Finance Bill

HL Deb 23 July 1985 vol 466 cc1130-59

5.9 p.m.

Second Reading debate resumed.

Lord Williams of Elvel

My Lords, in response to the noble Earl's courteous and complete exposition of Government policy, I should like in my turn to pay a somewhat unexpected tribute to the Government, and to congratulate them on the constancy of stated purpose in their economic policy. I believe that nobody can complain that the Government have not stated and restated on many occasions, and with great clarity, the central thrust of their policy. If I may sum it up, it is that inflation must be defeated and the defeat of inflation is the best way to achieve growth and full employment.

All that is quite clear and understood. What is less clear in my mind are the methods that the Government choose to employ in achieving their stated aim. It used to be said, and still is said in certain quarters, that it is the Government's function to ensure a sound financial framework, and that if this is done the real economy will look after itself. It is perhaps said with somewhat less frequency than formerly because the problems of achieving such a framework have proved to be extremely difficult in practice.

To give one instance, if we look at the money supply figures for banking June, to which my noble friend Lord Barnett referred, we see that sterling M1 grew in the second quarter of the year at an annualised rate of 44.5 per cent.; that sterling M3, which is still the market's favourite monetary aggregate, grew during the same period at 23 per cent.; and that PSL1, which is said to be the Bank of England's favourite indicator, grew at approximately the same rate. Furthermore, net purchases of commercial bills by the Bank of England amounted to £0.5 billion and net gilt sales to the private sector were zero.

Apart from presenting the Bank of England not as a lender of last resort to the banking system but as a lender of first resort to the trading sector through its bill purchases, the picture that emerges is one of considerable confusion. This may be due to the Government over-funding in the early part of the year, which was much criticised and which is now being unwound. On the other hand, the existence of the Bank of England bill mountain appears to have the effect of discouraging clearing banks from lowering their base rates, since they believe that this will encourage what they call round tripping.

At all events, none of this makes very satisfactory reading for those who believe that the monetary aggregates bear a close and defined relationship to the future rate of inflation. Again those voices are heard less and less frequently in the land. This is perhaps a good thing since it means not only that greater rationality is entering into economic and financial thinking but that we can better understand exactly what the Government's present counter-inflation policy consists of.

Instead of predicting the sort of rates of inflation which the monetary aggregates that I have quoted might lead us to expect, the Government appear to be forecasting—and the noble Earl confirmed this—a decline from the present rate of inflation of approximately 7 per cent. to around 5 per cent. at the end of this year and to perhaps lower than 4 per cent. in mid-1986. In my view, none of those predictions is particularly unbelievable. They are in fact consistent with what outside commentators are saying.

However, the theory of a sound general financial framework producing these types of inflation figures must give way to something else. The only serious suggestion as to what that something else might be was prompted by the intervention of the noble Viscount, Lord Eccles, and was contained in the somewhat delphic statement made by the Chancellor of the Exchequer to the Treasury and Civil Service Committee of another place a week or so ago—and I quote: To the extent that the pound appreciates it would enable a lower level of interest rates to be consistent with monetary conditions exerting downward pressure on inflation". In other words, counter-inflation policy mark 2 consists of maintaining interest rate differentials between sterling and other major currencies at levels which make sterling an attractive haven for international money. The market figures support this interpretation. The London Interbank offered rate for three months deutschmark deposits is at present 5.4 per cent. The equivalent rate for dollar deposits is 7.7 per cent., and the equivalent rate for sterling deposits is 11.75 per cent. It is these interest rate differentials that have caused the relative strength of sterling and will in turn continue to cause the relative strength of sterling if maintained.

Counter-inflation policy mark 2 has a number of dangers. There are three pre-conditions for the policy to work which I would enumerate as follows. First, the balance of payments must be protected from the relative over-valuation of sterling. Unless this is achieved, the process is self-defeating, since any serious balance of trading or payment deficit would weaken the currency in spite of the interest rate of differentials. Fortunately, as the noble Lord, Lord Ezra, pointed out, the Government have a cushion of North Sea oil and gas protection which has quite radically changed the underlying balance of payment position since 1979 and therefore appears to make us secure from the sort of sterling crisis with which we were only too painfully familiar in the 1950s, 1960s and 1970s. Not since the Spanish Government of the 16th century can any Government have been so fortunate as to have landed in their lap a source of foreign exchange and public revenues at such a fortuitous moment.

The second pre-condition of the working of the policy must be that the Government guess right about the movements of other currencies and their interest rates, particularly the dollar. We live in a world monetary system which is dominated by the dollar, and the Government have therefore to adjust their own interest rate policy relative to the behaviour of the dollar interest rate, which it is unable to affect. Last week showed the particular difficulty of this position.

On Tuesday the Federal Reserve let it be known that it had, in effect, decided to ignore excessive monetary growth in the United States economy in the first half year. The result was immediate euphoria in the United States bond markets. On Thursday, the chairman of the Federal Reserve Board announced that it would be "a serious misreading of the Fed's intention" to conclude that it had eased its stance on inflation. The euphoria in the bond markets changed to collapse. At the same time the release of second quarter United States GNP figures showed a growth of 1.7 per cent. against the flash forecast for the quarter of 3.1 per cent., which indicated a slow-down in the United States economy and hence a move towards easier interest rates; but that was accompanied by a statement by the Commerce Secretary calling for a 25 per cent. decline in the dollar exchange rate against other major currencies. Furthermore, and all in the same week, the President's deficit reduction measures were announced as being stalled in Congress and some congressional officials were predicting that it might be impossible to agree between Congress and the White House on a budget for the year.

One can only sympathise with those in the Bank of England watching these events and trying to pursue a policy of fixing interest rate differentials between sterling and the dollar. It is not in the least surprising that during the past week a confusing set of signals was sent out by the Bank of England and largely disregarded by the major clearing banks. That was the story of only one week. Every week is different and has a different story; yet in order for counter-inflation policy mark 2 to work, the storyline has to be not just closely followed but in many respects anticipated by those responsible for money rates in London.

The third pre-condition for such a policy to work is that a Government following it must be wholly impervious to its side effects. They must not be deflected by the inevitable exchange rate volatility when the storyline is guessed wrongly. They must not be deterred by the destruction of large segments of the domestic manufacturing sector due to high interest rates and imports that are cheap in sterling terms. Above all, they must not be distracted by the prospect of high, lasting and even growing unemployment as the policy takes effect. If they are distracted by any of those, and if they start talking about the middle way or of tempering the wind to the shorn lamb, the policy will be put in question and it will consequently fail.

