shorthand—but I think that they were 27, 24, 23, 22 and 22. The important point that the House was supposed to take on board was that they showed a downward trend, albeit a marginal one. The House's reaction to the numbers might have been slightly different if the Chancellor had instead read out the Institute for Fiscal Studies' figures for the same period. Its projected figures are 25, 28, 31 and 35. If independent forecasters suggest—

Mr. Plaskitt

One of them.

Mr. Dorrell

It is the consensus of independent forecasters. If the hon. Gentleman wants to set himself up as an expert witness to argue the case against the IFS before some committee, I shall be in the audience. I would want to witness such a blood sport. The Chancellor is engaging in wishful thinking.

Mr. Barry Gardiner (Brent, North)

Does the right hon. Gentleman acknowledge that the IFS goes on to say that it expects

the government to overachieve the golden rule over the current cycle by around £31 billion"?

Mr. Dorrell

I am trying to focus the minds of hon. Members on the question of whether borrowing will go down, as the Chancellor projects, or up, as the IFS projects. Given the Chancellor's track record on forecasting and the fact that one of his forecasts was £25 billion out over two years, it is likely that he will not deliver his objective of achieving a declining trend in total cash borrowing during the period of the forecast unless he takes further action. I shall explain why that is likely in a moment.

Mr. David Laws (Yeovil)

Does the right hon. Gentleman agree that we need not rely on only the IFS? We could rely on the Treasury's published average of all independent forecasts, which forecasts £31 billion of borrowing in 2004–05.

Mr. Dorrell

The hon. Gentleman is entirely right. I thought about using that figure when I was considering what to say because it is an independent figure. I wanted to draw the House's attention to figures from the IFS because it has published a run of forecasts over four years, which is comparable with that reported by the Chancellor today. The consensus and the IFS forecast suggest that the underlying position of the public finances is unstable and that borrowing continues to have an upward trend, despite the Chancellor's attempt to give the opposite impression this afternoon.

Mr. Love

Assuming that the figures produced by the IFS are correct—a big assumption given the difficulties of forecasting—does the right hon. Gentleman believe that we must take corrective action, and should that be to increase taxes or to reduce public expenditure? What level of public expenditure does he believe to be consequent on getting public finances back on to a reasonable path to the future?

Mr. Dorrell

That brings me neatly to an attempt to identify why the public finances are unstable and, by implication, what should be done, as the hon. Gentleman asked. No one should be surprised that independent forecasters think that public finances are unstable, because the Chancellor published figures in the pre-Budget report that show that, in the first three years that he was Chancellor, public expenditure—measured in funny money of constant value pounds—decreased fractionally as a total level of spending. In those three years, expenditure fell by 1 per cent., went up by 0.2 per cent. and then went up by 0.7 per cent. The growth of public expenditure was securely slower than that of the rate of the economy as a whole. In the next two years for which the funny-money number is published, public expenditure started to grow by 4.5 per cent. a year. As we know, the projected figures for the current year and the out years suggest an 8 per cent. cash growth of public expenditure. If the brakes are let off public expenditure to such an extent against the background of slow world trade and disappointing growth compared with what was expected, it is hardly surprising that the public finances turn into a deep black hole. That is precisely what is happening.

The figures that my right hon. Friend the Leader of the Opposition cited in his reply to the Chancellor about growth forecasts might have seemed to be rather dry statistics, but it is not dry statistics to point out that if public expenditure grows by 4.5 per cent. in a year when the economy grows by 1.8 per cent., sooner or later taxes will have to rise. That is simple arithmetic.

Mr. Flight

Surely the point is that not only is borrowing rising, but, as this year's Red Book shows, taxation is going up by £27 billion.

Mr. Dorrell

Borrowing is rising despite the huge increase in tax revenues. Some of that can be attributed to the national insurance increase—the £8 billion extra tax on jobs—that started at the beginning of this financial year. Incidentally, that increase was justified in last year's Budget as being necessary to fund health expenditure and we were invited to debate the benefits of spending extra tax revenue on health. Hon. Members should remember that only £2.4 billion of the £8 billion is for the national health service, while £5.6 billion is for elsewhere. The debate about health was not relevant to the debate about the £8 billion tax increase that was announced last year.

The fact of the matter is that expenditure is rising faster than any likely outturn from economic growth, which is why the Chancellor is playing fast and loose with the projections of growth that he publishes annually. He told us today that the outlook for growth in 2003 is 2.25 per cent.—between 2 and 2.5 per cent. That is a whole percentage point less than he predicted at this time last year. For what it is worth, the consensus forecast is that even the reduced level will not be met. We are being asked to believe that the forecast that the Chancellor published a year ago for next year was too cautious, so he has improved it for 2004. Why? Because if he did not, he would be unable to publish the figures of projected declines in borrowing.

The Chancellor is grappling with an economy that is not growing fast enough to meet the public expenditure ambitions to which he has committed himself before his colleagues, and he is trying to assure the electorate that they can be delivered without increases in taxation. That is why I describe the situation as unstable. In truth, we have gone back to planning the public finances on the basis of a wish list.

I started by drawing attention to some of the disciplines that the Chancellor praises—disciplines without which he will never deliver successful economic management. One of the most basic disciplines is that one draws up the forecast before deciding the expenditure plan; it is not possible to draw up the expenditure plan and make the forecast fit. I do not often agree with much of what the leader of the Liberal Democrats says, but I agreed strongly with his opening comment. He said that on this Budget the Chancellor had shut his eyes and hoped for the best. That is exactly right. We are committing ourselves to a set of spending plans and the only way in which they can be made to work is by making the forecasts fit the plans rather than making the plans fit the forecasts.

It is right to remind ourselves of the claim that new Labour made to be different from old Labour. We were asked to believe that the old ways of tax and spend were no longer the instinct of the Labour party—that somehow things in the future would be different. But the Government are reverting to type. We do not need to look into a crystal ball to see what the effects of that will be on the economy. Prudence is dead and has been replaced by Heath Robinson improvisation. The situation will continue to get worse, as it has over the past 12 months, unless there is an outbreak of realism in Great George street.

3.40 pm

Rob Marris (Wolverhampton, South-West)

It is interesting to follow the right hon. Member for Charnwood (Mr. Dorrell), because I too want to begin with borrowing, as several right hon. and hon. Members have done. Many hon. Members may know that I lived in Canada for a number of years and I follow events there quite closely. The debate in Canada on the federal Government's level of borrowing started 10 years ago and has largely worked its way through the system. I am delighted that we are discussing it, but I note that the approach of Opposition Members is to look for doom and gloom. I appreciate that that is the official Opposition's role, but given that average household income has increased by 3.5 per cent. in real terms every year for six years, it is surprising to hear them talk about the economy as though it is in rack and ruin.

Mr. Tyrie

I got a bit of a shock when the hon. Gentleman began by suggesting that we should look to Canada. Its level of borrowing, both at provincial and national level, has been out of control for ages. Partly as a consequence of that, the gap between its GDP per capita and that of the United States has widened markedly over the past decade.

Rob Marris

We are here to debate matters relating to the United Kingdom. However, the hon. Gentleman is not correct. The forecast for economic growth in Canada is higher than in other G7 countries apart from the UK. All economists in Canada would agree that its federal debt has been markedly reduced and is well under control. He would not find a single reputable Canadian economist who would say that federal Government debt was out of control. Economists might have said that five years ago, but they would not say it now.

The right hon. Member for Charnwood implied that the Chancellor fudged the figures on borrowing. Of course borrowing will increase. Table C5 on page 254 of the Red Book sets out the end-of-year public sector net debt as a percentage of GDP. It will be 32.2 per cent. in 2004; 32.7 per cent. in 2005; 33.2 per cent. in 2006; and 33.5 per cent. in 2007. That trend is rising very slowly. It is not a fast rise or fudge. It is right that the Government should engage in counter-cyclical spending.

We must also consider the history of the official Opposition. On public borrowing, the national debt doubled in the five years of the Conservative Government between 1992 and 1997. When Labour took over in 1997, national debt as a proportion of GDP was, from memory, about 46 per cent. The figures that I quoted are in the low 30s and not climbing markedly. Labour Members need take no lessons from Conservative Members about the difficulties of borrowing and the public debt.

Mr. Tyrie

If the hon. Gentleman looks up the figures for the 18 years of Conservative government, he will find that the British economy was just about the only one that succeeded in reducing its debt stock as a proportion of GDP. All other major industrialised countries saw sharp rises, which was a remarkable achievement. Only by picking the arbitrary period of the last five years can he make his point.

Rob Marris

I am afraid that I must again disagree with the hon. Gentleman. It was not an arbitrary period. What happened was that, for their first 13 years in office, the Conservative Government sold the family silver to cook the books. When they ran out of silver, they had to borrow massive sums to try to balance the books. That is the history, and it is why borrowing doubled.

David Taylor (North-West Leicestershire)

I am listening carefully to my hon. Friend's analysis of the trend in Government borrowing. Does he accept that one of the Major Government's responses when their public borrowing got out of control was to introduce the concept of the private finance initiative and the public-private partnership? Given the borrowing levels under the current Government, does he agree that further expansion of PFI and PPP is not only wrong and flawed but absolutely unnecessary?

Rob Marris

I would not agree with all the adjectives that my hon. Friend uses, but I do have grave concerns about the PFI, as he knows. Public borrowing, in which the Government continue to engage—and rightly so, as it is counter-cyclical—is quite reasonable. The Organisation for Economic Co-operation and Development estimates show that the United States of America, France and Germany have public debt of around 60 per cent. of GDP, and Italy and Japan have public debt of more than 100 per cent. of GDP, while we are talking about public debt of 33 per cent. in round terms—32.2 per cent., I think, in this financial year. It is not exactly a cascade of debt.

Mr. Flight

In focusing on the level of Government borrowing, does the hon. Gentleman agree that everyone should be aware that something of the order of £100 billion is off balance sheet, covering all the PFI liabilities, Network Rail and other obligations?

Rob Marris

I am aware of that figure, as are all right hon. and hon. Members. Interestingly, that brings me neatly to my next point, which is based on something that the hon. Member for Arundel and South Downs (Mr. Flight) has rightly and widely been quoted on: the 20 per cent. cut, which Labour Members often say the official Opposition are considering. Last Thursday in a Statutory Instrument Committee, I raised the issue in response to a comment by the hon. Member for North Wiltshire (Mr. Gray): His party talks about a 20 per cent. cut in spending across Government, but he has put forward three points, and adverts to a fourth, all of which would involve increased spending. The hon. Gentleman, who is a Conservative Front-Bench spokesman, intervened on me and, in his usual rapid way, which Members may well know, said: He is also wrong about the Conservative party's proposals. We propose a cut in taxation. At no stage have we proposed a cut in public spending. The two are quite different."—[Official Report, Standing Committee, 3 April 2003; c. 9–10] To me, as a non-mathematician, it seems fairly obvious that if there were a cut in taxation but no cut in public spending, borrowing would increase even more under the official Opposition.

Mr. Flight

If the hon. Gentleman cared to read the interview in The Daily Telegraph on 26 November, he would be entirely clear that the figure of 20 per cent. referred to the scope to cut waste in government. He may he aware of certain reports by his Government as to a scope of some 20 per cent. to cut excessive administrative costs in health care. I am therefore surprised that he should be misled by his party's propaganda. The issue is how much can be saved by more efficient government. Whether that should be spent on better and more front-line delivery or on cutting taxes is a separate judgment.

Rob Marris

It is no surprise that the hon. Gentleman thinks that I have been misled: I might even use that verb in relation to the remarks of the right hon. Member for Wokingham (Mr. Redwood), who talked about the hon. Gentleman wishing to cut overheads; now we hear that it is about cutting waste. I hope that the official Opposition make up their minds about what 20 per cent. is being cut from and when, so that we can have a clearer public debate. As ever, the Opposition are all over the map on this issue. It is time that they got their act together.

Mr. Laws

Does the hon. Gentleman support or oppose cutting capital expenditure now?

Rob Marris

It is not wise to get into what we should do with capital expenditure but, as I said before, counter-cyclical measures are needed. I would certainly wish to maintain capital spending.

Mr. Laws

If that is the hon. Gentleman's position, can he explain why the Chancellor, without apparently announcing it in the Budget statement, has decided to abolish the capital modernisation fund, thereby cutting capital expenditure by more than £3 billion?

Rob Marris

I am not the Chancellor of the Exchequer, and have no aspirations to hold that post. In my right hon. Friend the Member for Dunfermline, East (Mr. Brown) we have a Chancellor of the Exchequer who is doing an excellent job, and I suggest that the hon. Gentleman put that question to him.

As for public spending, we must acknowledge that business wants infrastructural spending. It is simply not true that the agenda of business is all about cutting taxes and being lean and mean in the public sector. In a document produced for the west midlands, my own region, the CBI—the voice of business—says: And then there is our infrastructure … From hospitals to roads to rail to schools, what business sees is inadequate infrastructure that fails to deliver what a 21st century economy needs … the UK really has little excuse—all it needs is the will and the money. That is right—the money has to come from somewhere. It comes from taxpayers and, counter-cyclically, some of it will come from borrowing.

Lynne Jones

It does not come from just those sources. Surely, it comes from increased revenue, charges that can be made as a result of investment in infrastructure, and other revenue streams such as congestion charges. There is every case for increasing capital expenditure, which is about half what it was in 1992–93 and a fifth of what it was under previous Labour Governments.

Rob Marris

I agree that revenue-raising measures such as those that my hon. Friend mentions come into the equation, but they are relatively small. I am sure that she would not want to raise revenue, as some in the House would, by imposing charges for the use of hospitals and so on. The money that the Government spend comes principally from taxation.

I would like to make a few remarks about taxation on business. If cuts in corporation tax are included and if the windfall tax on utilities and pension fund dividend taxation is excluded—I appreciate that those are fairly big ifs—on the CBI's own figures, the total net increase in business tax between 1997 and 2004 is just £3 billion, including national insurance increases. In fact, British business has had £25 billion-worth of tax cuts and tax breaks since 1997, and cuts in corporation tax alone are expected to cost £20 billion by the next financial year, 2004–05.

To assess what we are getting in return, we have to look at the business tax scenario. We have cut business taxes, but what is the relative position of the United Kingdom and its G7 competitors? I am sure that you have heard many figures today, Mr. Deputy Speaker, and, with your indulgence, I shall take you through some more. In the United States, the top corporate tax rate is 45.2 per cent.; in France, it is 41.7 per cent.; in Japan, 40.9 per cent.; in Germany, 38.9 per cent.; in Canada, 38.6 per cent.; in Italy, 37 per cent.; and in the UK, 30 per cent. Payroll taxes in the United States are 21 per cent.; in France, 32.1 per cent.; in Japan, 16 per cent.; in Germany, 24.4 per cent.; in Canada, 16.4 per cent.; in Italy, 29.9 per cent.; and in the UK, 12.9 per cent. Thus as a percentage of hourly costs, payroll taxes, too, are lower in this country, even with the 1 per cent. national insurance rise that comes into effect this week—my hon. Friend the Member for Warwick and Leamington (Mr. Plaskitt) adverted to that fact when discussing comparative costs in his thoughtful speech.

One of the largest private sector employers in my constituency is the American company, Caterpillar, which is based in Peoria, Illinois and owns Turner Powertrain Systems Ltd. The managing director of Turner Powertrain, a wonderful man called Dennis Mott, is Caterpillar through and through—his father worked for Caterpillar, Dennis grew up with the company and has worked for it throughout his working life. I asked him what he thought about the 1 per cent. national insurance increase to raise money for the health service. He said, "Well, it doesn't worry me too much. Of course I wish we didn't have it; it is another cost to the business, but when I look at what goes on in the American operation, where we have health care plans and so on for our Caterpillar employees, it is far higher there."