Even if those pre-conditions are met and the Government persist in counter-inflation policy mark 2 over the next year or two, two serious problems still remain. First, the level of wage settlements in the trading sector is alarmingly high, in spite of pressures. Negotiators on both sides appear to pay no attention, as we were told that they would, to the monetary discipline being imposed by the Government. Not only are average settlements up by an underlying 7.5 per cent., but labour unit costs in manufacturing were up by 7.9 per cent. in the three months to the end of May. The inability of the Government to influence settlements, and the fact that they do not set out with a desire to influence settlements except in certain well-publicised cases, must be a matter of concern since it is an underlying assumption of the counter-inflation policy that realism will enter wage negotiations once the effect of international competitiveness is perceived, given the figures that I have just quoted. There must be a serious risk of an acceleration in the rate of unemployment if the counter-inflation policy is rigorously pursued.

This in turn leads to a second problem of a rather longer-term nature. We are advised on the highest authority to take no thought for the morrow. Yet in terms of economic policy this is not necessarily the most practical way to approach life. In the not too distant future, as the noble Lord, Lord Ezra, has pointed out, the balance-of-payments protection from North Sea oil and gas will start to be eroded and the current deficit in manufacturing trade, which will have been aggravated by the strict application of counter-inflation policy mark 2, will be fully exposed.

It is not enough to rely on service industry to make up the difference. As the Association of British Chambers of Commerce recently said, each 1 per cent. decline in manufacturing exports requires a 3 per cent. increase in the export of services to compensate. In any event, service industry without manufacturing does not make sense, as two distinguished captains of industry have recently pointed out, not least because 20 per cent. of service industry output goes to manufacturing as a customer.

I have deliberately not dwelt on the social aspect of the policy I have been describing, not because it is unimportant but because it is difficult to argue fully. One either cares about the level of unemployment and deprivation in distressed areas, or one does not. If you do not care, no amount of argument will make you do so. I have concentrated on the practical effects of what I believe Government policy to be, for the simple reason that I do not believe that it is viable in the long term. Inflation may be reduced from 7 per cent. to 5 per cent., it may be reduced to 4 per cent., or it may even go down to the figure that the Prime Minister has stated as her target of 3 per cent. The consequences of so doing, if the exchange rate is the mechanism through which this is achieved, seem to me woeful to contemplate.

5.22 p.m.

Lord Bruce-Gardyne

My Lord I must begin by apologising to my noble friend Lord Gowrie for missing the early part of his opening remarks. Your Lordships seem to have taken Questions at a spanking trot today and I must confess that I was taken by surprise thereby. Certainly I found myself very much in agreement with the second part of my noble friend's speech which I heard. I was interested in the contrast, as it seemed to me, between the attitude of the noble Lord, Lord Barnett, and the attitude just expressed by the noble Lord, Lord Williams. I should like to return to that in a moment.

First, I want to comment on what seem to me one or two perhaps not unimportant lacuna' in the Bill before us this afternoon. I revert to what my noble friend Lord King said in his remarkable and important contribution to this afternoon's debate when he referred to the undesirability of the Government being overwhelmed by the art of the possible in politics, and the anxieties he expressed about the Government being to some extent shaken off their nerve.

In two particular respects in connection with this Bill it seems to me that there is supporting evidence for that view. I was sorry that this year my right honourable friend the Chancellor did not in the end continue the work he began in last year's Finance Bill on progress towards a system of greater fiscal equality and fiscal even-handedness. I have to say to my noble friend Lord King that I think any of us who have served in the lower House have to recognise that politics can indeed be the art of the possible. One of the matters that I have found most depressing about the abandonment of earlier plans to extend or diminish the fiscal effectiveness of life offices and the like, and the fiscal treatment of the pension system, was that the Chancellor was I think clearly deflected from his original intentions by a massive lobbying exercise which overwhelmed the nerves of Members of another place on the Government's own Benches. I think perhaps the Chancellor had no option but to abandon his original, more radical intentions.

Again I think the same applies in the area of VAT, to which my noble friend Lord King also referred. Ever since I had something to do with the operation of VAT, I personally have yearned for a much more comprehensive tax, something much more akin to a straightforward expenditure tax which I believe would eliminate so many of the difficult anomalies in our present system. Now that my noble friend (if I may still so call him) Lord Cockfield, has mapped out a Europe sans frontiéres in which the anomalous position of the vast range of VAT zero rates which we have in this country would no longer be tenable, I must say that I wonder about the wisdom of the comment of my right honourable friend the Chancellor that, with the extention of VAT to newspaper advertising, he intended to make no further changes in the scope of VAT in the lifetime of this Parliament. I have always thought that that was the kind of pledge that one was best advised to avoid.

I believe the Government need to look more closely at the whole area of so-called tax allowances. I see that we are promised later this week a report from a distinguished committee, headed by no less a person than the Duke of Edinburgh, which will call in question the wisdom of mortgage interest relief and its retention. I know that this is an almost forbidden subject, not only on my own Front Bench but also, as I understand it, on the Front Bench of the party opposite. Nevertheless, when one contemplates the accumulated evidence of the diversion of so-called housing finance into purposes which have little or nothing to do with housing, when one considers the extent to which the availability of mortgage interest relief must be a contributory cause to the explosive growth of bank credit to the personal sector, and when one bears in mind also that, contrary to much popular belief there is no evidence that mortgage interest relief is of any great benefit to first-time house buyers, though it is undoubtedly a benefit to those later on in the housing chain, I believe that the case for reappraisal of this tax allowance, perhaps above all others, becomes stronger day by day.

I should like to welcome one item in the Finance Bill which does not seem to have attracted much attention. I suppose it does not fit into at least the Opposition's picture of what the Government are about. I refer to the shift in the weight of the employer's national insurance contribution from the lower paid to the higher paid. I think that was a remarkably brave step to take, particularly as no industry was likely to suffer more from that particular change than the newspaper industry in whose comments the Government were bound to be interested. Nevertheless, I believe it was a welcome and perhaps an overdue change.

I am delighted to see that the Government have now promised us a Green Paper on a reform of husband and wife taxation. It has for a long time seemed to me illogical that we give a positive fiscal bias in favour of the two-breadwinner families at a time of very high unemployment. I agree with noble Lords who have defended the large increase in part-time female employment. That is one thing. It is another thing to give a positive fiscal stimulus to the two-breadwinner families. I am glad that the Government intend to review the scope for reform in this area.

I want mainly to concentrate upon the comments of the noble Lord, Lord Barnett, and also upon the comments, in the same area, made by the noble Lord, Lord Williams. I must admit that the description of the noble Lord, Lord Barnett, of my right honourable friend the Chancellor was one that, for once, I found rather difficult to recognise. I was going to be tempted to quote what the Chancellor said to the Treasury and Civil Service Select Committee last week. But the noble Lord, Lord Williams, took the words out of my mouth, and I shall not repeat them. How the noble Lord, Lord Barnett, comes to the conclusion that my right honourable friend the Chancellor remains dedicated to the exclusive observance of the monetary statistics as the only guide to the achievement of lower levels of inflation, I am not sure. It certainly seems to me that the evidence, based upon what my right honourable friend said to the Treasury and Civil Service Select Committee last week, reiterates that, in practice, it is the exchange rate that is today at least as important an indicator in the Government's mind of the condition of credit and the condition of inflation prospects as any of the money supply figures.

We have even had money GDP elevated to some sort of substitute target. I have always regarded money GDP as a signpost and not as a target. I have always wondered whether you learnt much about the way you are progressing along a particular route by putting a signpost beside you on the dashboard. But that is apparently what the Government have done. It is a little unreasonable of the noble Lord, Lord Barnett, to accuse the Chancellor of being myopic in his obsession with sterling M3. Curiously enough, I believe that this might be a charge that could almost have been levelled more in recent months at the Bank of England. That is a strange reversal of roles since it was the Bank of England that traditionally worried about the exchange rate while the Treasury worried about the monetary aggregates.

I believe that there has been a shift in Government attitudes. It is a shift that I welcome. I thought that during the course of last autumn the markets were given too much indication of a determination to bring down interest rates at any price. The attitude of the authorities seemed to be that if the exchange rate steadied in its downward path for a moment, then interest rates would be thumped upon the head, and that if the exchange rate started to resume its fall, then interest rates would not be allowed, if the authorities could possibly help it, to rise. Once the markets had been given that sort of one way signal, they inevitably took it with the consequences that we recognise. There has been an important shift since then.

The noble Lord, Lord Barnett, said that if only the Government would cease to be so obsessed with the monetary aggregates, they would then get interest rates down and thereby achieve lower inflation. I must say that I find this a very large assumption. I would have thought that the most likely consequence of the sort of reduction in interest rates for which the CBI, for example, has been clamouring, would be liable to be a substantial drop in the exchange rate. Our experience from last year suggests that this feeds through relatively fast into a rise in domestic prices. Whether or not it would be possible to achieve the sort of drop in interest rates for which the noble Lord, Lord Barnett, was appealing, I would not know. But if it were achieved, I suspect that the impact on inflation in the medium term would be very much the reverse of what he was suggesting.

Of course, we have all heard the grim warnings, the increasingly strident warnings, from the CBI about the impact of the level of interest rates. My noble friend Lord Gowrie interjected in the speech of the noble Lord, Lord Barnett, to ask why, if industry was so seriously affected by the high level of interest rates, it was investing as if there were no tomorrow. So far as I could tell, he did not receive any response to that. I believe that the truth is that at a time when so many businesses are accumulating almost the legendary cash mountains and at a time, too, it is true, when we are approaching the end of a period of initial allowances, it is hardly surprising that there should be such a high level of investment. What does seem to me surprising is the high level of bank borrowing that persists to the corporate sector. I agree with the noble Lord, Lord Williams, that it is very hard to resist the conclusion that some of this—quite a lot of it—must be intended not for purposes of investment or for trading but for the more refined purposes of round tripping. It is very hard to avoid that conclusion.

What is clear, I believe, is that the CBI is clamouring not so much for a drop in interest rates for its own sake but because it holds the view that this would bring the exchange rate down, thereby making it easier for manufacturers and service industries to pass on the sort of earnings increases to which the noble Lord, Lord Williams, referred. I do not find it remotely surprising that the Chancellor should display relatively little enthusiasm for this approach. I would be very worried if he did display enthusiasm for it. I feel much more confident now that the Government are prepared to continue with a tight hold on interest rates and a tight hold on credit conditions generally until there is much more evidence that inflationary pressures—the sort of pressures to which the noble Lord, Lord Williams, referred—begin to abate effectively.

I wish to conclude by referring briefly to the other plea that we have heard from the noble Lord, Lord Barnett, and the noble Lord, Lord Ezra, for spending on the infrastructure. There has been much reference by both noble Lords to the reports of Mr. Manser and by NEDO. I have not had the privilege of reading Mr. Manser's report. I hope to do so shortly. I must say, however, that I found a great deal of logic in the suggestion of my noble friend Lord Gowrie that if the FCEC commissions a report, it is relatively likely that it will recommend additional civil engineering work.

As to the report of the NEDO staff, to which the noble Lord, Lord Ezra, referred, I do not know whether the noble Lord read the report. I did. It struck me as being a remarkably flimsy document. The staff of NEDO had gone round asking people like traffic officers on local authorities whether they could point to additional works that they could do if only they had additional funds. They were astonished to discover that these worthy gentlemen regarded themselves as the Cinderellas of the local government system. Really, it is a little naive to imagine that if you go around asking for anecdotal evidence from officers responsible for certain programmes, they will turn round and tell you that they have all the money that they want and see no purpose that could be served by having any more. Frankly, I do not think that the report bore out at all the sort of weight that was put upon it. We need much more clear and conclusive evidence than we have had to date that being held up for lack of funds is genuine work on the infrastructure that would serve a positive purpose, apart from the simple expectation that it would serve a make-work purpose.

Lord Ezra

My Lords, the report of the meetings of the NEDC on 10th July appears to suggest that more importance was attached to this document than the noble Lord, Lord Bruce-Gardyne, indicates.

Lord Bruce-Gardyne

My Lords, there was indeed evidence that importance was attached to the report. I just wondered how many people had actually read it. Indeed, if one reads it, I wonder whether it bears out the type of conclusions which the noble Lord and others seek to draw from it.

I wish to conclude my remarks by saying that I very strongly agree with my noble friend Lord Gowrie and disagree with the noble Lord, Lord Barnett, that there is every prospect of both a continuing rate of growth and a resumption of progress towards a much lower level of inflation. It is against that background that I think that, on overall balance, we can welcome the Bill.

5.41 p.m.

Lord Houghton of Sowerby

My Lords, I wish for a few minutes to deal with some of the matters which are in the Bill itself. I know that there is a certain freedom and a strong temptation to regard a debate on the Finance Bill as an occasion to study our economic and fiscal policies. However, when there are important matters in the Bill itself which should concern your Lordships' House, then someone ought to say what those matters are.

I listened with great interest to the speech of the noble Lord, Lord King of Wartnaby, and I wondered in what condition our system of personal taxation would be were it not for pay-as-you-earn. I also recall that never in our fiscal history have we introduced a system of tax deduction from wages and salaries except in wartime. We have utilised a scheme which was introduced during the war for the foundation of our permanent system of personal taxation. None of the thresholds of personal income tax, the rate hands, nor the top rates would be collectable in present circumstances but for the system of tax deduction from wages at source. Nor should we have had as successful a scheme of VAT had we not laid the foundations by the introduction of a widespread purchase tax also during the war.

That suggests that we rely—as we do—very heavily indeed for the success of our direct and indirect taxation systems upon the agencies of unpaid, conscripted taxgatherers. They are the employers who deduct the pay-as-you-earn. They are the traders who pass on the VAT to the customer at the time they are delivering the goods and receiving payment for them. An enormous proportion of our total revenue depends on this twin agency of taxgatherers. No wonder that, as time goes by, we realise that our taxation problem is not confined to getting the money out of the taxpayer, but is confined to getting the money out of the taxgatherer.