It might not show up on the inward investment figures, but Turner Powertrain Systems in Wolverhampton, as part of the Caterpillar worldwide empire, is actually getting business in from the plant in North Carolina—I am sure you will forgive me if it is in fact South Carolina, Mr. Deputy Speaker—because, when we look at the totality of labour costs, it is cheaper to do the work in Wolverhampton and the labour force there is more skilled. That is not direct inward investment, but it is jobs coming to my constituency, and investment in the constituency.

Mr. Dorrell

I would just like to remind the hon. Gentleman that the Chancellor of the Exchequer said today that the American economy was still significantly more flexible, and therefore more competitive, than the British economy. Is the hon. Gentleman now arguing the opposite?

Rob Marris

The American economy is huge, as all hon. Members know, and there are different flexibilities. The American economy embraces 52 jurisdictions: the 50 states, the District of Columbia, and the Federal Government, who have their own mechanisms, depending on whether something comes under the federal constitution or not. It is a huge and complex economy that is more liberal in some parts and tighter in others, depending on which part one focuses on. All that I would say to the right hon. Gentleman is what the managing director of Turner Powertrain Systems in Wolverhampton tells me, which is that the overall package is better in the United Kingdom for some production—for example, the banana transmission for Caterpillar products—than it is in North Carolina.

I was quoting some statistics at you a moment ago, Mr. Deputy Speaker. They were taken from the OECD tax database for 2002, the OECD figures for 2002, the US Bureau of Labour statistics for 2002, the Office for National Statistics data for 2002, the European Commission, and the European Union structural indicators for 2002. Those figures relate, so far as they can in terms of comparability between different countries, to the years 2000 and 2001.

I should like to move on to the point made by my hon. Friend the Member for Warwick and Leamington about red tape. It is a shibboleth of most politicians to say "We want to get rid of red tape", but what counts as red tape varies from one commentator to another. In February, the British Chambers of Commerce put out a report that stated that the cost of new regulations to UK business had "soared" to £20 billion. That is a very large figure in anybody's money, even today, but it is a question of what we call red tape.

There is a difference between the red tape involved in filling out forms, ticking boxes and so on—which we would very much like to cut down on where we can while retaining accountability—and the cost of compliance with regulations, many of which improve the quality of life of working people. Examples of such provisions include extended maternity leave and pay, paid paternity leave, and the minimum wage. If we are to do as the British Chambers of Commerce do and characterise those provisions as red tape, then I am in favour of them. In terms of administrative burdens and form-filling, I have a predisposition to say, "Do we need this?", and we often do, for reasons of accountability.

Before Bills go through Parliament, the Government produce regulatory impact assessments. The British Chambers of Commerce calculates its figures by looking at those regulatory impact assessments, not at the figures that would be applicable once the Bill has become an Act of Parliament, often having been simplified—as in the case of the legislation on the minimum wage and the working time regulations—so as to cost businesses less. The BCC is not comparing like with like.

The Department of Trade and Industry has commissioned some research from Kingston university's small business research centre on the effect of the fear of red tape on businesses. It focused particularly on small businesses, which tend to have fewer staff and therefore find such tasks more difficult, often filling in their tax returns round the kitchen table on a Sunday evening, and that sort of thing. The university asked a carefully structured sample of small businesses to list the most important factors affecting their business performance. Only one in six—that is 17 per cent. in round terms—cited regulation. A third of the businesses said that the most important factor that affected their businesses was competition, and a half of them referred to financial issues. Interestingly, about a third of respondents said that employment rights had had a positive effect on running their businesses.

I salute what my right hon. Friend the Chancellor and his ministerial colleagues, particularly in the Department of Trade and Industry, have been trying to do to encourage manufacturing, which is of particular interest to any west midlands Member, as was evidenced earlier by the speech of my hon. Friend the Member for Warwick and Leamington.

The Government set up the Manufacturing Advisory Service, which has helped more than 200 companies by giving in-depth consultancy advice. The average added value for those companies is £85,000 a year, and there has been an average improvement in stock turnover of 90 per cent. There has been a work productivity improvement of 30 per cent. and a scrap or wastage reduction of 37 per cent. The service has dealt with 8,500 inquiries to regional centres and has completed more than 1,000 free health checks. Its training events have been attended by 5,500 manufacturing companies.

Nationally, with £30 million of funding—£15 million from the DTI and £15 million from the regional development agencies—the service has started positively to push forward. It is not epoch making—it is not changing the structure of the economy by having 5,500 companies participating in training events—but it is pushing things forward. I say again that that is particularly important in the west midlands, where about 30 per cent. of the economy depends on manufacturing as opposed to about 17 per cent. in the rest of the United Kingdom.

The black country chambers of commerce have put out a manufacturing support campaign booklet, which was officially launched at College green, Westminster, two weeks ago today. They wish to put out the message, especially to young people, that manufacturing can be a positive work experience and something to which they should aspire. I am delighted that the Government are redoubling their efforts to increase the number of young people who take up modern apprenticeships. Commission figures indicate that between 1998–2000, the UK manufacturing sector received less direct support than that of any other EU state with the exception of Portugal. The EU index is 100, and Ireland was top with 219. Portugal was at the bottom with 25. The UK stood at 36. Our position has undoubtedly improved since then, but we have a long way to go when it comes to support for manufacturing.

I am pleased by the announcements in the Budget that the Government will try to foster even more innovation with the British small business investment companies. Venture capital will be put forward and the qualifying threshold will be increased to £20 million, so that 3.7 million businesses will be eligible for 40 per cent. investment allowances. There is the extension by one year of the IT 100 per cent. tax relief until April 2004 and the threshold of £56,000 for value added tax registration.

I was interested in the amount of paperwork that needs to be completed to set up a business. I hope that we shall be given more detail during the debate, or perhaps it can be found in the hefty bundle of documents with which we have been supplied. My right hon. Friend the Chancellor said this afternoon that 10 years ago an individual needed 28 certificates or pieces of paper to set up a company. He added that the process now takes one week and costs £20. In the rest of the EU, the average times and figures are four weeks and £600, so we have made a step forward. My right hon. Friend the Chancellor is talking about reforming or abolishing 500 regulations, which is a great step forward.

Business, with the assistance of the Government, should encourage training. It is crazy that there are skills gaps in many constituencies. Jobs are going unfilled and yet there are stubborn pockets of unemployment. I was pleased that my right hon. Friend talked about putting more support into skills training, especially for those who do not have skills at the basic level of GNVQ 2.

According to a 2002 Department for Education and Skills labour force survey, 29.2 per cent. of employees are never offered training by their employer, but the figure rises to 53.8 per cent. for those with no qualifications. That is an appalling indictment of our system, and the Government must continue to press employers to come on board and increase skills levels. Only by doing so can we increase productivity, which is vital to our economic future.

4.5 pm

Tony Baldry (Banbury)

In reference to the last comment from the hon. Member for Wolverhampton, South-West (Rob Marris), a number of other supposed initiatives in relation to training were announced in today's Budget, but I am interested to know how many employers in his constituency have had any contact from the Learning and Skills Council. The Government keep introducing more and more initiatives in these areas, but that is no satisfactory replacement for action and delivery on the ground.

Rob Marris

Will the hon. Gentleman give way?

Tony Baldry

No, no. I have only just started.

Rob Marris

The hon. Gentleman asked me a question.

Tony Baldry

I responded to make it clear that I listened to what the hon. Gentleman had to say and to observe the courtesies of the House.

I offer a limited welcome to but one part of the Budget—that which relates to international development—and everyone concerned with it would welcome the Government's further contributions to humanitarian aid and reconstruction in Iraq as well as the Chancellor's commitment to the international financing facility in the hope that it will lever in $50 billion a year to finance development. I also welcome his comments on the need to reform the European Union's development budget. However, I express these cautions to him on each of those items.

On the money for Iraq, we have seen with Afghanistan that the amount required for humanitarian needs has far outstripped earlier estimates. Much of the money pledged by the international community at the Tokyo conference for funding reconstruction in Afghanistan has simply gone on meeting basic humanitarian needs. I suspect that the demands for humanitarian assistance and for reconstructing Iraq are far greater than anyone, including the Chancellor, has contemplated.

Indeed, during the Select Committee's visit to New York the other day, the United Nations announced a $2.2 billion request for food and non-food aid for Iraq just to get that country through the next six months. That is the largest request ever made by the UN in that regard, and that is before one gets to any question of reconstruction in Iraq. Those who think that that country may be oil rich and that it can meet all those costs itself should remember that, because of the policies of Saddam Hussein and others, Iraq is substantially in debt. So, the Chancellor and the Government must recognise the fact that if Iraq's needs are to be met, that will require the united efforts of the whole international community. I suspect that those efforts would be better harnessed through the co-operation and endorsement of the UN.

The international financing facility is a brave initiative by the Chancellor, and he is to be congratulated. I genuinely think that he has committed himself to supporting international development, but I caution him that he has yet to persuade many in the G7 and the World Bank that the initiative will work and that it is not just a well-meaning project that will rob Peter to pay Paul. I hope that, this coming weekend, he can convince G7 colleagues not only that the initiative is worth supporting, but that it will work. Unless he can do so, it will simply be worked up and used as a line to take, thereby giving the impression that something is being done when things are not being done.

Lynne Jones

Of course, I agree with the hon. Gentleman that everything that is done to increase investment in developing countries is to be applauded, but has he made an assessment of the international loan facility and how that may differ if rich countries increased the amount of aid that they give to developing countries to the 0.7 per cent. of GDP target?

Tony Baldry

I do not want to turn this into a debate on financing for development. The reason why the Chancellor made the suggestion is that, as a consequence of the financing for development conference at Monterey, the international community, primarily the United States and the European Union, are committing an extra $12 billion a year for international development. It is welcome as far as it goes but clearly it is not enough and the Chancellor is seeking ways to plug the gap. Even that which is pledged from the United States under the millennium challenge account is pretty conditional. Under good governance rules, not even countries such as India will qualify. The Chancellor's proposal is a worthwhile initiative but the test will come when he tries to convince his colleagues that it is workable. Unless he can convince them that it is, it is simply an initiative, a line to take that gives the impression of doing something but does not deliver. We will have to see this weekend.

If I were given £1 every time I heard Ministers talking about reforming the common agricultural policy and reforming European Union development policy, I would be a very wealthy man. I continually hear the Secretary of State for International Development and other Ministers, including the Chancellor, talking about reform of European Union development assistance. It is a disgrace that more money goes to a single eastern European country such as Hungary under EU development assistance than goes to the whole of Asia under EU development assistance. It is fine the Chancellor and other Ministers continually mouthing this but there needs to be action. Otherwise, it simply becomes a rather boring catechism.

It is a Budget of blame, of borrowing, of failed forecasts, of high taxes today and higher borrowing tomorrow. Higher borrowing tomorrow will inevitably lead to even higher taxes the day after tomorrow. The Chancellor tended to blame the military conflict for the UK economy's performance. He seemed to blame quite a lot of people, yet United States companies such as the General Electric Company, which are a barometer for economic performance and Borders, which has many outlets in the UK, suggest that blaming events elsewhere only masks deeper economic problems here. The problem is demonstrated by the Chancellor making up this country's difficulties by more and more borrowing.

The Chancellor has also blamed the eurozone countries' slower economic growth for today's substantial additions to public borrowing, yet UK productivity is falling further behind not only the United States but Germany and France. Since the Government came to office in 1997, annual growth in productivity as measured by output per worker has averaged just 1.3 per cent., whereas between 1979 and 1997 it averaged 2 per cent.—almost double.

The Chancellor's Budgets downgrade forecasts time and again. His forecast on UK GDP growth for 2003 was downgraded today for the second time in less than five months. He predicted growth of 3 to 3.5 per cent. in last year's Budget, 2.5 to 3 per cent. in November's pre-Budget report and today it is down to 2 to 2.5 per cent. His central forecast is therefore down by nearly a third from the central 2002 Budget forecast.

Again, business investment forecasts have been downgraded. In last year's Budget, the Chancellor said that business investment would grow by 5.5 to 6.25 per cent. in 2003. Today the same forecast has been revised down and stands at minus 1.5 per cent. to minus 1 per cent. Today's Budget also confirms that business investment fell by 8 per cent. in 2002. Those figures are all clearly in the Budget statement.

Manufacturing output has been downgraded again. In last year's Budget statement, the Chancellor said that it would increase by between 2¼ and 2¾ per cent. in 2003. Today the forecast has been revised downwards to between a quarter and three quarters of 1 per cent. The Budget also confirms that manufacturing output fell by 4 per cent. in 2002.

What we see is the Chancellor seeking to blame others, and a number of failed forecasts. In fact I do not think my constituents, or indeed people anywhere in the country, are particularly interested in who is to blame, and I do not think they now place any trust in the Chancellor's or the Government's forecasts. They rely on what is happening currently. They are concerned about who will help them through the effects of the United Kingdom's increasingly poor productivity and economic performance—and today's Budget does not suggest that it will be the Chancellor.

Last week The Sunday Times featured an article entitled "Ten ways to safeguard your finances from future attack". We were told

Savers are suffering because of the low level of interest rates: even house prices are beginning to look shaky. Today's rise in National Insurance contributions from 10 per cent. to 11 per cent. could not have come at a worse time. The National Insurance bill for someone earning £30,000 a year will rise by £253.72 a year to £2,790.92 … The average Council Tax bill has also risen nearly 13 per cent., taking the typical annual cost above £1,000 for the first time. Such stark facts give little comfort to my constituents. They know that they and their neighbours are paying more and more tax, and from this week a typical family will be £568 a year worse off. In areas such as mine there are further difficulties for the average family, who know not just that taxes are increasing but that they face higher house prices. House prices are still rising in Oxfordshire. I was told by two local estate agents yesterday that prices were not falling in the area. That is entirely consistent with the Halifax's survey for the last quarter of 2002, which found that they had risen by an average of £26,000 in Oxfordshire, as against a £4,000 rise in London.

The consequences are considerable in terms of the delivery of public services, and the impact on those working in the public sector—nurses, teachers and police officers. Many public-sector and low-paid people in north Oxfordshire find it extremely difficult to afford homes, and, ironically, those who have been able to buy them cannot afford even a slight fall in house prices if they are not to find themselves with negative equity especially when low interest rates have provided neither group with substantial savings.

The Budget talks of local pay negotiations in the public sector and the civil service. We shall just have to see how that works out. For years, along with other Oxfordshire Members, I have called for sensible local cost-of-living allowances for public-sector workers. The test will be how much real help the Budget gives nurses, teachers and police officers when it comes to local pay negotiations.

There was talk in the Budget of 80,000 more nurses. If true, that is welcome news. The Chancellor has made much of investment in the national health service, but I can describe the reality of the NHS in Oxfordshire. The main hospital trust, the Oxford Radcliffe NHS trust—which includes the John Radcliffe in Oxford and the Horton hospital in my constituency—is so overdrawn that it will not admit to the figure, but it is somewhere between £22 million and £50 million this year. Why? Largely because of the cost of employing agency nurses at the John Radcliffe. Nurses cannot afford to work for the NHS in Oxford, and the only way in which the John Radcliffe can recruit them is through agencies. The only way that nurses can afford to work in hospitals is to be employed by agencies. Increasingly, groups of nurses are setting up their own freelance agencies simply so that they can be paid higher rates.

The result is not better treatment at the John Radcliffe or through the Oxford Radcliffe NHS trust, but the hospital's continually having to dip into the red to afford the nurses that it currently has. I shall be extremely interested to discover how many of these 80,000 so-called extra nurses the Chancellor is able to deliver to hospitals in Oxfordshire in the next few years. However, whether he achieves that will largely depend on whether he has at last woken up to the fact that in counties such as Oxfordshire, where it is expensive to live, a sensible cost-of-living increment is required if people such as nurses, teachers and police officers are to be attracted.