Attention has been drawn more than once recently to the fact that there are several billion pounds of tax collected under pay-as-you-earn or through VAT, which are outstanding, which have not reached the Revenue for weeks and weeks, and which are long overdue when they do come in. Indeed, there are several billion pounds-worth of tax in the hands of the unpaid taxgatherers which amount to a permanent interest-free loan. That is a situation which, in part, the Keith Committee on enforcement was asked to consider. That committee has reported at intervals in recent years and it has dealt in one large volume with the pay-as-you-earn problem and the VAT problem. It has looked at the powers of both the Inland Revenue and the Customs and Excise to enforce the efficiency of their collection of taxes. That is the matter to which I wish to refer because the first instalment of the Keith recommendations relates to VAT and they are to be found in the Bill before us this afternoon.

A whole section of the Bill creates for the Customs and Excise a new code of civil penalties. In fact it has transferred matters from the criminal to the civil fraud law invented for the purpose of the Customs and Excise to get their money in without recourse to the courts by using powers conferred upon them for surcharges; for penalties; for conduct involving dishonesty, serious misdeclaration, failure to notify, the unauthorised issue of invoices, breaches of walking possession agreements and breaches of regulatory provisions. All those matters now come under Customs and Excise law and have been withdrawn from the criminal law and the other branches of the civil law.

It seems to me that we are getting very near to the liberty of the subject and our system of jurisprudence in this field of the powers of departments to exercise powers which are generally in the hands of the courts. The Customs and Excise civil servants are given the power of arrest. We are witnessing a significant transfer of powers from the system of jurisprudence in the courts to the commissioners of revenue who, after all, are civil servants and are exercising their powers by letters patent.

Next year we are promised the second instalment of the Keith recommendations, which will deal with enforcement of income tax and allied taxes and with the problem of unremitted pay-as-you-earn. I imagine that certainly if next year the Finance Bill includes the recommendations of the Keith Committee Report it will contain some startling clauses which will be nearer still to the problem of the liberty of the subject in the taxes system.

What are we to do about this situation? All that the Keith Committee can think of is the stick—enforcement, enforcement officers, enforcement sections of departments. I wonder whether enforcement will achieve the desired purpose. After all, this vast army of unpaid, conscripted taxgatherers find their duties to the Government in many cases irksome, unrewarding and somewhat of a thankless task.

When looking at the report of a fairly large company I find an item which illustrates the situation in many companies throughout the country. The item is "Tax and levies collected on behalf of the Government". It says that the value added tax on sales amounts to £176 million and income tax and social security contributions deducted from employees amount to £52 million. That makes a total of £228 million in the year from that firm alone, which is three times its own liability for corporation tax, national insurance and rates.

I wonder whether we shall be able to continue this system, indispensable as it is to our taxation arrangements, on the basis of applying the stick and turning the screw on those who occupy a key position in the whole enterprise. Is there another way? Shall we have to find another way? I believe that we shall have to do so. The taxgatherer today, who is paid and salaried, is largely occupied in seeing that the unpaid taxgatherers are kept up to scratch. If the unpaid taxgatherer goes on strike, then the penalties under this Finance Bill can pursue him all the way to jail. But if a salaried tax collector goes on strike, he is welcomed back and told that all is forgiven. Is that the way we are going to conduct our tax collection affairs?

The penalties for neglect and delay are increasing, but we have been hearing about penalties all our lives. I remember first hearing about the scandal of tax evasion, and the intensification of enforcement that was needed, in 1905, when my father told me about it and when tax was 9d in the pound. In all the years since we have been talking about the same thing in the same connection, and not apparently achieving as much success as we desire.

I am not being frivolous when I suggest that we might try a modern approach to the unofficial, unpaid, conscripted taxgatherers. Offer them some inducement for prompt payment. Why not? Why should we assume that duties under statute law placed upon the citizen shall be discharged free of reward, with few thanks, and with penalties if he fails? That is what we do. "As long as you collect the money and hand it over promptly, we will send you a receipt. It will not even say 'with thanks'. But if you fail, then you will feel it on your backside, because we are going to punish you for failing in your obligations to the state."

This belongs to the Victorian era and beyond. It is not a modern system of debt collecting at all. We ought to offer, alongside a stiff tariff of penalties for neglect or default, an attractive tariff of discounts for prompt payment. Is there anything wrong with that? Would it not help? Would it not induce a better spirit among those who are doing this responsible task?

After all, it is agency work. It is not a personal liability of their own, it is agency work. Why should they not be rewarded for it? It would be regarded as a scandal if they all got the MBE, but we do not even do that. I have yet to see anybody in the Honours List for, "40 years of faithful tax collection free of charge, and without thanks hitherto". No, we do not get that. It is for, "political services", whatever they are.

This system that I have been thinking over for some time ought to be examined: inducements. The tax collector can no longer take the high moral line on the payment of tax. That is all gone. There is too much injustice in the tax system at the present time to leave any idea of obligation to pay on moral grounds. We have to be realistic. We are in a new age. We may call it materialistic, we may call it what we like, but we are moving into a new age where people are looking quite differently at their obligations to the state and to other people too. Anyway, there it is. I leave it to your Lordships to ponder on. Nobody else has mentioned it, and it is probably a refreshing interlude in an otherwise obscure debate on our economic affairs.

5.54 p.m.

Lord Harmar-Nicholls

My Lords, I found the noble Lord, Lord Houghton of Sowerby, refreshing. I could understand what he was talking about. I understood his message, and I cannot say that about a lot of the debate which went before. I have a great interest in what he said. Those who were in your Lordships' House in 1975–76 may remember that I tried to do the almost unforgiveable: I tried to persuade your Lordships not to pass the Finance Bill because the Government of the day had put forward a Finance Bill which I thought was out of order.

In that Finance Bill they had tacked on to a Money Bill the power to break into houses and desks. This was an infringement of freedom. I argued then that that tacking on, which was against the agreement of 1911, was in breach of the compact between the two Houses. If they wanted to interfere with the freedom of the individual, it ought to have gone through the two Houses in the proper way and be justified. That is pretty much along the same lines as the argument of the noble Lord, Lord Houghton.

I hope that my noble friend Lord Gowrie listened to what the noble Lord said and will pass on to his right honourable friend the Chancellor the constructive and sensible suggestion made by the noble Lord. Through the ages the most hated man in the community was the tax collector. When the kings wanted their taxes they had to send a posse of soldiers to go with the tax collectors to protect them from the anger of the people who had to pay the taxes. The result was that between the taxpayer and the tax collector there was this rift.

One of the problems in our industrial relations today is that the people who have the taxes deducted under statute, the people whose wage packet is that much less because under statute tax has been deducted, do not always understand the situation. Their anger at what they think is the lower level of money in the packet is directed at the employer who is paying the lot, rather than at the Government whose wasteful spending has caused that amount of deduction. I hope that what my noble friend has heard he will pass on. With that sort of inducement, rather than the stick, we might get tax collecting at a level where it would not be such a painful process, and would be better understood. I had not intended to say that, but was induced to do so because the noble Lord's speech was refreshing and good.

I wanted to say that for 34 years I have been listening to debates on Finance Bills, and for the first half of that 34 years I understood what the speakers were talking about. But it has now got to a level where I frankly do not understand the language. If my noble friends would admit it, I would bet that nine-tenths of them do not understand it—M1; Mo! My noble friend, who is an expert on these matters, said that he was not sure whether that was a signpost or a target. The experts do not understand their own jargon and their own language. How are we, who are not expected to be expert in this matter, supposed to go along with them?

I hope that, if it is possible, we can get away from this battle of research assistants. The noble Lord, Lord Barnett, is almost a research assistant in himself. We have always looked on him in that way and he has been very valuable. But it is now a battle of research assistants—the research assistants on the official response from the Opposition Benches; the research people who advise the Treasury. It is a battle of research assistants.

Lord Mishcon

They are not research assistants, my Lords.

Lord Harmar-Nicholls

That is the name that is given to these people who come over the Atlantic nowadays to tell us how to get on and do things. The point I want to make is that I would like the debate on the Finance Bill to be as I remember it. I should like to see contributions from people who are having to run businesses and having to run industries; the people who have to sign the cheques and be responsible if things go wrong, or have the responsibility of getting the money in to get the cheques honoured. I should like to see them playing a bigger part in these discussions on the Finance Bill.

We have many great industrialists who could give good advice if they wanted to, but they are never here. They ought to be here. We have had one, my noble friend Lord King, and, my word, what a valuable contribution he made as a consequence of knowing what it is all about! I should like to see them here, I should also like to see more people—and this is the only reason why I am speaking now—in my category, if you like—

Lord Mishcon

Oh, no!

Lord Harmar-Nicholls

That of course is the understandable response from a lawyer. The people I refer to as being in my category are those who still run their private companies, their family businesses. I am not talking about pople in the big league, who talk in billions. I am tired of billions. That word is so used that nobody understands the amount really involved.

This week I have had to make a decision as to whether or not we would spend £500,000 on certain refurbishing and certain extensions to do with a business which employs people and which is making a contribution. If that £500,000 goes wrong, I shall be responsible for it. It is in that context, having done that for 50 years—so I am not talking about my book—that I wanted to make a comment to the noble Lords, Lord Ezra and Lord Barnett, so that I could get their comments on what I want to say now. When they were pushing for more of the nation's money to be spent on infrastructure they made an appealing case and said that we ought not to let our infrastructure tumble apart because it needs all this money spending on it. That can be a very attractive argument, but it could have some kind of appeal which was damaging if it was not looked at in a little more depth from the point of view of those who have to pay for it.

When the Government of the noble Lord, Lord Barnett, was in power, and the noble Lord himself was Chief Secretary to the Treasury, and perhaps mainly responsible, they were borrowing all this money and the national debt went up more during the last five years of a Labour Government than it had risen in the previous 300 years. It went up from £45 billion to £95 billion and the interest on the national debt which was being committed was £9 billion a year. That £9 billion per year, I should tell the noble Lord, Lord Ezra, is just about the average income we have had from North Sea oil.

All of the income from North Sea oil has been utilised in paying the interest, not repaying the capital, on the money that his noble friend borrowed and spent. How can they go on suggesting that the income from North Sea oil ought to perform all the miracles it has sometimes been said that money ought to be spent on, when it is already in pawn? The extra borrowing in those years was not done because people had confidence in the way our country was being run and the way it seemed to be going. The strength of being able to borrow at all, our collateral, was the world's knowledge that we had North Sea oil and its potential. I should be a little chary of talking about how we should spend the income from North Sea oil better in the future. We have already spent it in the past and we ought to keep that clearly in mind.

The argument about the small businessman that I wanted to talk about is that in the days when that money was being borrowed and spent the tender prices quoted to us when we wanted something done in our small businesses went through the roof. We could not afford to pay the tender prices that contractors and the building industry generally wanted to do the work, because of the availability of these big contracts at almost any price where the money was going out pretty loosely. This week, and indeed this year, we are spending money in our small businesses—though I may have been spending only £2 million during the last three years and there are a few thousand in my boat who also are spending £2 or £3 million. However, if that is added together it amounts to the billions we talk about which might be spent on infrastructure. If it reaches the point where we are so spending taxpayers' money on infrastructure that it greatly puts up the tender prices, they may be doing work on the nation's infrastructure but the contractors will be pricing themselves out of the private market and therefore will not be adding to the employment market and adding to the nation's wealth which is just as useful.

Lord Ezra

My Lords, the noble Lord is very eloquent in his point of view about running a business. But the CBI put entirely the opposite case. The CBI said that if the infrastructure services—on which industry depends to move its goods, which ensure that we receive adequate water supplies and everything else—were not kept in good repair then the ultimate cost of putting that right, when leaving it could no longer be avoided, would be considerable. In the meantime much damage would be done to industry.

Lord Harmar-Nicholls

My Lords, I accept that absolutely. That would be a basis if nothing was being spent on the infrastructure. I am arguing that we have to be sensible in our expenditure on infrastructure. The noble Lord only has to get into his motor car and drive up to Leeds to find the number of times he is stopped while men are digging up the main road to repair some infrastructure, or in the side streets where they are putting in extra electric extensions or doing some such thing. Quite a lot is being spent on infrastructure.

In the old days when I could not afford the tenders because of the way his noble friend had put up the prices with his easy spending of money, what did I have to do? I had to make use of my own maintenance staff to patch up and do things because I could not afford the prices I was having to pay for new structures.

Lord Bruce of Donington

Oh!

Lord Harmar-Nicholls

My Lords, the noble Lord will know what I am talking about because he is an accountant. I have no doubt that the books he has had to deal with from which he has found this has happened have been innumerable. The reason I shall not withdraw on this is that I know what I am talking about. I am saying that if my noble friend and his right honourable friend the Chancellor are persuaded about the need for infrastructure beyond what is sensible at the present time, whatever may be gained in employment terms may be lost in employment terms in the private sector because people are paying extra money to have work carried out instead of making a contribution to increasing the wealth of the country.

I have a great respect for the noble Lord, Lord Barnett, but I do not know how intimately he has been connected with the small business structure that I am speaking about. But in my book I find that keen tendering for the work I want done is much more important than the interest rates that the bank charges. A keen tender price down to the level I can afford is more important to me than whether the amount I have to pay to the bank if I borrow money is 1 or 2 per cent. above or below a certain figure.

Many of the businesses, and mine is one—I hope it is because of reasonable management in the past—use their own money. Many of us do not necessarily use borrowed money, which is affected by interest rates. We do what private industry by and large usually does—not in line with the myth that when you make a profit you turn it into cash, go to Cannes or do some silly spending: we usually invest money again and nine times out of 10 the amount of help we want from the bank, where the interest rate is involved, is only a fraction of what we shall actually spend. The opinion I am giving to my noble friend is that if I could choose to live in an atmosphere where the tender prices are keen and acceptable, I should prefer that to a 1 or 2 per cent. reduction in the borrowing rate for money, that nine times out of 10 I do not want to borrow.