Not only are people being hit by higher taxes and difficulties with house prices; homeowners and tenants alike are having to pay 12.8 per cent. more in council tax in Oxfordshire, or an extra £100 for a band D house in Cherwell because of a stitched-up local government finance settlement. It could have been worse for residents if Oxfordshire county councillors had not cut investment in roads, transport, fire engine replacement and training budgets.

This is the background to the Chancellor's Budget—a background against which the article in The Sunday Times to which I have referred proceeded to give people advice on how to prevent their pockets from being drained even further by today's Budget. Each of its 10 tips, however, has caveats that are reinforced by the Chancellor's announcements. I should like to look at three of them.

Mr. Bercow

Given that the Government's resource allocation formula is the vehicle through which they are effectively draining resources from the south-east of England in order to prop up their feckless and profligate friends in the north, does that not underline the importance of the ten-minute Bill that my hon. Friend himself introduced to ensure that, in future, there is an independent body whose function it will be to allocate resources to local authorities across the country?

Tony Baldry

I was very grateful to my hon. Friend for his support for that Bill, and for the support of many other Members of Parliament with constituencies in Oxfordshire, Buckinghamshire and elsewhere. The fact is that it is not us who are saying that money is being taken away and given to Labour's friends in the north. Organisations such as the Chartered Institute of Public Finance and Accountancy, by simply looking at the funds for this year's grant allocation, can see that local authorities in the south of England are being raided, and that the money is going elsewhere.

The Chancellor has given us a lot of froth today about assistance for pensioners, but pensioners in my constituency are not concerned about his latest gimmick; they are concerned about how they are going to pay the increase in their council tax bills. [Interruption.] Labour Members may scoff, but pensioners in my constituency are much more concerned about the bills that land on their doormats today than about the Chancellor's promises of benefits tomorrow, because bills on the doormat are the reality. People have now rumbled the fact that the increase in council tax bills is a consequence of this Government's fiddled figures and unfair treatment of the local government finance settlement.

Top of the list of the suggestions in The Sunday Times is: Reduce your National Insurance Bill". It is not surprising that people should consider how to reduce their national insurance bills. Given the higher national insurance contributions that came into effect on 6 April, people are now faced with the triple whammy of frozen personal allowances, frozen national insurance thresholds, and the 1p/10 per cent. increase in the rate of NICs. The Sunday Times advised: You can cut your NICs through 'salary sacrifice' whereby you give up some of your salary and your employer increases your pension contributions by the same amount … However, you can only sacrifice future increases". However, future increases do not account for the higher cost of living that today's Budget will create for many people. They will not reduce council tax burdens, which have to be paid now. Nor do they equate with the pensions crisis, which has caused a yearly £5 billion hole in pension provision, and has led Age Concern to point out that Government proposals on pensions require fairness, security, clarity and flexibility". After today's announcements, elderly people in my constituency will be faced by 23 means-tested benefits, which are so opaque that many pensioners will end up not claiming them. All that elderly people want is a simple and straightforward pension.

Indeed, everyone wants a straightforward pension system, but the Labour Government have made the benefit system much more complex and the Chancellor's meddling with tax credits has made the system impossible even for experts to understand. Coupled with that, changes to the payments system in April have been poorly promoted and the Government need to do much more to ensure that people get the benefits to which they are entitled. I am not surprised that the Chancellor feels it necessary to write to pensioners about the increase in the winter fuel allowance, but I wish he would write to them all in an endeavour to ensure that they all receive every penny to which they are entitled.

Mr. Bill Tynan (Hamilton, South)

Does the hon. Gentleman accept that the constant reference to means-tested benefits affects pensioners' attitudes to the minimum income guarantee, which is a right and is not means-tested? If we continue to talk about means-tested benefits, it will detract from people's ability to benefit from the minimum income guarantee and the pension tax credit.

Tony Baldry

I have no quarrel with the hon. Gentleman, but the fact of the matter is that those benefits are means-tested. I hope that every Member of Parliament wants to ensure that every pensioner receives every penny of benefit to which they are entitled. However, year on year, the Chancellor makes the system more complicated, more difficult and harder for people to understand. Today's Budget provides yet a further example.

To return to the article, under the heading "Offset your Savings", people are advised to combine mortgages—and sometimes credit cards and personal loans—and savings schemes. They deduct your savings from your debts and only charge interest on the balance … but you need sizeable savings to really benefit". What about my constituents who do not have sizeable savings because of the high house prices encouraged by the Chancellor's Budget? What of those who do not have such savings because the Chancellor has encouraged low interest rates, which have partly resulted in higher credit card bills and personal loans? And what about those who simply do not have the capacity to play piggy banks and would benefit much more from straightforward and direct measures that help people to save their money, but are penalised by the Budget?

The final piece of advice in the article is to "Claim your Tax Credits". The Chancellor has made a lot of noise today about new tax credits, but, as with the minimum income guarantee for the elderly, they prove more elusive when people try to claim them. Nevertheless, The Sunday Times notes: If you have children you can offset some of the increase in National Insurance by claiming the new child tax credit". But not everyone in my constituency has children—[Interruption.] Well, it is an important observation. Some people can benefit in certain ways, but we should recognise that much of the credit will be clawed back in national insurance contributions—the Budget's biggest caveat. Some of today's initiatives—we have had a lot of them—may look good, but few people qualify for them. Every year, the Chancellor introduces more gimmicks in a great wodge of paper, but on further analysis the next day—or even the same day—one recognises that not many people will benefit.

Other initiatives may seem helpful, but they have to be viewed in relation to all the Treasury's taxes. Most will be too late to help businesses raise productivity, but a rise is needed now. Of course more help for research and development is helpful and the proposals for the British small business investment companies are worth investigating, but they are not what business wants. Businesses in my constituency are concerned about increases in national insurance contributions, further burdens in taxation such as the increase in petrol duty in recent years, and increasing amounts of red tape.

It may come as a surprise that, for 2003—04, a Treasury document claims that the Government will be able to raise the rate of sustainable growth and achieve rising prosperity and a better quality of life, with economic and employment opportunities for all. But that does not seem to chime with what is happening in my area, which I suspect is one of the more prosperous in the United Kingdom.

I will turn to the Budget's impact on productivity in a moment, but I wish to refer to the assertion of opportunities for all. Many who will have a chance of concentrating on today's Budget, and on previous announcements that start to impact today, will see it as an attack on middle England. They can hardly be wrong when almost 1 million more people have been dragged into paying tax at the 40 per cent. top rate following the Chancellor's 26 alterations to the tax system since 1997, changes that have cost these taxpayers more than £47 million.

No one in my constituency, whatever their tax bracket, benefits from higher council taxes, higher stamp duty or higher house prices. No one is helped by insecure pensions, which the Budget—like last year's—fails to address.

On productivity, there is simply not a scrap of evidence that the UK is experiencing sustainable growth. No one benefits from low productivity. Business productivity is low simply because the so-called initiatives by the Chancellor that were meant to avoid low productivity are overly complicated, irrelevant or counter-productive. That was the central concern of the local business community when I conducted a survey of the small and medium-sized businesses in my constituency last year. They were concerned about corporation tax, capital gains tax, the petrol tax, stamp duty and national insurance contributions. These were the measures that were of concern to them, as were business rates. It is difficult to see what the Chancellor has done today that helps in any of those areas, or significantly addresses productivity.

Mr. Flight

On productivity, does my hon. Friend accept that one of the key problems has been that productivity in the public sector is, if anything, negative and the more resources shift from the private to the public sector, the lower our productivity growth becomes? Indeed, it has halved in comparison with what it was before 1997. Moreover, the consensus view of economists is that the overall growth rate—the achievable sustainable level—has been reduced to about 2 per cent. as a result of the same factors.

Tony Baldry

My hon. Friend makes an extremely good point, echoing what my right hon. Friend the Member for Charnwood (Mr. Dorrell) said about public expenditure racing ahead of the private sector. Not only is that a matter of concern; we will inevitably see higher taxes. The Government seem to be making little attempt to get to grips with that.

In the past, we have seen attempted reforms to the competition regime, designed to make markets more competitive by stamping out abuses of power. They did not. We have seen complicated changes to capital gains taxes that sought to encourage investment for the longer term. They did not. The Treasury justified raising corporate taxes on dividend payments on the basis that it might encourage companies to retain profits. It did not.

Tax credits for research and development spending aimed to correct a potential market failure: that companies under-invest in research and development because their competitors would also gain from their innovations. However, that has resulted in an imbalance in research and development, which I doubt can be addressed by today's announcement, welcome and limited though it might be.

Today, sadly, with the Government halfway through their second term, the UK's productivity performance shows little discernible improvement. If anything, it has deteriorated since the Government came to power and is now at a 10-year low. That is not my judgment; it is the assessment of the Bank of England's latest inflation report, which notes: The growth of labour productivity per person has been below its long-run average". The IMF, in its recent annual assessment, stresses that, for the United Kingdom: Raising productivity remains a key challenge. Much the same is said by the CBI and the British Chambers of Commerce, echoing the concerns of local businesses in north Oxfordshire.

An article in the Financial Times this week observed that there appears little appetite left for more government-directed measures to remedy the shortcomings. The City is preoccupied with the immediate economic outlook and the health of public finances. Business is in a lather about rising taxes and national insurance contributions. And employees are growing fearful that their private-sector pensions will not provide the retirement income they had expected. On that final point, it is not surprising that employees are growing fearful about their pensions, given that the Chancellor's £5 billion-a-year pension grab tax has cost 12 million people an average of around £400 a year. It is disgraceful that pensioners retiring now will receive half of what they would have got five years ago.

What would have happened if, during the 1997 general election, I had knocked on doors in Banbury and Bicester and told people, "Hey guys, I've got news for you. By 2003, under a Labour Government pensions for people retiring will be worth half of what they are today"? I wonder how many people would have voted Labour in that election.

Rob Marris

On that point, the principle reason that pensioners are getting less is that annuity rates have come down considerably. That has happened because, under a Labour Government, interest rates have more than halved from their levels under the previous Conservative Government. Does the hon. Gentleman support low interest rates, or not?

Tony Baldry

When they start knocking on doors, Labour Members will have to face the fact that the various stealth taxes introduced by this Government, including the raid on pension funds, are less stealthy now. People—pensioners, and those in business—appreciate the impact of those taxes, and the damage that they are doing. Sooner or later, a tax will have an impact. The Government's chickens are coming home to roost.

Mr. James Wray (Glasgow, Baillieston)

Was not the hon. Gentleman embarrassed, when he was knocking on doors at the general election before the one that he mentioned, about the fact that the previous Prime Minister advised old people to have equity? They got their houses at a knock-down rate of 6 per cent. but, after 18 months, the interest rate had risen to 18 per cent. Thousands of houses were repossessed, and local councils had to rehouse the old people who were thrown out of them.

Tony Baldry

Clearly, the hon. Gentleman was not listening to what I said earlier about people's concerns about negative equity. In my constituency, those concerns remain alive today. People who can afford to buy houses are concerned about them losing value and about falling into negative equity as a result.

I am sure that, in the coming year, we will witness higher growth in the US, France and Germany, where people worry a lot less about higher taxes and lower personal savings. Nothing in today's Budget changes that outlook. The reality is that Labour is taxing, spending and failing. From this week, people are working for less as a result of the Chancellor's national insurance increase. It is a tax on jobs and on pay. Given increased council tax bills, a typical family in my constituency and in every constituency will find itself £568 worse off this year.

Understandably, all my constituents are anxious about their futures, and concerned about their jobs, savings and pensions. Meanwhile, our public services are just not good enough. This Government have brought us more taxes, more spending, more borrowing, more promises, more failure and more excuses—and still no results.

Mr. Deputy Speaker (Sir Michael Lord)

Order. Before I call the next speaker, may I tell the House that a considerable number of hon. Members are seeking to catch my eye. Unless contributions are considerably shorter, a very large number of hon. Members will be disappointed.

I call Mr. John McFall.

4.39 pm

John McDonnell (Hayes and Harlington)

I hope, Mr. Deputy Speaker, that you meant to say John McDonnell. There is some similarity between me and my hon. Friend the Member for Dumbarton (Mr. McFall)—although not necessarily politically.

A reference was made earlier to Labour's old ways. That shows that I listened to some of the other speeches that have been made. I want to try to tempt my right hon. Friend the Chancellor and the House to consider some of the old ways, and to see whether we can go a little way down that path today.

I concur with many of the descriptions of the budgetary environment in which we are working. It is clouded with risks, in terms of the international situation—there is international deflation, and stagnation within the eurozone. We face different risks in our constituencies. In mine, there is a problem of house prices overheating, but also of job losses at Marks and Spencer, Safeway, the Ministry of Defence and in the aviation industry, where, as a result of the war, 3,000 jobs are at risk at British Airways. I therefore understand the problems that some northern constituencies have experienced in recent years as a result of loss of employment. I also understand the implications of what has happened elsewhere in the country as a result of recession in the manufacturing industry, which I balance with the south-east's problems of house price increases and the concern that some people have about falling into negative equity. There is an edginess about national economic prospects, set in the context, I have to say, of overall growth in recent years from which many people have gained a lot—both through direct income and the benefits of public services.

My main concern is the lack of robustness in the public finances. In my view—returning to what some describe as the old way— that is the result of a failure to introduce at a sufficiently early stage more redistributive, fair and just tax reforms, which means that we are now having to increase our borrowing. I support that, because our borrowing is minimal by comparison with other countries, and we could borrow more if necessary. Because we did not introduce soon enough adequately redistributive tax improvements or reforms, we have not built up sufficient critical mass in terms of our tax base or tax take to fund all the public service reforms that we wanted. The failure to face up squarely to redistribution through general taxation—on wealthy individuals and on tax-avoiding elements of the corporate sector—has resulted not only in the lateness of the delivery of public service investment and the lack of impact of that investment for some communities in terms of visible improvements, but in large sections of the community missing out on the full benefits of the increasing wealth of the country that has been generated by a relatively successful Government.

I reiterate what my hon. Friends said earlier. We need to remind ourselves that we live in a very wealthy country and that we can afford to provide excellent, high-standard public services and to give all our people a decent standard of living and a decent quality of life. We can certainly afford to eliminate the worst effects of poverty that many of us experience in our constituencies. The Chancellor mentioned the war against Iraq and referred to the amount that has been spent so far, with £3 billion set aside. What I find interesting about the economics of this war is that the Chancellor was so easily and readily able to find £3 billion for military expenditure. That takes into account neither ongoing military expenditure nor the humanitarian aid that will be required to rebuild Iraq's infrastructure, which has been devastated by sanctions and coalition bombs. The facility with which the Chancellor found that £3 billion led some of us to the conclusion that if he can so readily find £3 billion to pay for a war on Iraq, it should be equally easy for him to find £3 billion to pay for a war on some of the worst aspects of poverty and inequality in our own country. Hon. Members are bound to guess what is to follow. I will set out a limited number of priority spending initiatives that have been promoted for discussion by me and several hon. Friends in the socialist Campaign group. They amount to approximately £3 billion.

Let me start with the largest group of people in poverty, who over the past 25 years, under successive Governments, have not fully shared in this country's growing wealth—namely, the pensioners.

I am an admirer of what the Chancellor has done on investment in services for pensioners and of his attempt to bring pensioners out of poverty. However, many of us have received briefings from Help the Aged, Age Concern and others in the past few weeks and we must all admit that to a large extent successive Governments have failed pensioners. Twenty-five per cent. of pensioners live below the Government's official poverty line—the same number as in 1995–96. In the past decade, 17 per cent. have lived in what is described as "persistent poverty", which means that in three out of the previous four years they have been in that poor condition, and 44 per cent. live in accommodation that is in need of repair and what is described as "thermally inefficient". In other words, they are poor and cold. As a result, as we all know, more than 20,000 of them each winter will die from cold-related diseases. Contrasted with some of the coldest countries, such as Finland, we have a very poor record.