The only point I want to make is to balance up the persuasive arguments that have been used in this House and are continually being used outside urging that we must not let the infrastructure fall apart. Of course, we must not let it fall apart, but to pretend that nothing is being spent on it—when if we look in the Estimates we find that there is more being spent on it now than there has been for many years—is a misrepresentation of the facts. If we encouraged any Government to borrow more money, thereby getting in even worse trouble than we were in when we borrowed against North Sea oil, we should be putting round our necks many more problems than we should solve in a desire to help what we hope is only a passing problem.

I do not want the Government to neglect the infrastructure. I want them to pay proper attention to it so that we are not losing out. But I ask my noble friend not to be persuaded, because it is thought that there might be one or two cheap votes in it, to move away from his policy and thereby injure the private sector and the smaller businesses, which, at the end of the day, make up a bigger part of the productive capacity of this country than do the CBI or any of the other organisations.

6.9 p.m.

Viscount Chandos

My Lords, my relative youth and greater inexperience do not permit me to set this year's Finance Bill in the same historical perspective as the noble Lords, Lord Harmar-Nicholls and Lord Houghton. I hope your Lordships will forgive a speech which looks forward more than backward.

The noble Earl, Lord Gowrie, has introduced the Second Reading of this Finance Bill with his customary vehemence and vigour and once more argued the case for the Government's economic policies—indefensible as the noble Lord, Lord Barnett, said—to the height of his rhetorical abilities. It has been a long and sometimes heated session of your Lordships' House, now coming to an end. The noble Earl and his colleagues on the Government Front Bench have had to endure many setbacks and disappointments, as illustrated by the withdrawal of the Bill announced earlier today by the noble Lord, Lord Denham. Your Lordships' House quite rightly has no powers to amend the Bill before it today, even in the age of television, so rather than comment on any of the details mentioned in the Bill I will reply with enthusiasm and relish to the challenge proposed by the noble Earl to answer his three questions honestly and simply and, I hope, rather less patronishingly than the noble Earl himself posed the questions.

Is real growth desirable? Yes, it is, unequivocably and undoubtedly. There may be people in every walk of life, in every political party, including the noble Earl's own party, whose personal interests and priorities embrace ecological and environmental matters first and foremost. I am sure that they will be encouraged and reassured by the noble Earl's sympathy here and there for their views. My noble ally, Lord Ezra, in answering the noble Earl's first question in the same way as I, specified that real growth was desirable so long as it served the people of the country and was not at excessive cost to the environment.

If the innuendoes of the noble Earl about differences in economic policy between my own party and that of the noble Lord, Lord Ezra, related to the strong, well-argued case made by some members of the Liberal Party but also by members of the Social Democratic Party to consider most carefully the environmental impact of every type of industrial development, let me say this to the noble Earl. I welcome that critical questioning from within the SDP, from within the Alliance and from every other quarter. It is vital that business in both the private and public sectors as well as the Government themselves openly and fairly consider the environmental aspects of economic growth, without in any way implying a lack of commitment to that growth.

The Prime Minister frequently prefaces her bold and forthright assertions on economic policy with the phrase: "It's perfectly simple". The noble Earl, Lord Gowrie, in opening his speech claimed that the Government's economic policy was simple. Many of your Lordships may well agree that it is simple and that many of the measures applied are assuming a level of simplicity in the real world which is totally unjustifiable. Every decision in economic and social life requires many different factors and interests to be taken into account and it is best that these are aired openly and freely where their validity can most easily be judged. There is less disagreement between the Social Democratic Party and the Liberal Party on economic policy than between one wing of the Conservative Party and its centre, let alone between the extremities of dry puritanism and of wet paternalism.

The second question was this. Has real growth taken place? My noble ally, Lord Ezra, has already answered that one better than I could, but not, I should hasten to add, any differently from how I would have answered. The noble Earl, Lord Gowrie, will find no evidence of these illusory differences between the two parties in the Alliance here. The Government would have had to display economic ineptitude and obduracy even beyond their actual record in order to achieve zero growth in the economy during the peak years of North Sea oil production. The devastation of the country's industrial and manufacturing base during this period has, however, been horrifying, far exceeding the shake-out and changes which none of your Lordships would deny were needed and still, selectively and through more thoughtful and careful policies, are needed.

Finally, is the economic growth sustainable? If the noble Earl, Lord Gowrie, means by that, "Can the Government replicate the last five years in the next five?" I believe that they can. But before the noble Earl thinks that the noble Lord, Lord Ezra, and I might disagree on the answer to this question, let me clarify my response. If the Government continue their current policies then I believe that there is every danger that the same type of economic performance will recur: a further decline in manufacturing industry, low growth in the non-oil service sector and continuing but soon declining contribution from North Sea oil production. Heaven, or an early general election, protect us from that!

The noble Earl, Lord Gowrie, and I have disagreed in the past as to whether figures quoted by him have been selective or not, so I will leave him to argue that point this time with the noble Lord, Lord Barnett. Let me just point out to your Lordships that the undoubted boom in investment over the last 12 months has been influenced very significantly by the changes to capital allowances for industry introduced in last year's Finance Act. And, while welcome, these will therefore inevitably tail off, irrespective of the fears of the business world about the risk of a Labour Government. Nonetheless, I will be happy to claim in your Lordships' House over the next few years full credit for the Alliance as our support consolidates and grows in maintaining investment confidence in the face of the two unpalatable and, I think, decreasingly likely possibilities of either the Conservatives or Labour parties having an outright majority after the next election.

On what the noble Earl has rightly called a lovely July afternoon, I think that I should find favour with all sides of the House and not just those who disagree with me if I kept my other remarks brief. On the Motion of the noble Lord, Lord Barnett, on the Budget which introduced this Bill last April, I said that the Budget was dull and unimaginative. And I was not alone either in your Lordships' House or among outside commentators. The Chancellor of the Exchequer has recently talked of the importance of following the middle way—perhaps a sign that he has now got his doubts about the virtues of the radical Right; though I have been told that we were meant to understand this reference to the well-known phase of the noble Earl, Lord Stockton, as being ironic. I wonder whether the noble Earl, Lord Stockton should allow such irreverent pilfering of his copyright to go unchecked. I am somehow reminded of the recent law suit in which two rival hamburger chains disputed the right to use the expression "Big Mac"; but perhaps that is both irrelevant and irreverent as a precedent.

The Prime Minister, the First Lord of the Treasury, must however take precedence over her Chancellor. She has recently reaffirmed the commitment of herself and her Government to more years of radical policies. In case I am accused of trying to find major differences of policy within the Cabinet when of course there are none, or at least not as much as between the Cabinet and many of the Conservative Party's most distinguished Back-Benchers in the House of Commons, perhaps I should compromise and suggest that the Government are pursuing policies epitomised by the radical Right, middle way. Judged by this magisterial phrase, or, for that matter, by any part of it, this is still a dull and unimaginative Finance Bill introduced by a mouse of a Budget speech.