The state pension is the main income that we provide to pensioners, but that has declined by 15 per cent. as a proportion of average earnings in the past decade or so—we predict that it will be only 7 per cent. by 2050. It is lower than the rest of Europe in terms of gross domestic product.

Mr. Tynan

I accept the figures on the basic state pension. Does my hon. Friend accept that the minimum income guarantee is dealing with the problems of the poorest pensioners, and that the heating allowance, which it has been announced today will increase from £200 to £300, will make a tremendous difference and, hopefully, save many of the lives that have been lost in the past?

John McDonnell

I was about to deal with that. The Government's anti-poverty strategy, much of which I support, is based on what I can only describe as means-tested benefits. I would like to find another way to encourage take-up. I am happy to explore the use of the minimum income guarantee.

I do not think that anyone has worked harder in their constituencies than a number of Labour Members to encourage take-up. We have held surgeries and there have been all sorts of stunts to advertise the means-tested benefits. The reality is that, as the Public Accounts Committee report that was published at one minute past midnight last night demonstrated, between one fifth and one third of pensioners do not take up the MIG. Nearly £2 billion worth is not claimed every year.

I refer my hon. Friend to the report. Basically, it sets out in an objective way that 2 million pensioners live in low-income households", and that £1.86 billion of the main benefits remain unclaimed".

Mr. Wray

Will my hon. Friend give way?

John McDonnell

May I finish this point because I do not want to lose track of it?

I refer my hon. Friend the Member for Hamilton, South (Mr. Tynan) to the report, which states: Many pensioners and those that advise them consider the systems and administrative procedures for claiming benefits to be too complex. In all there are 23 potential entitlements for pensioners, with 36 different linkages between 16 of them". The report goes on to describe, using graphics, the system of linkages, which is a nightmare maze for many pensioners when they are claiming benefits.

Mr. Wray

My hon. Friend mentioned poverty. According to the last survey, four of the 11 most deprived areas were in Glasgow. Does he agree that there should be a deadline and that all the benefits that are not taken up should be ring-fenced and put into deprived areas?

John McDonnell

My hon. Friend makes an interesting suggestion. The Public Accounts Committee report examines every method that has been used to encourage take-up. Some have worked, but many have not. Now, we need to consider how we reassess the take-up levels and the impact of promotional campaigns and whether we should target some of the resources strategically.

According to PAC analysis before the report was produced, the administration of means-tested benefits is six times more costly than the administration of a universal benefit. Some of the campaigning agencies say that it is 12 times more costly to administer a means-tested benefit than a universal benefit. That must be of concern.

We need urgently to do something for pensioners. We should listen to what the pensioner organisations are telling us. Last week, 150 pensioners from the Greater London Pensioners Association visited the House of Commons to meet the Financial Secretary to the Treasury. Their basic demand was the restoration of the link between pensions and earnings. They want to continue to share in the wealth of this country as it grows in future years—as I am sure it will under the Government. It would cost £530 million to re-establish that link this year. That money could be found from the Budget. If we can draw down £3 billion for the war from contingency funds, we should be able to find £530 million to restore the link between earnings and pensions, so that pensioners do not lose out from the growth of incomes and wealth in this country.

My second point on pensioners relates to older elderly people, who are more likely to be poor. Often, they are women, living alone and suffering from illness or disability. Today, I am pleased that the Chancellor acknowledged their plight—a real breakthrough. He added £100 to the heating allowance. Unfortunately, however, that amounts to less than £2 a week. Help the Aged and others have been campaigning for a £5 increase. The 25p a week increase was derisory, as the Chancellor accepted. Indeed, last week, one pensioner said that it would not even pay for a phone call to the Chancellor to tell him where to stuff it.

I should like the increase to be more than £5; the Liberal Democrats want a £15 increase. A £5 increase would cost about £550 million—not a lot in the context of overall public expenditure, but it would address real needs.

The concessionary travel schemes that have been introduced in some local government areas are one of the most welcome benefits for pensioners. When I was a member of the Greater London council, I—like other hon. Members who are present—supported the introduction of the concessionary fare scheme in London. Free public transport in London dramatically improved the quality of life for older people. It has allowed them to enjoy travel in London and visits to their relatives. It has brought about an overall improvement in their social lives.

The funding was extended and there is now free travel in London, Scotland and Wales, but only 20 per cent. of England is covered by a concessionary scheme. It simply depends on where one lives—[Interruption.]As my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) says, there is an excellent scheme in the west midlands.

The Government have introduced a wonderful initiative to extend the concessionary fare scheme throughout the country, but only for half-price fares. One of the simplest ways of improving the quality of life for pensioners throughout the country would be to introduce free travel nationally. It would cost £300 million, according to the Minister of State, Department of Transport, whom I am quoting faithfully. Those initiatives for pensioners would increase the credibility of the Government's claim that they are tackling poverty among the poorest.

A great deal has been said about the need to attract young people into education and employment. However, students have not been treated particularly well by successive Governments. The removal of grants by the previous Conservative Government and the introduction of tuition fees by the Labour Government have undoubtedly resulted in hardship. Barclays Bank estimated that the average debt for students graduating in 2002 was £12,000, a 28 per cent. increase on the previous year. The National Union of Students and other lobbying bodies have examined student loans and other forms of student debt, including credit card debt. In some cases, students have accumulated debts of £25,000.

That is a disincentive to study or to stay in education. The drop-out rate for higher education is 20 per cent. People get into financial difficulty, which undermines their motivation. When the Department for Education and Skills held a consultation to find out why students were dropping out, financial difficulties were the major factor. In one survey, a third of the students cited finances as a factor when considering dropping out of higher education.

Mr. Bercow

I do not dissent from what the hon. Gentleman has just said. Does he recall that, as long ago as 14 April 1997, the Prime Minister was quoted in the national press as saying that Labour had no plan to introduce tuition fees and that that commitment was underlined and reinforced 10 days later by the right hon. Member for Livingston (Mr. Cook)? I accept the legitimacy of the hon. Gentleman's concern about the impact of tuition fees on students, but may I put it to him that the Government would do well to reconsider their capricious and arbitrary target of 50 per cent. participation in higher education?

John McDonnell

I do not believe that that target is capricious; I want the largest number of pupils, particularly from working-class backgrounds, to enter higher education. I would like a higher target to be set, and achieved.

On student debt, we should remove any barrier that we can that prevents people from entering higher education or dropping out of it. Financial hardship is increasing that pressure, and it is causing stress. All hon. Members whose constituencies contain universities have had experience of the increasing mental health problems among students, even including breakdowns. We should lift that burden from young people and restore the incentives to study, so that they gain the skills needed to go into industry, creating the industrial development that has been discussed today.

Our communities and economy need those skills, so I recommend that we abolish tuition fees. That would cost £1.4 billion—a minimal amount. Today the Chancellor introduced something that I welcome—the baby bond—but as has been said, it seems as though the baby bond will only amass a sufficient amount of money to pay the tuition fee in future. Let us at least look again at tuition fees, and remove that disincentive to continued study.

I welcome the continued investment in public services, but I have some anxieties about school budgets in the current year. A number of my local schools have reported to me that the national insurance change has had an impact on recruitment and that we are returning to the days when some teaching posts were frozen. I would welcome an urgent and immediate review of school budgets. The Chancellor has moved in some areas and an additional sum—£38 million, I believe—has been put into some local education authorities to cope with some of the problems that have occurred, but the problems extend well beyond those areas, and we need an urgent review to avoid returning to a growth and cuts situation in education.

One public service has dogged the Government in the past 18 months—the fire service. The wage settlement for the fire service is in desperate need of resolution, to avoid the Deputy Prime Minister imposing a settlement and undermining the atmosphere in the fire service and trade union rights. So I urge the Government to set aside a sum to settle the fire service dispute as quickly as possible.

I have met firefighters at two local fire stations in the past week, and they have just been invited into what is described as new dimension training. The Chancellor has set aside a sum today to fund some of that training, which is about tackling the biological and chemical weapons threat from terrorism in this country. As well as calling on our firefighters to tackle that threat, we should acknowledge their commitment and professional skills by paying them appropriately. That is why we should set aside a sum—it would cost £240 million—to settle the firefighters dispute at the 16 per cent. wage offer, as proffered last November, but payable immediately. That is not a large sum of money to pay for a dedicated team of workers, whom we are now asking to risk their lives against a new and very dangerous peril.

In conclusion, I wish to say that, surprisingly and coincidentally, the total cost of those Budget proposals comes to about £3 billion—give or take £200,000. This alternative Budget will afford modest expenditure in priority areas and significant improvements for Britain's pensioners, students and firefighters.

Since 1997, new Labour has alienated key groups that have traditionally supported us through thick and thin in difficult years. They have worked for us and voted for us, and we need to address their concerns. They think that we have not always done that, which has resulted in some alienation. The invasion of Iraq has provoked massive opposition among many Labour supporters and voters. We need a Budget that addresses those concerns and transforms that disillusionment into recommitment. By giving back to those people who have invested so much in this country their hopes and their dreams, we will mobilise a large amount of support not just for the Government, but for the public services that we are trying to provide.

5 pm

Sir Archy Kirkwood (Roxburgh and Berwickshire)

I am keen to keep within the 15-minute deadline. The debate has been interesting, but we need to pick up the pace if all those hon. Members who wish to speak are to be able to do so.

I am pleased to follow the hon. Member for Hayes and Harlington (John McDonnell) whose comments relate to the first of three points that I will make. The budgetary process—how we explain what is going on and what we want to achieve—gets lost in the charade and showbiz circus that follows Budget presentations. I have felt for some time that these annual jamborees do more harm than good. We should have a statement of income tax rates followed by a more measured series of debates, separating out some of the more technical aspects for the Treasury anoraks to address. That would allow the rest of us to discuss those things that ordinary people can properly understand.

I enjoyed the hon. Gentleman's speech because he took the time to explain what he wanted to do and how he was going to raise the money. More of us should take the time to argue a case when additional resources are needed. We should have the courage of our convictions and argue with the public for that change to substantiate and support our policy proposals. If we did that, politics would be held in better regard.

My first point is that there is a gap between the reality of the experience of my constituents and what we have heard today. I think that the Chancellor has been relatively successful. Much of what he has done has promoted positive change. The hon. Member for Wolverhampton, South-West (Rob Marris) was right to say that we in the UK have enjoyed, on average, household income increases. They have been beneficial and were hard won. The first two years after the Chancellor came into office in 1997 were particularly difficult.

There are, however, wider dimensions to the argument than personal household income. Collectively, public services have not received the expenditure and capital investment that we would all want. I am in favour of politicians having ambitious targets, but talking about the economy in grand terms, as if everything is either a total success or total gloom, does not match the reality of our constituents. I know intellectually that £6 billion has been put into the pension system, but the hon. Member for Hayes and Harlington is right: we all meet pensioners all the time who feel hard pressed. Council tax increases are part of that. We have to bridge the gap between the way in which people live and their everyday experiences in the high streets and in their homes with what we are talking about and trying to achieve in this place.

I have been an MP for 20 years—although it feels longer—and I am desperately worried about the increasing level of alienation in our society. That is apparent even in my constituency, which is very different from Wolverhampton and Hayes. People are becoming turned off from public policy making and the political process. We should all be concerned about that because it leads to divided communities. Regional economies are vastly different, north and south. That is true in Scotland and it must true in places such as Wolverhampton when compared with the home counties. The policy does not always appear to address that. I support the Chancellor in saying that we need to examine regional policy post-2006 when the European Union structural funds regime changes. I support the decentralisation of the promotion of regional policy, which is important, and, incidentally, I agree with the Jobcentre Plus discretion being devolved.

All those initiatives are helpful, but we have a serious problem. I was struck by a figure produced by the Institute for Public Policy Research, which I read about in The Independent yesterday, in relation to the assets gap that has emerged over the last 10 to 15 years. It reminded us that between 1988 and 1999, the top 1 per cent of the population increased its share of personal wealth from 17 to 23 per cent. That does not sound much, but according to the next sentence: The richest 2.4 million households control wealth of about £1,300bn, while the combined wealth of the poorest 12 million households is about £150m. I am no left-wing loony socialist, although I may have been in my student days—[Interruption.] That was the hon. Member for Hayes and Harlington. There comes a point, however, when the issue of lack of fairness becomes a corrosive factor. The Chancellor is right to talk about equality and fairness—he mentions lots of buzz words. I know him well and I am always suspicious when he talks as fast as he was talking this afternoon—it means that he has something to hide. I have experienced that before, to my cost, although we will not go into that, as we do not have time. We must all work harder at explaining, using transparent figures to argue our case. If we think that there is a case for spending more public money, we should say so, and we should say from where the money is coming.

Secondly, on social policy—I do not have time to develop these points as much as I would like—I am concerned about the increasing complexity of our social support systems. Experts struggle to understand them. I try to specialise in the area, and I struggle to understand the interrelationship between certain policy areas. The Inland Revenue has now taken over responsibility for the administration of the new tax credits, and I can see the validity of the change in principle. I am receiving worrying reports, however, about the inability of the computer systems available to the Inland Revenue to deal with current demand. I a m worried about the apparent inability to get to grips with some of these complicated computer systems.

I am also concerned about housing benefit payments being turned into flat rate housing tax credits and added to the list, and anyone who thinks that the working tax credit is complicated will under stand why that is. The hon. Member for Hayes and Harlington will be among the first to learn about it, as it will hit people in London much harder than it will anywhere else. A flat rate housing tax credit for public sector and social rented housing causes me real concern. We will need to return to such issues in more detail in the immediate future.

I am also worried about the extent of the increase in the informal economy, which I now detect, mainly in urban, deprived areas. The Grabiner report, commissioned by the Inland Revenue in 2000, did sensible work, but it has been gathering dust. Estimates at the time were that a £50 billion to £80 billion informal economy existed. One of the consequences of the increasing complexity of the welfare support system is that people slip out of it: they do not want anything to do with it, as it is too complicated for them. What they therefore do is to work "on the side". That is not in anyone's interests. What we should do is have an amnesty: the Inland Revenue should say that, for the next six months, it will come to some arrangement with anyone who comes clean and declares what they have been doing. We would therefore be able to get those people on board, take them into the system, and have them paying taxes like the rest of us. That is a growing problem, the extent of which is underestimated. There is a lot of entrepreneurial activity in urban centres below the line, which is a real concern.

On unemployment figures, we should look at the group of people who are classed as economically inactive. I welcome the Government's changes to incapacity benefit and the pilots that will take place in the autumn, as that is a problem area that we do need to address. Useful work is being done in trying to get people into welfare-to-work programmes, which I support. The Grabiner report, however, deserves further study, and we should consider implementing its conclusions rather quickly. Knowing the Chancellor as well as I do, I recognise that he is infatuated, if that is not too strong a word, with American systems, of which there are some good examples in the world of social enterprise. Companies get tax breaks and people promote mutual activity, almost old-fashioned co-operative activity along the lines of the New Lanark mills and so on. Social enterprise could be much more aggressively promoted, supported by tax breaks, to help deprived communities work their way out of multiple deprivation.

I shall deal quickly with two other social policy issues. The Government's child poverty targets are ambitious. The Chancellor of the Exchequer skated over it, but the report by the Institute for Fiscal Studies on the green budget suggests that we need another £1 billion to be sure of reaching the target of reducing child poverty by a quarter by 2004. I was interested to learn that all that the Chancellor is doing in the hope of achieving that target is leaving the per-child element of the child tax credit at £27.75, indexing it with earnings for the rest of this Parliament. The IFS report thinks that that will leave the Government £1 billion short of the target—a £3 a week increase in the per child element of child tax credit would be needed to achieve that. I noticed that the Chancellor did not say anything about that.

I do not have time to develop this argument but, briefly, the question of pensions, which other hon. Members have raised, is one to which the House will need to return as it will cause major long-term problems. The Government have genuinely, and in good faith, tried to address pensioner poverty, but there are longer-term questions about means testing, which is more pernicious than people may imagine. One of the main indicators in the indexes of multiple deprivation by which funding allocations are made is means-tested benefit take-up. If people are not getting a benefit, not only do they not receive that assistance but their areas do not get the benefit of the multiple deprivation index subventions. We need to be extremely careful about that possibility of double jeopardy.

On pensions, the problem it is not just the state retirement pension or pension provision but the whole policy on ageing. Government Departments across the board need to turn their attention now to demographic changes that will take place between 2020 and 2050. They need to look at the change in the age profile of the working population compared with the current age profile of people who, hopefully, will have retired by then. The Government are not spending enough time on that issue or giving it enough priority.

In the final three minutes available to me, I shall make one or two points about local issues that are worth making as they have a wider salience. I was pleased that the biofuels issue was addressed, but we still have not gone far enough. Biofuels have a double benefit—they are something that our agricultural community can grow which might make them a welcome profit for a change, and they reduce carbon emissions. This afternoon's announcement would introduce changes by 1 January 2005, but by that time other European Union countries will be well ahead of us in the biofuels department. I accept that the Chancellor did not want to introduce change immediately—because we do not have capacity nationally, biofuels would have to come in from outside. I understand why there is some delay, but I do not understand why we are not going further and faster in trying to level the playing field and get the 4.5 p per litre that the biofuel generating industry thinks is a necessary incentive to make the initiative profitable.

I shall conclude with the problems of public insurance liability, which was mentioned earlier. Some businesses in my constituency have been subject to 500 and 600 per cent. increases in public liability insurance, which do not fairly reflect the risks that they face. They are, for example, small steel construction companies with a flawless safety record. They are family businesses; they have had no trouble and are very careful about how they conduct their business, yet they are now struggling to find insurance cover of any kind. It would be perverse in the extreme if such high-quality businesses were put out of business and their profitability extinguished simply because of the changes in the insurance industry. I know that the Department for Work and Pensions is conducting a review on this matter. That review needs to reach its conclusions very quickly—before the summer—and I hope that it will come up with recommendations that the Government will quickly and urgently implement to take some of the pressure off those businesses, because if they do not, those businesses will disappear in very short order.

The manufacturing sector in my constituency is taking a real pounding. We have lost £29 million in exports from the Scottish Borders in the last year, mainly in textiles but also in electronics. Manufacturing is taking a real hammering there. Knowing the Chancellor as I do—and knowing his provenance as a politician—I am surprised that he is not spending much more time and energy on this issue. That makes it sound as though I am his best buddy. I am not really, but I sometimes meet him in aeroplanes at 37,000 ft without his advisers. That is a really good opportunity to talk to him, and I have been known to spoil his breakfast. I get the impression, however, that manufacturing is just another issue for him and that he is not as focused on it as I think that he should be. The announcement of 100 per cent. capital allowance for information technology equipment is very welcome, but some of our manufacturing industries, such as textiles, are competing against huge global market pressures, and they need further consideration of that kind.

I heard some warm words from the Chancellor on apprenticeships, although he spoke them at such a rate that I could not properly understand them. I am finding it very difficult to get small family businesses to take on joiners as apprentices, because the construction industry training board regulations mean that the apprentices have to go off for 20 weeks before they can come back. A small business in a place such as Kelso or Hawick in south-east Scotland simply cannot carry that cost and responsibility. There is an endless amount of work available, with very good rates of pay. We could encourage lots of young people to come into the industry, and they want to do so, but the businesses just cannot carry the on-cost. I understand that we need excellent standards, and that we do not want gas fitters going round causing explosions all over the country, but we seriously need to do something to get better provision for small-scale businesses so that they can take on and train skilled journeymen.

This is a high-risk Budget. The Chancellor is taking a gamble on growth rates if he thinks that those forecasts are going to be robust. I wish him luck; he has been lucky in the past, but it will be, a very good trick if he can do it.

5.17 pm

Mr. Bill Tynan (Hamilton, South)

This is the first Budget speech that I have made. I went through feelings of elation as the Chancellor spoke to depression when Opposition Members were speaking, and I must now try to find my way round the reality of the situation. I shall begin with a unique contribution: I congratulate the Chancellor on a Budget that improves the lives of my constituents. I am sure that most of the country—I will not say the whole country—will congratulate him. People who smoke will say that they do not like the Budget. Those who drink whisky will be quite happy; those who drink wine and beer might be less so.

The Budget shows the Labour Government's clear determination to maintain the economic strategy and foundations that they have developed over the past six years. It will protect the least fortunate in our society, as the Government have done during that time. They have also delivered effective public services. The hospital-building programme in Scotland has been substantial over the last six years, and without the public-private partnerships, we would not have a new hospital being built on the border of my constituency. We have to understand what is being done and appreciate what can be done if the political will is there.

I understand the concerns that have been expressed about business. We must ensure that business has the best possible opportunities to enable it to thrive and to enable us to pay for the benefits that we would like to see. Since 1997, my right hon. Friend the Chancellor has been delivering for the country, for business and for the people.

We did not have economic stability during previous Governments. That was the position during the 18 years that I served as a full-time union official. I am well aware of the difficulties that those 18 years created for the people whom I represented. I believe that the previous seven Budgets have set the foundations for the well-being of the UK.

We must remember that we have low interest rates, low mortgage rates and low inflation rates, and the highest employment level ever. We should continue strongly to push that message. I welcome my right hon. Friend the Chancellor's commitment to the continuing crusade to create full employment. Many years ago, we could only dream about that. Delegates at Labour conferences spoke about full employment, but never thought that it could be achieved. I think that we are on the brink of something that is extremely important and worth while for the people of this country.

I apologise for having left the Chamber to attend a Select Committee hearing, but I have listened to Opposition Members' responses to the Budget statement. I exempt the hon. Member for Roxburgh and Berwickshire (Sir A. Kirkwood) from the remarks that I am about to make. He made a constructive speech, but some of the other responses were pathetic. Opposition Members' speeches were depressing because they referred to all the problems in their constituencies without recognising any of the solutions that have been created by my right hon. Friend the Chancellor over the years.

We must have regard to the results. We talk about blighting old age, and I am asked whether the minimum income guarantee is important. If we had a flat-rate increase in the basic state pension., I do not think that we could reach the levels achieved by the MIG, which is crucial if we are to get those who need and deserve support out of poverty.

When I was campaigning in the 2001 election, some people were clearly concerned that those on the MIG were receiving benefits that others were not getting. Some people told me that they were on a small pension but were excluded from housing benefit and the MIG. In those circumstances, they felt hard done by. That is why the pension tax credit is a wonderful opportunity. I recognise that there may be take-up problems, but it is something that we must fight for in the House in a united fashion. If we do that, we can make a difference to each and every pensioner in our constituencies.

Last Sunday morning, I listened to "The Frost Programme"—I am a sad person, and perhaps there are other sad people in this place—on which it was said that nearly 5 million people or families were losing out by more than £10 a week. Last week, I attended a meeting of the Institute for Fiscal Studies, at which it was said that 5.8 million families would see few changes as a result of the pre-announced tax, tax credits and benefit changes that would take place during 2003–04. It was said also that 6.7 million families would gain between £1 and £10, and that 3.7 million families would gain more than £10 a week. So we should tell the whole story when we are talking about the changes that are taking place. I welcome that redistribution, because that is what it is. I can afford to pay more in national insurance contributions and I can afford to pay more to create the opportunity for people to benefit. The 1 per cent. increase should be seen in the context of benefits for the national health service and for the community. If we look at it in that way, we will put it in perspective.

It is time that we looked at the question of the entitlement to tax benefits. It is also time to stop exploiting the situation, which we do to a degree. In talking about tax credits, we are in a position to say clearly, "This is a means-tested benefit." I recognise what was said as regards how we deliver, but the means-testing of the 1930s would be unacceptable to me. It was an attempt to take money from people, not to give money to them. If we make that distinction on tax credit, we will take the stigma away from it. We are looking at people's standard of living as well as what they desire, and we should move forward by saying, "This is what you are going to get." We have to take that message out to the country. We have different points of view and different philosophies, so we tend to exploit the wording that is used, but we should stop doing that as it tends to play on the political divisions between us and it impacts badly on the people whom we want to benefit.

We should welcome in particular the extra £100 for older people. We have been arguing that a 25p increase is rubbish and unacceptable. This increase may not mean £5 or £10 a week, but it is £100 a year for those over 85. That should be welcomed. In Scotland, there is an increase for 135,000 people, aged over 80, so an incredible number are being affected. On the extension involving 52 weeks, how many Members in the Chamber have found themselves talking to a pensioner's family who say, "This is ridiculous. We are having money taken off because my mother is in hospital."? We should be pushing hard and saying more and more that the benefit is absolutely superb.

I also want to mention the intensive support that we are giving for lone parents and partners. We speak about child poverty, but unless people have suffered it they do not know what it is like. Living in a tenement close where three families shared an outside toilet was real poverty. Today, we have a system that no longer stigmatises lone parents, which was the problem at one time. I have a daughter who has two young children, and she is a nurse at Hairmyres hospital. I know the benefits that have been created—the working families tax credit and the child tax credit—and I have just discovered that she will get about £10 a week more. That is a real benefit for my daughter in those circumstances, and I hope that people understand that. I do not mind paying the additional 1 per cent. in national insurance.

If someone from a different planet dropped in here today, they would think that things had never been any different, but we should look at what happened as regards this country's manufacturing base. I worked in a large factory—Hoover in Cambuslang. When I went there in 1972, there were 4,500 manual workers and about 1,700 staff. It has one of the best pension schemes in the UK, and I am delighted to say that it is still a final salary scheme. Due to competition from the likes of China, Japan and the far east, that factory found itself unable to produce motors at the price that they could be bought from abroad. That is a problem. Unless factories and workplaces continue to invest in research and development to bring about new products that can be delivered for the people who work there, we will lose out.

We have a major problem. In 1972, Robert Carr was Secretary of State for Employment in a Conservative Government. He said that we no longer needed a training incentive to develop apprentices, as employers were too wise and knowledgeable to allow apprenticeships not to exist. At that time, large factories had to pay a levy grant of 2.5 per cent. to develop their own apprentices. Small workshops fed off those large factories and took the apprentices once they had been trained. Therefore, I appreciate the point that has been made about apprenticeships, but we must ensure that people are trained properly if we are to deliver the type of employment that we are looking for.

We cannot compete with the likes of the far east. In my constituency I have a company called Philips, which used to produce about 300 million bulbs a year. The work went to Poland Pila, which now produces about 450 million lamps a year. Philips produces only specialist lamps. We still have employment there, but it will be threatened unless we continue to develop new processes and new job opportunities.

I am conscious of the time and I understand that other hon. Members want to speak, but let me make the following points about the Budget. It is essential that we continue to invest in the health service, education and transport. If that means borrowing more money, we must face that crisis. We must face any issue in order to maintain the stability that we have at present.

We talk about national insurance contribution increases of 1 per cent. Workplace absences cost companies an estimated £11.6 billion in 2001. The CBI has called on the Government to guarantee that by 2010, all young people will have mastered the basics of literacy and numeracy, to create clear paths into employment and higher education for young people who have vocational qualifications, and to improve intermediate skills by extending entitlement to a publicly funded—note that: a publicly funded—level-three qualification from age 19 to 25.

Even the CBI recognises the difficulties that this country faces internationally as a result of the war in Iraq, but we can move forward if we continue to push as we have done. We have a sound economy and we are creating opportunities for business. In those circumstances, I believe that we will make the progress that is desired.

5.33 pm

Mr. Andrew Mitchell (Sutton Coldfield)

I greatly respect the sincerity of the hon. Member for Hamilton, South (Mr. Tynan), although he will understand that I intend to take a rather different view of the impact of the Budget. I draw the House's attention to my interests, which appear in the Register of Members' Interests.

There are aspects of the Budget that all hon. Members and indeed everyone in the country should welcome. I particularly welcome what the Chancellor has done for overseas aid, his announcement today about the United Nations fund, which will get extra support, and his attack on illiteracy and poverty in Africa. Those are good measures from a Chancellor who has consistently driven forward the frontiers on those matters and has always been good enough to pay tribute to John Major for his work when he occupied the same office. Therefore, there are many good things in this Budget. The baby bond is an interesting idea. It sounds like a bit of a gimmick but I would be interested to know from Ministers in due course whether it will be a funded baby bond in discrete accounts. Those matters will no doubt be explained and be of interest.

A lot of things were not in the Budget that should have been. Although the Chancellor made it clear that he was going to take measures to help the poorest pensioners in our society, he did not say anything about the grave pension crisis that is affecting many of our fellow citizens. I hoped that he might say something about the failure of stakeholder pensions. They are manifestly a failure now, and a bit of humble pie would have been nice—an admission that his idea had not worked, and an assurance that there would be measures to help.

We heard nothing about the chaos on the interface between state provision and private saving for pensions. We also heard nothing about the confusion caused to independent financial advisers trying to advise less well-off people how much private provision to make: they are in an impossible position.

I was amazed that the Chancellor said nothing about individual savings accounts—ISAs—as the Government rebranded the personal equity plans, or PEPs, set up by the Conservatives. What a pity that he did not double the amount that people could save, which would have sent a clear signal. ISAs were meant to be a way of allowing the Treasury to forgo tax, the profit being retained by those investing in them. During a time of falling markets, however, the Government have been saving money that they would otherwise have had to pay out in capital losses. The lack of encouragement to savers represents a big missed opportunity.

I can do no better than quote a former pensions Minister, the right hon. Member for Birkenhead (Mr. Field). In an article in The Sunday Telegraph, he said: All too many families stand on the brink of financial disaster as they see their pensions snatched away from them. Failure to act will be punished by voters as surely as markets punish cuts in dividends. The Government cannot continue to hide behind the claim it is consulting; it has been doing that for the past six years. What is now desperately required is action. That was said not by a Tory, but by a former Minister in this Government. The Government would be well advised to heed his words if they will not listen to Conservatives who are saying exactly the same.

I noted the Chancellor's full and staunch defence of expenditure on the war. Defence is undoubtedly one of the areas in which he will have to spend more. We are now spending a lower percentage of GDP on defence than we have spent at any time since the 1930s. It is the Government's first duty to defend the realm, but it is hard to believe that, in the uncertain and insecure world that we currently inhabit, we can get away with spending only 2.3 per cent. of GDP—half of what we spent in 1979. There will be no more peace dividend; we will have to spend a great deal on homeland security. The Chancellor muttered that he would increase that budget by £200 million, but we shall have to spend far more. We shall need to beef up our reserve forces to deal with new threats and uncertainties. The United States is having to spend a huge amount on the high-technology weaponry that must now be developed, and its example should be heeded. The Government must pay more attention to what is happening in our own country and economy.

Let me return briefly to my point about the omission of pension measures. It is typical of the Government that they saw fit to replace the chairman of the Labour party immediately, but have not yet seen fit to replace the Minister for Pensions. At a time when the pensions industry is in crisis, the Prime Minister cannot even be bothered to appoint a Minister. That is pretty disgraceful. I also greatly regret the Chancellor's failure to take the advice of many people, including Conservative Members, and suspend the £5 billion a year raid on pension funds. By doing that he could have sent a signal that he understood the industry's current difficulties.

We have heard many cerebral speeches, especially from my right hon. and hon. Friends. My main point is this. My constituents have paid a huge amount of extra tax. They took the Prime Minister at his word when he said "If you pay more tax, you will get world-class public services". However, my constituents have been comprehensively deceived by this Government. They have paid more tax, but the result has been no improvement at all in the quality of public services, as I shall explain.