The noble Earl, Lord Gowrie, found time during his speech, between asking the question which he thought would clean-bowl the batsmen at both ends simultaneously and concuss the wicket keeper as well, to mention some of the reforms, simplifications and incentives that can be found through careful research within the Bill. I am delighted that research and development can now be financed by business expansion scheme funds and that an attempt has been made to prevent property development from being so financed. I am still doubtful, however, that many new businesses are financed by business expansion scheme funds which would not otherwise have found backing, without the loss of revenue to the Exchequer associated with the business expansion scheme.

The simplifications to the astoundingly complex rules on capital gains tax are welcome but they still leave a maze of regulations and practices which baffle most taxpayers and enrich their financial and tax advisers. Perhaps I may therefore commend to the noble Earl, Lord Gowrie, the Green Paper published last week by the Social Democratic Party under the distinguished editorship of Dick Taverne, entitled Fairness and Enterprise, which I believe demonstrates genuine and potentially fruitful radicalism in simplifying the tax stystem.

Based on revenue-neutral assumptions, national insurance would be abolished and a higher standard rate of tax introduced. Business "perks" would be taxed at their real economic value and mortgage relief restricted to an amount equal to that saved by a standard (rather than by a higher) bracket taxpayer. Capital gains tax would ultimately be abolished, but gains over and above inflationary gains would be taxed as income. All forms of saving, and not just arbitrarily preferred forms, would be subject to tax relief. Capital transfer tax would be made to have effective "bite", rather than the unfair and disingenuous workings of it now.

The Economist, which the noble Earl, Lord Gowrie, quote approvingly in his opening speech in another context, suggested in the same issue that the proposals in our Green Paper could—and I would say should—influence the sadly unradical policies of the Government. The noble Earl, for the first time in my memory, has not quoted in his speech the fascinating book, Inside the Treasury, by the noble Lord, Lord Barnett. I would not wish to prevent him having the time to re-read it during his well-earned summer break, but I hope that he will still also find time to read the SDP Green Paper. If he does not read it, or if he resists its simple, radical and fair appeal, the country will be poorer for the time being; but I am confident that this would only delay, and not ultimately prevent, its ideas being incorporated into the much-needed reform of the country's tax system.

6.22 p.m.

Lord Bruce of Donington

My Lords, I must congratulate the noble Viscount, Lord Chandos, on the fealty he has shown towards his party. I congratulate him on his obvious comfort within the two parties that he has described. However, I disagreed with him somewhat in his description of the speech of the noble Earl, Lord Gowrie. I have not been unknown to attack the noble Earl on more than one occasion, but I must say that today, aside from when he dealt with the question of unemployment, I found his speech and his presentation most agreeable. The noble Earl was disposed to argue and to reason, and therefore, for my own part, I shall seek to respond in kind.

It is abundantly clear, despite the way in which the noble Earl dealt fleetingly with monetary policy as such, that the Government have in fact abandoned monetarism; and, of course, that is long overdue. Gone are the days when the noble Lord, Lord Cockfield, did not argue with but lectured your Lordships on the virtues of monetarism. Of course it is now well known—and, if I may say so, it was abundantly proved by my noble friend Lord Williams—that the behaviour of the money supply, however determined, and the rate of inflation, have both moved in diametrically opposite directions to what was anticipated. The money supply went consistently up, up and up, far beyond the various medium-term strategies that adorn the Vote Office every autumn—far beyond those—and yet, in spite of that, the rate of inflation went down.

The noble Lord, Lord Ezra, gave one quotation from The Times that was apposite to it, and, if I may, I should like (as it were) to "rub it in" by quoting to your Lordships the views of the financial editor of The Times from the issue of the 11th July, which I think disposes of the matter. He said: Although a stage fog surrounded Tuesday's money supply figures, it could not disguise the fact that by the Bank of England's own calculations £M3 has risen in the past three months at an annualised rate of 23½ per cent. This despite a regime of high interest rates which is meant to prevent such a thing from happening". My noble friend Lord Kaldor in fact disposed of the monetarists' argument in the May and June issues of a publication called Challenge. I do not propose to flog the monetarist issue any more. It is as dead as a dodo: the Chancellor of the Exchequer knows it, and the noble Earl opposite knows it. What I will do, however, is to put a copy of the paper by my noble friend Lord Kaldor in the Library, and if the noble Earl, after having read it, finds any reason to dissent, then perhaps he can give a reasoned reply.

I also wish to congratulate the Government on another point. It has at last been perceived that there is a connection between the exchange rate and interest rates. At one time we were told the Government were powerless to influence the economy in any way. I remember the eloquent arguments which came from the noble Lord, Lord Thorneycroft, when he threw up his hands and said, "There is nothing that Governments can do". Of course, we know perfectly well there is something they can do.

The question of interest rates becomes more important, and its association with exchange rates of more immediate importance, when one realises that we are in a rather different situation from that in which we were some 20 or 30 years ago. Today the money swilling around the world is 15 or 20 times as much as is required for the settlement of ordinary commercial transactions internationally. There are vast sums involved, and billions of pounds can change hands every day. Their movement across the exchanges causes rises in interest rates; there can be no doubt about that.

Therefore, it was all the more surprising—it all comes back to this, and, indeed, I hope I shall be able to carry the noble Earl with me—that the ridiculous decision was made in late 1979 to push up the interest rates by something like 5½ per cent. at one fell swoop. The results of that were immediate. Hot money —medium money, swill money, whatever you call it—flooded across the exchanges into this country, and the exchange rate (against the dollar in particular) progressively rose.

The money having arrived in United Kingdom banks at very high rates (which had in fact been set by the Government and not by the banks themselves as a matter of commerce) had therefore to be lent. Banks do not accept money on deposit on the basis that they are not going to re-lend it: they have to do so in order to make a profit. And not only did the money supply rise generally but, of course, very considerable sums were lent to other countries in the world on security which, in the light of hindsight, appears to have been highly dubious, and which is to some extent responsible for the internatonal monetary conditions that we are in today.

That occasioned this terrific rise in the rate of exchange, which meant that our goods became very much more difficult to sell abroad. In fact, as is now known—it is in so many commercial and economic journals now—the step to raise the exchange rate against the dollar to 2.40 and taking other currencies with it, though not to the same degree, was the most disastrous step that this Government ever took. In fact, that resulted in our manufacturing industry having great difficulties in exporting abroad. Concurrently with that, it acted as a subsidy to imports, particularly of manufactures coming into this country.

Lord Bruce-Gardyne

My Lords, will the noble Lord pardon my intervening before he leaves that point? Surely the rise in sterling against the dollar did not commence in the autumn of 1979. It commenced in the autumn of 1978 and was already accelerating well before the present Government took office. Would that not lead one to the conclusion that the second oil shock, so-called, had at least as much to do with the steep rise of sterling at that time as did the increase in interest rate?