The truth is that the Government have been spending the hard-earned money of taxpayers such as my hard-working constituents and other hard-working people throughout the country by the billions; however, there has been no improvement in public services. There have been 53 tax rises and a clear breach of faith in the raising of national insurance, which was announced last year but is coming in now. Let Ministers square that with their promise not to raise income tax. This is mere sophistry; everyone will be able to tell from this month's pay packets that this is nothing other than the equivalent of a rise in income tax. As hard-working families lugubriously study their April payslips and their greatly increased council tax charges, they will see that the rise in national insurance and council tax is the equivalent of about 7p on income tax. Tax, as a percentage of gross domestic product, has gone up: it was 34.9 per cent. under the Conservative Government, and now it is 37 per cent. Not only have taxes increased; they will continue to increase. A group of independent forecasters, blessed by the Treasury, agrees that taxes will need to increase yet further, but it also points out that tax money is being spent inefficiently—a point to which I shall return.

Business has warned the Chancellor about the impact of these measures. I listened with increasing incredulity to the hon. Member for Warwick and Leamington (Mr. Plaskitt), who told us that businesses in his constituency understand the increase in national insurance and hope that the money will be spent well. I surveyed 1,200 businesses in Sutton Coldfield,and I read the results of that survey with great interest, as any Member would. Not one of the respondents said what businessmen are apparently saying in Warwick. Company profits are at their lowest point for 10 years, yet the Government are loading business with their jobs tax—a £4 billion increase in taxation. The Chancellor boasts about having fuller employment, but as my right hon. Friend the Member for Wokingham (Mr. Redwood) said, there is every conceivable danger that as a result of this jobs tax, Britain will have a very different employment market in the next 18 months.

The CBI has spoken of the "dire consequences" of this Government's policy towards businesses, and it warns of a total cost in tax and red tape of about £15 billion. The director general said: Businesses gave the Chancellor the benefit of the doubt in 2001 and have withdrawn their support in droves. The head of the Engineering Employers Federation spoke of the terrible mistakes by the Chancellor", and the director general of the British Chambers of Commerce warned of the terrible timing of these national insurance rises. On top of that, the International Monetary Fund has criticised the Chancellor's forecasting, and there has been criticism from the European Union. So there is no doubt that there has been a tremendous increase in the level of tax and red tape on businesses, as well as increases in tax for hard-working families.

Things might not be so bad it the Chancellor got his forecasts right. As my right hon. Friend the Member for Charnwood (Mr. Dorrell) said, the Chancellor has a lamentable forecasting record. In 2001, he said that public sector net borrowing during this year would be £1 billion; in March 2002, his estimate had risen to £11 billion; by last November, it was £20 billion. In the 10 months to February of this year, Government revenue rose by 1.5 per cent., compared with an earlier forecast by the Chancellor of 4.2 per cent. Last March, he predicted that the FT all-share index would grow in line with money GDP—in other words, at 4 per cent. Of course, since then, as we know, it has done nothing of the sort; rather, it has lost a third of its value.

There have been massive rises in tax for hard-working families and businesses, along with huge increases in regulation and red tape, but no delivery on the Prime Minister's much-vaunted promise of world-class public services.

A relatively new, non-party-political academic think-tank called Reform, which is establishing itself as Britain's leading body in the field, set up a commission on the reform of public services under the highly respected Sir Steve Robson. The commission concluded: Britain has some of the worst public services of any advanced country in the world. The Government's answer is to spend more money on them and to increase taxes. In the nine years to 2005/06, public spending is being increased by £203 billion to £512 billion—equivalent to an extra £100 every week for every household. This approach is programmed to fail. That is the conclusion, and failing it certainly is.

Let us consider the health service, whose budget is up by 20 per cent., whereas its activity is up by less than 2 per cent. For the first time in NHS history, we have more bureaucrats than beds. There is a glimmer of hope in the Government's policy on foundation hospitals. The Secretary of State for Health and the Prime Minister understand why such structural reform is essential, but their party certainly does not. It may be, as with the war, that an alliance will develop between this side of the House and the Prime Minister and some of his Blairite colleagues to help to deliver the foundation hospital policy, but if they do so, it will be without the support, or even the passive acquiescence, of Labour Back Benchers.

Mr. Dorrell

My hon. Friend touches on an important point about foundation hospitals. They will provide an opportunity for the Secretary of State for Health and the Prime Minister—who have clearly been persuaded of an argument that they rejected in the 1990s—to ally with the Conservative party to carry forward a programme of health service reform that goes even further than what was planned by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) in the early 1990s. That is where the logic of the Government's policy is taking them.

Mr. Mitchell

My right hon. Friend is right. When he was Secretary of State for Health, he wrestled with many of the problems and reached fairly similar conclusions to those of the current Secretary of State. The difference is that in those days the Labour Front Bench did not support him, whereas today Opposition Members are offering help and assistance. We are the only developed country in the world with waiting lists of 1 million, so the huge increase in health expenditure is clearly not working.

On education, the picture is more mixed, but it remains true that, although we currently spend £4,900 per pupil, 17 per cent. of children leave school functionally illiterate and 23 per cent. leave functionally innumerate. So much for education, education, education! Worse, we now hear that one in five teachers are so demotivated that they want to quit the profession in the next few years. The same applies to law and order, another area in which the Prime Minister has promised so much. Next to Sweden, the UK is now the most crime-ridden society in Europe, and London is more violent than New York. As the Audit Commission has made clear, there is no link between the level of resources and the performance of our police.

We have been comprehensively let down. My constituents in Sutton Coldfield, who work hard and pay their taxes, have been let down by a Prime Minister who promised so much, but has not delivered. Labour Ministers have raised billions on a false prospectus. They have failed to live up to their promises and spending has not improved the performance of those services. Meanwhile, national prosperity is driven by productivity, which is damaged by continuous increases in tax and Government spending. The next election will be won not on the battlefields of Iraq and Basra, but on the Government's performance on public services. Labour has blown billions earned by hard-working families; ordinary people who have been fleeced by a bunch of Labour Ministers, greedy for political success at the expense of those self-same hard-working families. There is virtually nothing to show for that. Public services are still not delivering. The Government are deeply divided over reform, without which they will continue to pour good money after bad.

The Chancellor has squandered the golden legacy of sound public finances bequeathed to him by my right hon. and learned Friend the Member for Rushcliffe. The Budget today, and the other tax measures over the last year, demonstrates that old Labour is back. That probably brings joy to the hon. Member for Hayes and Harlington (John McDonnell), but it is not in accordance with Labour's last manifesto. Instead of low taxation, reduced state intervention, reduced red tape and greater personal responsibility, all those hard-won gains that Labour inherited have been frittered away and destroyed in an orgy of spending other people's money.

5.50 pm

Alan Simpson (Nottingham, South)

The hon. Member for Roxburgh and Berwickshire (Sir A. Kirkwood) said in his enlightening speech that he was no left-wing socialist. However, there is hope for him yet. There is considerable support for his comments about the New Lanark experiment by Robert Owen; the principles of mutuality and common ownership have a great deal of resonance on some of these Benches. The hon. Gentleman raised a number of points and it is important for us to address them within the context of a Budget debate. I shall attempt to do so.

I want to begin with a recognition of where the Chancellor started from. It seems absolutely right that the Chancellor spent a considerable amount of time looking at the state of the world economy, the European economy and the influence of the war. Having said that, it is clear that the next general election will be determined by the way our constituents see us tackling the economic war on poverty in the UK, rather than the military war on the poor of Iraq. That may be unfortunate, but that is how it is.

In respect of the Chancellor's projections, there is a gloomier scenario that we need to try to build into our projections. Frankly, the world economy is in a mess. We are living in the aftermath of asset price bubbles that have burst. We have seen a number of the major industrial countries with serious external imbalances in their budgets. We see within the EU and Japan serious structural weaknesses and high levels of unemployment. The picture is getting worse.

After the distractions of the war on Iraq, we will be faced with some serious short-term consequences that will make the global picture much gloomier. In the United States, the net external liabilities that the Bush Administration have built into their own budget will see current external liabilities—which stand at 25 per cent. of the US GDP—increasing to up to two thirds of GDP within the decade. The trade deficit that the United States faces will possibly rise to 7 per cent. of GDP. By the middle of the summer, there will be a further depreciation in the value of the dollar of between 10 and 15 per cent.

Within the EU, there is a picture of chronically weak demand and growth, a hopelessly tight economic corset imposed by the European Central Bank and high and rising unemployment. When the Chancellor set that out, the only thing that he did not say was that that drives us to a fairly logical conclusion: that there is not a case for joining the euro. I suspect that he may have to have further discussions with the Prime Minister before the House is able to face the reality of that.

It is important for us to recognise the real value of things such as the increase in winter fuel payments, the abolition of hotel charges in hospitals and the continuing programme of NHS improvements. They are to be welcomed in any economic scenario projected for the future. My cautionary warning is that those projections built into the Budget are based on some dangerous assumptions about what will happen in the future. It is always dangerous to build in Budget projections based on high rates of growth in the future that are never delivered in the present. For only so long can one promise jam tomorrow that never materialises today. We therefore need to be extremely cautious about the scope and extent of a global upturn, and about the extent to which it will boost Exchequer revenues.

We also need to be more honest about the scope of future borrowing likely to be required to underpin the investment programmes that a Labour Government would, rightly, wish to pursue. We must begin to question more rigorously the effectiveness of the investment planning built into some of the Budget projections. Labour Members need to view with some caution the extent to which we are becoming dependent on tax credits as a mechanism for wealth redistribution in the UK.

However one dresses them up, tax credits are a form of means testing. As my hon. Friend the Member for Hayes and Harlington (John McDonnell), my colleague in the socialist Campaign group, rightly pointed out, the whole House would be well advised to look at the Public Accounts Committee report on pensioner poverty, which was published today. It describes the extent to which those means-tested benefits are under-claimed. In itself, the sheer complexity of the claim process is a massively socially divisive process. We need to look again at cash savings in the delivery mechanisms for universal entitlements, but we must recognise too that a real sense of social solidarity comes out of those universal presumptions. At some stage, we will have to go back to that.

We must also recognise that the £3 billion set aside by my right hon. Friend the Chancellor to pay for a war in which most people in this country did not want us to participate was a provision of missed opportunities. I want to identify myself strongly with the very modest proposals made by the socialist Campaign group, setting out the very different ways in which that £3 billion might have been spent. For example, that money could have been spent on restoring the link between pensions and earnings. It could have delivered £5 a week extra for the over-80s. It could have extended the national concessionary travel scheme and made it a free entitlement to all pensioners. It could have paid the firefighters' claims in full, and abolished tuition fees for students.

Those are the alternatives that we must consider if we are to take seriously the responsibilities of Budget allocations. They are the opportunities that we missed to pay for this wretched war.

The picture gets worse. We have just been told that there is a compelling case for increasing capital investment in relation to defence, but it is worth considering the slice of the Government's capital expenditure that already goes on defence. In the current allocations, the figure for direct capital expenditure by the Government on defence is £5.5 billion. That amount is the same as the combined capital expenditure on education and health, and it is 15 times what the Government are investing directly in local government.

We must ask ourselves where, in the scheme of our constituents' priorities, the Government's capital investment in new defence expenditure lies. The Government's investment in defence takes priority over fighting the war on poverty in our towns and cities.

We must also take account of the questions arising out of the pensions crisis. I have no doubt that the issue will come back and chase this Government and this Parliament for years, until we cease to consult and begin to act in ways that genuinely address the scale of the crisis.

My right hon. Friend the Chancellor announced that public borrowing this year will reach £27 billion, to pay for investment and the programmes of wealth redistribution. However, much of the investment that the Chancellor talked about is now off-balance sheet—it is what some people unkindly. but perhaps accurately, call Enron accounting. As far as we are concerned, that ties a Labour Government into an increasing dependence on PFI schemes and PPP programmes. It is clear from the Budget booklet that some 60 per cent. of the Government investment that is mentioned comes through the mechanisms of PFI schemes. We then create a legacy of poor direct public investment as a result of moneys being raised by the Government and put directly into those infrastructure programmes. Many of the Chancellor's problems stem from the legacy of the failure of privatisation and of precisely the kinds of PFI schemes that we are now struggling to make work. Given the freedom to invest under the years of Tory

Governments, the one lesson that we should have learnt is that the private sector is not willing to invest in that infrastructure provision unless it is paid handsomely and given Government guarantees that the risk will remain with the public sector, with the private sector taking only the assets and profits.

The scale and folly of those presumptions is best illustrated by the complete collapse of the stock market over the past three years. The disaster that that will bring to private pension provision will be of awesome proportions. I offer the Chancellor and the House the possibility of a way out of that mess. I shall not feign false modesty when I suggest that hon. Members should attempt to read a pamphlet entitled "People's Pensions", which was recently published by the New Economics Foundation. The reason why I shall feign no false modesty is that it was written by me, Richard Murphy and Colin Hines, who brought to bear their experience and expertise in pension provision. The pamphlet examines where the theft of public money has gone in recent years. When Conservative Members talk about the Chancellor's £5 billion raid on pension funds, we should set that in the context of the market's raid on pension funds over the past three years—£350 billion has been wiped off the value of people's pensions as a result of speculation against this bubble economy.

Workers put about £50 billion a year into their pension funds. Eighty-five per cent. of that money has gone into share speculation, and 43 per cent. of the value of those funds has been wiped out in the past three years. Less than 1 per cent. of share speculation has gone into new share issues—the rest of the money has been spun round. The shares are dead shares, in that they were issued long ago and the buyer pays the last bank that owned them. People may think that they are buying shares in ICI or Courtaulds, but they are not. That generated no new capital investment, but locked us into a speculative economy that span wildly out of control and has now collapsed around our heels. The outcome is that there has been no structural investment, and for many people there are no bloody pensions either. They have been left in that situation as a result not of the Chancellor's theft, but of theft by the market.

In 1962, 51 per cent. of pension fund assets went into Government bonds. By 1993, that had fallen to 7 per cent., driven by the presumption that the free market and speculation represented the answer. Our framework for people's pensions proposed new mechanisms for putting workers' savings into public investment to improve the quality of services and to give them a secure pension, none of which would disappear in the bursting of a dotcom bubble or anything else that followed. Going down that path would profoundly change the whole framework within which the Chancellor can construct the Budget. If only half of today's pension fund savings went into that sort of people's pension fund, we would have massive savings on which the Chancellor and society could draw. If those had been in place, we could have paid for the entirety of the Government's public investment programme for the past five years and have reduced the national debt by £18 billion a year. We would not have needed a single Mickey Mouse PFI scheme. We would have had no need to pay for any increase in public sector borrowing over the next five years. That would have allowed us to pay for the restoration of the state pension and its link with earnings.

Mr. Tyrie

Could the hon. Gentleman explain why he thinks the Government did not do so?

Alan Simpson

I spent a few months working on the idea and I realise that all Governments have to catch up. Part of the problem has been the crazy flirtation with speculative free market economics, which has got us into precisely the mess that we inherited from the Conservatives when we came to government. Breaking from that set of economic blinkers is the biggest challenge that we now face as a Labour Government.

If we were to do so, all those elements that I just set out are within the Chancellor's reach, but he has to make a choice. It is a political choice. He can side with the savers, but in doing so he must challenge the speculators. He can deliver the schools, hospitals, houses and public transport services that the public want, but he has to do it by ending the private casino that has been allowed to play with your and my deferred wages, which have gone into those pension funds, Mr. Deputy Speaker. He can restore and secure pensions on the basis of an investment programme that he longs for, but only by ending the love affair with the free market economics that have dragged us into the various crises that we now face.

This is not a poor country, but we have become poor in vision and poor in political conviction. That is the challenge that I want the Chancellor to rise to.

6.7 pm

Rev. Martin Smyth (Belfast, South)

We have heard an interesting speech from the hon. Member for Nottingham, South (Alan Simpson). It reminded me of a contribution from one of his predecessors. The former leader of the Labour party, Neil Kinnock, asked why more money from our national insurance contributions had not been invested in pensions. Perhaps no money was ever invested because Chancellors were frightened of speculative investment. The reality was that one generation's contributions paid for their fathers' pensions. It was living from hand to mouth.

The hon. Member for Roxburgh and Berwickshire (Sir Archy Kirkwood) made a valuable contribution. Following the hon. Member for Hayes and Harlington (John McDonnell), he said that at least the issues were being examined seriously in this debate. That sentiment was endorsed by the hon. Member for Nottingham, South when he referred to his hon. Friend the Member for Hayes and Harlington.

As I understood it, the Chancellor's contribution to the Iraq war came from the contingency fund. I did a little calculation as the hon. Member for Hayes and Harlington was adding up the sums. He estimated that there was about £3 billion, not for contingency reserves but for regular allocation. That is one of the issues that every Government will have to face as they try to produce a Budget that will deal with day-to-day issues, but will also have something in the contingency reserve.

The contributions to the debate have been useful and stimulate our thinking. Budgets must always be treated with caution, particularly given the modern trend of spin. They are prone to contamination by gimmickry and re-announcement, as was demonstrated with the introduction again today of child trust funds, which the Government made known some time ago. People out there, however, who might have missed such an announcements will think that the proposal is a new one. It is not fair to create that impression. Against that background, our reaction must be guarded. Budget announcements tend to unravel in the fullness of time as the facts emerge from beneath the spin.

The Budget is less dramatic and more anaemic than others from the Chancellor, but some of its contents are certainly welcome. I agree with those who have already welcomed such things as abolishing the penalisation of elderly people through deductions from their pension while they are in hospital. That change is long overdue.

I welcome the extra £100 for the heating allowance for people aged over 80. However, I should have liked a greater increase for all pensioners, although we need further examination of how that could best be achieved. Means-testing may be the best way to target the less well-off, but it might be simpler to make benefits universal as the money can be clawed back in taxes from those who are well off. I am not sure that means-testing is the answer.

Mr. Kelvin Hopkins (Luton, North)

I am following the hon. Gentleman's speech with interest. If the minimum income guarantee was the basic state pension, would that not solve the problem that he describes? In that way, we could get rid of means-testing and link pensions with earnings

Rev. Martin Smyth

That is a worthwhile suggestion. However, it is argued that the minimum income guarantee is the only way to ensure that money goes to the people who really need it. I disagree, but that is the argument that we shall have to face. I hope that Ministers on the Treasury Bench have heard the hon. Gentleman's point.

Many of the usual targets raided by the Chancellor have been frozen or held to rises in inflation. I am especially glad that air passenger duty has been frozen and that fuel duty has been frozen until October. Even so, any increase in the duties is unfavourable to Northern Ireland, which is the only part of the United Kingdom that has a land border. We suffer from the aviation tax, although it will, sooner or later, affect everyone.

I am pleased about the moves to help small businesses by reducing some of the regulation and red tape that burden them. Small businesses are essential in most of our constituencies, and certainly in south Belfast where we do not have many large industries. Local communities will benefit from the changes.

I have long advocated more Government help for small businesses through economic and rating policy. We are suffering a complete revamp of rating in Belfast and throughout Northern Ireland. One nursery found that its rates bill rose from £1,000 to £20,000. That had nothing to do with the value of the property; the valuers had estimated that if it was let as offices, it would raise more money. But what will happen to the young married couples who are paying for child care while they continue their professional careers, as the Government, in other ways, encourage them to do? Some of those couples will find it extremely difficult to meet the increased nursery charges and that will result in another downturn in our economy.

As the hon. Member for Roxburgh and Berwickshire pointed out, the Government will have to look into the whole insurance business, which has gone haywire throughout the kingdom. In Northern Ireland, only four insurance firms provide cover for the construction industry and other industries. Small charities and community and voluntary organisations are under extreme pressure, mainly because insurance companies say that 9/11 made such a difference. Others say that the problem has been caused by the downturn in investment in stocks and shares. Whatever the reason, I suspect that insurance companies are ensuring that they cream off money from people irrespective of the hardship that that causes them in carrying on their business.

On the international stage. I welcome the £240 million in humanitarian aid for Iraq. That announcement is particularly apt on the day when the Iraqi people are joyously reacting on the streets of Baghdad, as the realisation sinks in that the days of Saddam's reign are over. However, although I welcome what the Chancellor has been trying to do and rejoice in some of his successes in international aid. along with those of the Secretary of State for International Development, I would press him to do more on the concept of trade justice. The larger countries are erecting barriers or trying to break them down to suit themselves, but they are hindering the development of small countries and developing countries that cannot meet the tariffs so often imposed on them.

I would argue that trade justice is one of the best ways to help people and to allow them to produce goods in a way that develops their economies, rather than simply protecting our own. I hesitate to say that the United States is a nation that should think a little bit more about lowering some of the tariffs so that the rest of the world can compete. I do not join those who talk about a level playing field, for I have never played on a level playing field, but trade justice would make things a little more equitable and help those emerging countries.

I trust that we shall follow the argument of the hon. Member for Dumbarton (Mr. McFall) on that score, but we got into a little contretemps about productivity. There are those who think that training and education will improve productivity. It ought to —I would encourage it—and I regret the fact that so few people go beyond even NVQ1 and that others stop at NVQ2. Individuals and businesses must be encouraged to increase their knowledge, but having said that, we have to re-establish in our country the concept of a work ethic. It has been put to me, quite seriously, that some firms are moving their production to developing countries not because labour is cheaper there, but because people have jobs and are in work.

As I said jocularly to a colleague near me on the Bench in an aside, the tragedy is that many in our work force today spend more time discussing the results of the Manchester United-Real Madrid match last night—or perhaps for the younger folk, what happened on their latest date—than doing the work for which they are paid. Dare I mention the presence of mobile phones?

People receive phone calls during their working time—there is no difficulty about taking those calls—but they are not paid to do their private business in working time. If we are to increase our productivity, we certainly have to raise the skills of our people, but we also have to remember the work ethic.

In 1983, I visited Taiwan and Hong Kong. I came back amazed because I discovered that people in Taiwan had turned round a firm that manufactured televisions in England and made it a productive entity. I discovered that firms in Hong Kong were using computer-aided design technology when our firms were still labouring in the old style. We have to improve all that, and I trust that the Chancellor's decision to try to spread technology through the regions will develop because I speak for a region that has been put down often as the poorest. I have often thought that we would love to be like the south-east region, which gets Government subsidies for research and development, Government buildings and so on. We would much prefer to have such things in our constituencies, rather than handouts and people not getting jobs.

6.20 pm

Mr. Barry Gardiner (Brent, North)

It is always worth rereading speeches made by the shadow Chancellor and the Leader of the Opposition if one wants a good laugh. I perused the speeches that they made during last year's Budget debate, and I was not disappointed. The Leader of the Opposition recycled much of them verbatim today, but last year he said: The NHS should, as we all agree, offer people the best treatment regardless of their ability to pay.—[Official Report. 17 April 2002; Vol. 383, c. 596.] The right hon. and learned Member for Folkestone and Hythe (Mr. Howard) said last year: Of course, we acknowledge that more resources are required for the NHS"—[Official Report, 23 April 2002; Vol. 384, c. 243.]

By opposing the measures that my right hon. Friend the Chancellor set out today, they have set their party against the 7.5 per cent. real-terms rise in the national health service budget year on year through to 2008. They have set their party against the 80,000 extra nurses, health visitors and therapists, and the 25,000 extra doctors that the Labour Government will have delivered since 1997. And they have set their party against the wish of the British people to see real investment in their public services.

I am sorry that the Chamber is now denuded of Conservative Members, except for one honourable exception on the Front Bench, because had I made my speech earlier, Conservative Members would no doubt have protested at this point. That happened when my hon. Friends suggested that the Conservative party was vulnerable on its desire to cut back on our national health service. I cannot understand why Conservative Members did that, because we can read the words of the hon. Member for Arundel and South Downs (Mr. Flight). He said in a memo: We remain vulnerable to the irritating attack that we are the party who will be cutting back on health care expenditure to reduce taxation. He continued: The reforms which we will be proposing will end the NHS monopoly…and will entail those who can afford it making some payment for health care services".

Of course, Conservative Members have jumped to the aid of the hon. Gentleman during today's debate and attacked Labour Members who suggested that the official Opposition plan to cut up to 20 per cent. from expenditure on public services. However, we have that on record, too. The hon. Member for Arundel and South Downs was quoted in The Daily Telegraph of 28 December 2002 as saying: I am digging through current spending, finding opportunities for cuts. It's too early to say how much, but it could be up to 20 per cent. Conservative Members said earlier that there was a misunderstanding and that Labour Members had got it all wrong. They said that the hon. Gentleman was talking not about 20 per cent. cuts to public expenditure as a whole, but about tackling waste—something that we would all want to do. They tried to add finesse to his words by saying that he was looking simply at cutting overheads.

I always believe that if one cannot get sense out of the monkey, one should go to the organ grinder, so I shall quote what the Leader of the Opposition said on "The World at One" on 30 December 2002. He did not talk about waste or overheads. He said: They're looking at the target of 20 per cent. savings across the board in Government spending … That's what we're looking at and we're beginning to come up with figures that will build towards that total.

It is quite plain: the Conservatives have made a commitment—although they are trying to retreat from it as fast as the Iraqi tanks—to cut spending on the health service by 20 per cent. That is why they oppose the Budget.

Perhaps the most instructive line from the Leader of the Opposition in his speech last year was: The Chancellor's record speaks more eloquently than his rhetoric ever can."—[Official Report, 17 April 2002; Vol. 383, c. 597.] For once, I agree with the right hon. Member for Chingford and Woodford Green (Mr. Duncan Smith). Let us examine that record. The underlying rate of inflation—just 2.9 per cent. in the year to January 2003—has stayed comfortably within the target range that the Chancellor set of between 1.5 and 3.5 per cent. since January 1997. I remember what it was like running a company in the City when the right hon. and learned Member for Folkestone and Hythe was at the Treasury and inflation was in double figures. I assure him that the Chancellor's record does indeed speak more eloquently.

Mr. Tyrie

My right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) was never in the Treasury.

Mr. Gardiner

The hon. Gentleman is right, but the right hon. and learned Gentleman was a member of the Government when inflation was in double figures.

The success has been largely achieved by the Chancellor's initiative back in 1997 to pass control of monetary policy to an independent Bank of England. In turn, that has led to historically low interest rates helping to foster investment and to stimulate and sustain demand during difficult economic periods. Currently at 3.75 per cent. and at 4 per cent. for 14 consecutive months up to February this year, we are a far cry from the days of interest rates at 15 per cent., when more than 300,000 families had their homes repossessed. So on that, too, the Chancellor's record is eloquent. The saving in mortgage payments to the average family calculated over the term of this Government compared with the previous Government is now more than £2,500 in each and every year.

Britain's economy has grown at a steady rate of 2 to 3 per cent. over the economic cycle. It did not overheat during the dotcom boom. Between 1998 and 2000, average growth in the UK was 2.8 per cent., whereas in the US it ran at 4 per cent. and in the eurozone at 3.1 per cent. But it did not fall away in the aftermath, when average growth between 2001 and 2002 stayed steady at 2.1 per cent. while it plummeted to 1.5 per cent. in the US and the eurozone. That resilience should not be underestimated. Twenty countries, making up half the world's output, are in recession or have been so in the past two years, while the UK has sustained a small but steady growth. That shows that, although we cannot get rid of the economic cycle, we can iron out the boom and bust that were its excesses. The Chancellor's success is that recessions do not cut us so deep. The problem that he faces, of course, is that the good times do not come quite so high.

Let us consider another aspect of the Chancellor's record. Unemployment, currently at almost 5 per cent., has seen a steady and stable decline from the 7.2 per cent. at which it stood in 1997, with the new deal specifically tackling long-term unemployment. Unemployment is now 13 per cent. lower than it is in the US, 35 per cent. lower than in the G7 and more than 50 per cent. lower than in the eurozone economies—and that is after introducing the national minimum wage, which the Opposition said would scrap 2 million jobs.

The OECD forecasts that the UK economy will maintain its position ahead of the other economies and predicts that unemployment in Britain will fall to 4.9 per cent., while it remains high in the eurozone at 8.3 per cent. of its work force.

I want to point out in passing to those who are rightly concerned about the UK's productivity levels, including the right hon. Member for Wokingham (Mr. Redwood), who is unfortunately not in his place and whose speech displayed particular ignorance of the causes of low productivity—[Interruption.] I was in the Chamber when he spoke. It is comparatively easy to improve productivity by allowing high unemployment levels in the economy. It is precisely the least productive part of the population that, by definition, is most difficult to get into work. As one does so, productivity falls.

It is therefore always important to consider productivity against the context of levels of employment and economic growth to arrive at a true picture. When set against the stable and steady growth figures, and the historically high numbers of people in work, the problem of productivity does not go away, but it certainly diminishes within our economy.

In July 1998, the Chancellor outlined two fiscal rules to guide his policy making to ensure transparency, sustainability and credibility. He attempted to create a framework similar to that in relation to monetary policy and the Bank of England, moving away from short-term political cycles and using a mechanism of pre-commitment to make his decision making open and accountable. The golden rule states that the Government will borrow only to Fund investment, not to fund current expenditure. That aims to ensure that future generations will repay only debt, the accumulation of which will have benefited them through the stock of capital that it financed. The sustainable investment rule states that public sector debt should remain at a stable and prudent level, interpreted by the Chancellor as no more than 40 per cent. of national income. By constraining the total level of debt allowable, the long-term sustainability of the public finances is ensured.

Those rules have been key to restoring credibility to the UK as having a Government who are responsible with their finances. That demonstration has required both courage and a belief in social objectives that lie beyond elections and the artificial cycles that they foster. The Chancellor's current commitment to meet those rules across the economic cycle remains intact. Those rules have set the tone for this Government, demanding greater value from public services, no new money without increased performance, and engendering confidence in the future throughout the financial markets, industry and the consumer sectors. Taming the public sector borrowing requirement has been one of the Government's single greatest achievements.

Again, that has not been the result of favourable macro-economic conditions, as the GDP figures that I outlined above demonstrate. From 1998 to 2002, the Exchequer has run repeated and consecutive surpluses, bringing public sector net debt down from 44 per cent. of GDP in 1997 to 31.3 per cent. in 2002. The Opposition frequently challenge those figures by pointing to the amount of off-balance sheet accounting that the Chancellor has done through the private finance initiative. That is simply inaccurate. If PFI deals are included in that figure, debt as a percentage of GDP increases by another 3.8 per cent., according to the Institute for Fiscal Studies. That means that even at the peak of Treasury debt to GDP forecasts, in 2007–08, the total including PFI would not exceed 36.8 per cent, which is comfortably within the Chancellor's target of 40 per cent. and a whole 7.2 per cent. lower than this Government inherited from the Conservatives. When it comes to records, therefore, the Chancellor's is eloquent.

If we compare the present tax and benefit system with the one that Labour inherited in 1997, we see that the Chancellor has introduced approximately £51.7 billion of revenue-raising measures, but against that he has introduced £53.3 billion of revenue-reducing measures: a net benefit to the British public of £1.6 billion a year. More importantly, the redistributive effect of changes in the tax and benefit structure has been to boost the incomes of the poorest decile of the population by more than 15 per cent., while the loss to the richest decile is approximately 3 per cent. In summary, the outlook for the UK economy, as the International Monetary Fund points out, is better than for every other comparator country.

One feature of a balanced economy is that individuals have to compete for jobs, but unemployment is low; consumer demand is strong, but inflation remains under control. One of the costs of stability is that the highs are never that high. Indeed, the factor that often delivers the greatest high—wage inflation—has been a firm target for the Government, and has been restricted in both the private and the public sectors. The doctrine that wages rise only in response to improvements in output and not as a career right is gradually being accepted, but it is important to realise that that has an adverse effect on short-term confidence. In short, as the economic environment is better understood, the fundamentals of the current situation will be viewed as business as usual.

Nothing could disrupt that business as usual quite as much as the decision that my right hon. Friend the Chancellor has to take within the next two months. If the UK joins the euro, it will be subject to the further constraints of the stability and growth pact and the excessive deficits procedure in the Maastricht treaty. In particular, the Chancellor will be concerned that the balanced budget rule would make it difficult to lay down investment that will benefit future generations. The European Commission now suggests that that rule be considered in the context of the position in the economic cycle and that provision be made to spread the cost of beneficial investment that passes benefits down the generations. If Europe is learning from the Chancellor's golden rule, all well and good, but I counsel caution when assessing whether the five economic tests have been met.

Let me immediately set aside the tests where joining the euro would hold no dangers for our economy. Investment will almost certainly rise as inflation, interest rate and exchange rate risks are removed, and the costs of trading with Europe fall—no problem there. As for the impact on the City, the factors that have led to the trade of financial products being located in London are wider issues of liquidity, access to capital, the skills base, the communications infrastructure and a sound regulatory environment. Those issues are broadly independent of currency, so there too I foresee no dangers.

On jobs and prosperity, investment may produce a short-term increase in employment, but Europe's labour markets are far more restrictive than the UK's. Ultimately, that may present problems, but it might be worth making that call. As for convergence with the eurozone economy, GDP growth, unemployment and the output gap are not aligned, although they are closer than they were in 1997. Addressing that is difficult, because on all those indicators Europe is lagging behind us—we have to wait for it to catch up with us. Equally, if we wish to join in the near future, the economy cannot afford to grow too much. Growth of even 2.5 per cent. while Europe is in recession will result in large gaps opening up and causing real problems in meeting the criteria. Convergence of cycles is about more than just having the same vital signs at the point of entry; it means having the same cycle, and experiencing and responding to the same shocks and stimuli thereafter.

If the Chancellor decides to take us into Europe, my assessment is that he might have needed to use the Budget to push us closer to European taxation and labour laws and bring spending and borrowing more closely into line with European norms. I am not saying that that is desirable; I am simply saying that it might have featured in today's Budget if the Chancellor were to be able to meet his criterion on convergence.

The final test of flexibility poses the greatest challenge. I doubt whether our economy is flexible enough at present to lose the shock absorber of its own exchange rate. The pound is too strong to join the euro—Goldman Sachs estimates an entry level of €1.37, but the pound is presently at €1.47. Moreover, fiscal constraint to stop the public sector borrowing requirement running at more than 3 per cent. of GDP will severely restrict the Chancellor, irrespective of the overall level of debt. I suspect that that loss of flexibility, so necessary to our economy as set by the Red Book figures on the public sector net cash requirement released today, means that the UK economy must continue to hoe its own row outside the euro for some time longer.

This is a modest Budget. By the Chancellor's previous standards, it is certainly undramatic. That is why much of the hyperbole coming from the Opposition today is implausible. This Budget is sensible and maintains the investment promised last year for our public services. Those investments are, in themselves, extremely dramatic, but they were announced last year. What is impressive today is that they can be maintained despite an adverse global economy and within the Chancellor's own rules. The fundamentals are good.

Madam Deputy Speaker (Sylvia Heal)

Order. A number of Members are hoping to catch my eye. If those who speak can be concise in their remarks, all might be successful.

6.40 pm

Malcolm Bruce (Gordon)

I shall not comment on the speech made by the hon. Member for Brent, North (Mr. Gardiner), but I think that it is more valuable if people who contribute to the debate have actually taken part in it, rather than just turning up halfway through, or even three quarters of the way through.

Mr. Gardiner

Will the hon. Gentleman give way?

Malcolm Bruce

No, I will not.

Those of us who have been here have taken part in a good debate, in which the general consensus from both sides of the House has been that the Chancellor has produced a Budget of extreme modesty in terms of its material content and the extent to which it has changed the background situation. Indeed, one of my colleagues has said that, in spite of the fact that the Chancellor spoke for an hour, the content of his speech was less substantive than some written answers.

The problem that the Chancellor faces is that he is presiding over a severely imbalanced economy in which, although the overall macro-indicators look good, there are fundamental weaknesses and a very fragile foundation to economic confidence. Manufacturing is in serious recession, and has been for a significant amount of time. We also have a serious balance of payments deficit, which has become the dog that does not bark, in current economic terms, but nevertheless ought to be recognised as a constraint. That deficit also illustrates that, wherever one might be coming from in the argument over the euro, there is something artificial about the exchange rate for sterling, because if the balance of payments is an indication of the overall performance of the British economy, the sterling rate should clearly be lower.

We now face a situation in which the EU is likely to enlarge in circumstances that will aggravate that position. In an intervention on the hon. Member for Dumbarton (Mr. McFall), I made the point that it does not require rocket science to understand—indeed, it is common sense—that, with 10 new members coming into the EU, all of which are committed to signing up for the euro and have very low labour costs, the reality will be that much of the new investment generated within the new, enlarged EU is likely to go to those countries in almost any circumstances. The United Kingdom will also become the most disadvantaged member of the European Union if we do not resolve the uncertainty about our future relationship with the EU. This will involve not only a failure to attract inward investment but British investment relocating to more competitive parts of the European market.

As is traditional with the Chancellor, the Budget was full of all kinds of complex initiatives and undertakings on which he will report back in due course. Some might yield positive results; some will probably be little more than gimmicks that might never be heard of again. We must accept, however, that consumer spending, which has sustained the economy and kept the UK growth rate performing relatively well, is fundamentally based on the inflation of our internal property values. There are two problems with that. One involves the extent to which our trading partners will indefinitely allow us to trade with the world on the basis of simply rebasing our own property values. The second involves the extent to which internal confidence will be maintained. People might have borrowed against the increased value of their property and, in the situation that we are approaching, in which the property market is levelling off or might turn down, that confidence will no longer be there.

Two further problems will result from that. People who have borrowed in that way will find it difficult to maintain their payments, and people who would have borrowed will be discouraged from doing so. That will take some of the growth pressure away from the economy. All of that could lead to what everyone agrees are rather optimistic forecasts by the Chancellor being proved to be extremely optimistic. We could then find ourselves in difficulties. We are not there yet, which is why my right hon. and hon. Friends acknowledge that the level of borrowing has had to be increased compared with the previous forecast. That is significant and the trend is worrying, but we accept that in the current year it is legitimate to operate on that basis. It may be more difficult to do so in the years that follow.

The Chancellor mentioned regional policy. He listed a number of initiatives but they did not seem to be radical or substantive. He said that he would try to persuade public agencies to disperse jobs from London. He talked of the potential of 20,000 jobs. He was clearly indicating that there is no darned way in which Government Departments will do that, so he will try to persuade the next line of public agencies to take that course.

We need a dynamic, within the United Kingdom to encourage private investment to go to the regions. I think that the methods of the 1960s would be unacceptable to Members on both sides of the House. We need no directions and no penalties, but a positive dynamic that encourages investment in the nations and regions.

I say as a Scottish Member that when we examine the forecast for Scotland we see with considerable alarm that the population projections are falling extremely sharply. Many of us who live in Scotland and represent Scottish constituencies feel that the quality of life is extremely good. However, it seems to many of us that the more that we train people in Scotland, the faster they leave. We are looking to the Government to provide a dynamic. Devolution is part of the process, but there are United Kingdom policies that are necessary, especially investment in infrastructure and communications, which in a small island can enable people to operate effectively and can encourage growth.

The idea of regional cost indices seems to be rather odd. Presumably it is the precursor to regional weightings based on local costs, which means that market forces will effectively be nullified. That may well meet the social needs of communities but it will discourage redistribution.

In many ways, the home counties are overheated and under enormous pressure. Regions of England, Scotland and Wales are under-invested and do not have constraints. It seems logical for everybody that if we can take away the pressure from London and the home counties and provide dynamic growth in the regions, we shall liberate the entire economy. It behoves the Chancellor to lead that debate in a way that I fear he has not.

I welcome the Chancellor's proposals on petroleum revenue tax, which I think will help to promote investment in the oil and gas industries and offset the damage that the right hon. Gentleman did last year by imposing additional taxes on them. I welcome also the freeze on spirits duty. I remind the House that Scotland produces not only whisky but the majority of gin that is distilled in the United Kingdom. The Chancellor has been confronted by necessity. He knows that extra tax will result in a loss of revenue.

The Chancellor has had a run of luck, and he may still have a further run of luck. All of us wish the economy to succeed, so we do not wish the Chancellor to fail. However, he needs to come clean and to recognise that there are imbalances and structural weaknesses in the economy that he cannot get away with indefinitely. He would be better advised to act now to ensure that we maintain investment and to address the imbalance. If not, he will find that he has an economy that is struggling and will not provide the revenue to fund health, education and public service improvements and the redistribution that all of us want. It is a warning. The Chancellor must do more than he did today to show that he understands that.

6.49 pm

Mr. Andrew Tyrie (Chichester)

The key question is whether the economy is better placed or less well placed than it was in 1997 to weather what could be quite a bumpy international economic ride, with a lot of macro-economic adjustments that need to take place in the American economy over the next few years. American consumption as a proportion of disposable income is more than 100 per cent. There is a need to retrench and consolidate, and the American economy may not be such a great engine of growth for the next year or two as it was in the 1990s.

It is clear that the economy is in much worse shape than in 1997. Borrowing is rising, and it will more than double in the projections for 2003–04: an increase from £13 billion to £24 billion. Spending is high, rising and probably running at unsustainable levels. Most significantly of all, taxes and the tax burden will continue to rise throughout the planning period, which will erode incentives for wealth creation.

I am particularly struck by an absolutely crucial graph on page 261 of the Red Book, which for the first time shows that Labour intends to increase the tax burden year on year throughout the planning period for the seven years to the end of the decade. Every other Red Book that Labour has published showed that there would be a blip up, arguably to pay for a little extra investment in the public services, and that that would plateau and then start to fall. This time, Labour has been unable to use that trick; this time, it has to admit, as the whole British public will get to know, that the tax burden is to rise every year. Labour has told us so, and now we know.

The story of how we reached this state of affairs, which although not quite disastrous represents a much weaker position, can be told in three phases. The first was the new Labour phase—the first two years of the Chancellor's Budgets when he kept public expenditure under control, the only major tax grab being the abolition of advance corporation tax, and when monetary policy was farmed out to the Bank of England.

We also had a lot of plausible-sounding economics with the golden rule and the sustainable investment rule, which we all now know are virtually meaningless. The golden rule is meaningless because, of course, it is impossible to distinguish between current and capital spending in the public sector. How can capital spending be defined in an area in which no income stream is secured? The sustainable investment rule has been rendered virtually meaningless by the fact that a huge amount of off-balance-sheet finance is taking place. The private finance initiative is running at massive levels and there are also huge contingency liabilities off balance sheet in the back of the Red Book. The last plank of the original phase 1 economics put forward by the Chancellor was the "neoclassical endogenous growth" theory. The language has disappeared, but the policy is still with us. Successive Budgets have contained one micro-management measure after another, which tried to achieve a bit of research and development here and a bit of internet investment there. That absolutely crazy policy is exactly the way to waste public money and, in the end, burden businesses rather than set them free.

Phase 2 was the two years after the 2000 Budget, which brought about a huge spending increase. It seemed that taxes did not have to rise. That was because the tax yield unexpectedly rose very quickly. There were also windfall gains from sales in the spectrum and one or two other areas. That was a nirvana for Labour. Middle England was happy because taxes were not rising and Labour heartlands were happy because the Government were able to spend more money.

Of course, that did not last. The spending will turn out to be unsustainable, as everything was based on overoptimistic growth assumptions. Even a slight blip in the growth forecast leads exactly to the content of phase 3, which started last year. Phase 3 is the national insurance contributions increase and the decision sharply to raise taxation, which has been continued in this Budget. Allowances have been frozen. That has not been mentioned much in the debate, although it represents another sharp increase in taxation. There is a graph sitting in the Red Book that tells us that, year on year, the tax burden will go up. Who will pay for that? Middle England.

Those three phases of the Chancellor's economics amount to a move from new Labour economics to old Labour economics. We used to have new Labour; now we just have the Labour party. We have what we have always had in this country: a spending binge, which is paid for initially by a bit of taxation, and then, when things do not work out as expected because there is so much complacency about growth, a collapse in revenues as growth tails off. Finally, there have to be massive increases in borrowing. That is what we could be on the edge of now.

The next few months or possibly year or two will be determined by the relationship between No. 10 and No. 11. As far as I am aware, No. 10 still thinks that there is something called new Labour economic policy. The Prime Minister even said a few years ago that he wanted to get taxes down. There is a war on of course, so he probably has not looked at page 261 of the Red Book. Whether new Labour eventually prevails and the Chancellor ends up being put back in his box or moved to some other post, or whether the Chancellor prevails from No. 11 and imposes that new policy on a longer-term basis, will determine not only the prosperity of the country, which will go down the tubes if these policies are maintained, but British politics in the years ahead.

6.55 pm

Mr. John Baron (Billericay)

I welcome certain aspects of the Budget, certainly the efforts to combat world poverty, but it will be a disappointment to both businesses and residents in my constituency, as there is little in it that helps them. Businesses in particular will be disappointed because they have been increasingly burdened with red tape and taxes since the Government came to power in 1997. The Government have produced about 15 new regulations every working day, a significant increase on before. There is little in the Budget that offers relief from that torrent of regulation and taxes.

In the House we are apt to quote august bodies to reinforce our points but what is perhaps more important is to get the views of those at the coal face, those creating wealth in our society. To that end, I sent all businesses in my constituency a pre-Budget survey seeking their views. Despite the views of Labour Members, the overwhelming response was that businesses are wasting much more time than previously on dealing with Government regulations and that those regulations and new taxes are costing them dearly and proving to be a real handicap in the running of their businesses. They were particularly scornful of the rise in national insurance contributions, many believing that that would adversely impact on employment prospects.

Time and again, entrepreneurs are saying that the weight of Government regulation and taxes is slowing growth and in some cases forcing them to downsize. Various statistics bear that out. For example, there were 16,000 insolvencies in 2002, the highest number since 1994, according to the Department of Trade and Industry. Those may be abstract figures to many but they illustrate a growing problem: our decreasing competitiveness. No wonder Digby Jones, director general of the CBI, said last month that the UK's reputation as the place to do business has never been under greater threat.

What Governments tend to forget is that the burden of red tape always falls disproportionately on small firms, which is particularly worrying as they are the lifeblood of our economy. Small companies simply do not have the departments or personnel to deal with increased regulations. It is often the entrepreneur who deals with the paperwork, when he or she would be better employed running the business and creating wealth.

That is the central point. Budgets should be about improving the country's economic performance and wealth creation. We would then be in a better position to give help to those who need it. The relief of poverty should be one of the main objectives of politics but that can be better brought about if we foster personal freedoms within the rule of law, encourage enterprise and allow businesses, especially small businesses, to breathe and thrive. Such an approach will create a more prosperous economy and more wealth from which the Government can take their rightful share to help the truly disadvantaged in society. That will not happen, however, if the Government pile regulations and costs on to businesses because that will hinder enterprise and in turn our ability to help those most in need. The Government have continued to make life difficult for entrepreneurs and the Budget does little to put that right.

It is not only businesses that will be disappointed by the Budget but the millions of taxpayers who have seen many tax increases and very little for it. The Prime Minister said before he became Prime Minister: We've no plans to increase tax at all". We have had 53 tax increases under Labour. The Chancellor seems to have forgotten that spending alone does not solve problems. It is the quality of the investment rather than the amount spent that determines whether extra spending is translated into better quality services.

My constituents, having paid much more in taxes, are now rightly asking certain questions. Commuters are asking why the punctuality and reliability of our trains have declined each year under Labour. Patients are asking why accident and emergency waits are so bad and why they are short of general practitioners. Parents are asking why teacher vacancies almost doubled under Labour, and assaults on—

Debate adjourned.—[Mr. Kemp.]

Debate to be resumed tomorrow.