Lord Bruce of Donington

My Lords, I am obliged to the noble Lord. I was not saying that all the rise to the figure of 2.40 which ultimately obtained was due to the interest rate factor to which I have referred. As the noble Lord said, it was rising for the very reasons which he has given. But this accelerated the rise. However, what was important was that the Prime Minister herself gloried in it. The Prime Minister regarded it as a virility symbol. She said in another place, "Now we can look the dollar in the face". The very height of the dollar at that time wrought untold damage not only to the exporting capacity of manufacturing industry in this country but also to its competition from imports.

High exchange rates have very frequently been justified, as the noble Lord knows perfectly well, by the fact that if they encourage imports that assists in keeping down inflation. That could be true if it did not at the same time destroy the same manufacturing companies' internal markets. The fact of the matter is that the subsidised imports consisted of only about 12 to 13 per cent. of our total imports. It was the completed manufactures that were in fact subsidised. So the manufacturing industry in this country was faced with undue competition from the finished article, from Europe in particular, and with difficulties in exporting abroad—and all for the sake of the maintenance of the dollar.

We know perfectly well now with hindsight that the exchange rate was fixed too high. The result, in the end, contributed very largely not only to the 66,000 liquidations that have taken place since that time but also to the 33,000 bankruptcies, and significantly towards the 4 million unemployed. That is what occurred.

What I want to be sure about is that we shall not make the same mistake again. What is happening now is that we have an interest rate that is very much too high, and completely unjustified. This is propping up the exchange rate in the United States. This morning the pound stood at 1.41 dollars; and as against the deutschmark it stood at 4.03. These are well above the rates that are normally regarded as competitive by British industry. I am afraid that if we persist in this policy the very tentative recovery that has taken place in part of the economy may again be strangled at birth. This is what the CBI are worried about.

Lord Harmar-Nicholls

My Lords, I hope that my noble friend will not overlook the fact that those rates also help imports. We are a great importing nation as well as desiring to be a good exporting one.

Lord Bruce of Donington

My Lords, I do not feel like arguing with the noble Lord now, if he will forgive me. If he will forgive my saying so, he came into the debate rather late. I am seeking in the main to reply to the noble Earl, Lord Gowrie, and to address my arguments essentially to him.

Lord Harmar-Nicholls

My Lords, to the House, I hope.

Lord Bruce of Donington

My Lords, and, of course, the House itself. Does the noble Lord wish to interrupt again?

Lord Harmar-Nicholls

My Lords, if the noble Lord invites me to interrupt, I was saying that it is not a matter of interchange between personalities. This is a discussion in the House. The noble Lord is talking to the House when he is on his feet at the Dispatch Box. That is all I wanted to say.

Lord Bruce of Donington

My Lords, those noble Lords who interpose in the speakers' list without notice, and without any comment on it, are not entitled to lecture me on the courtesies of the House.

So far as I can make out, the Government's reaction to all this is to resist what, in my view, are the quite legitimate and proper demands of the CBI. There ought to be an immediate reduction of interest rates by at least 2 per cent., possibly even 3 per cent. If that resulted in the pound weakening against both the dollar and the duetschmark to a point where they were competitive under normal commercial conditions, I suggest that this would be quite acceptable to British industry and it would at any rate not further retard the recovery that has taken place over I repeat, a very limited section of the economy.

The Government's reaction to the situation I have described—which has been caused in my view by a quite disastrous apprehension as to which levers of economic power should be used by the Government, and how—has been accompanied by a new factor. In spite of the fact that we have been told so many times by the Prime Minister herself that there is no alternative, we now find that there is a new task force whose specific work is the creation of jobs, a task force which within the old philosophy and certainly within the philosophy of the noble Lord, Lord Cockfield, was inconceivable, because by his definition governments could not create jobs, anyway. Here we have a situation where a new task force has been created to correct matters that must have been under the Government's own nose for the past six years at any rate.

We on this side of the House wish the noble Lord, Lord Young, and his task force the very best of luck. Any effort by any Minister or any Government that increases employment in the United Kingdom is very welcome. We are, however, crossing our fingers and hoping that something may be done. In the meantime—as indeed my noble friend Lord Houghton pointed out—we have the Finance Bill, which contains some very significant changes in VAT. Some 28½ pages, occupying 23 clauses in this Bill, have been devoted to VAT and are bound to make the procedure much more complicated. We wonder therefore whether the right honourable friend of the noble Earl, the Chancellor of the Exchequer, has been in close contact with the noble Lord, Lord Young, who in the White Paper, Burdens of Business, listed VAT difficulties as the highest burden of all on business. As I have said before, we now have a Bill that even further complicates it, and I am sure the House, would like to hear about the real position of the Government.

The other line that the Government have taken since apprehending, but not admitting, their own mistakes is enshrined in the Prime Minister's attack on members of her own Government, whom she has called somewhat irreverently—and I trust that she did not include the noble Earl among them—spineless spenders. I shuddered when I read that observation, and I wondered to whom the right honourable Lady was referring. Then I tried to identify the spineless spenders.

When we are discussing Government expenditure, and, in particular, when the Government are giving their own plans in respect of Government expenditure, it is divided into two categories. Expenditure which they do not like they always refer to as "taxpayers' money". For example, any further expenditure on kidney machines, any further expenditure on keeping hospitals open and any further expenditure on raising teachers' salaries to a fraction of what the top-paid people are apparently now to get is greeted immediately with the expression, "This is taxpayers' money that we have to safeguard". This is one category of expenditure. Expenditure which the Government do not like and want to reduce they always describe as taxpayers' money.

When it comes to expenditure which they are too spineless to cut, they always refer to it as percentages of the gross national product, or as percentages of the total budget, as though it is a matter of no concern. So I suggest that when the Prime Minister comes to consider the spineless spenders she should first consider that, in spite of her declaration at the commencement of her ministry that she wanted our money back, so far, net, we have had expenditure without any noticeable benefit of some £4,000 million, and, even after taking into account the arrangements come to at Fontainebleau, we are due to pay £898 million of taxpayers' money, as I shall call it, next year, £770 million of taxpayers' money the following year and £970 million of taxpayers' money the year after that. I would have hoped that the Government would have been a little less spineless, if I may use the Prime Minister's term, in getting our money back and in ensuring that we paid a more equitable contribution to the Community, bearing in mind the contributions of other countries.

Another example of spineless spenders are those concerned with the expenditure of £360 million in selling off British Telecom at half price. That was a waste of taxpayers' money which was completely unnecessary. The abolition of the GLC will cost the Government £166 million of taxpayers' money; their adventure in Lear Fan will cost them £57 million of taxpayers' money; and the bailing out of JMB will cost them that sum also. So I hope that when the Prime Minister refers to spineless spenders she will deal with those expenditures and will be able to reflect her own priorities as to what taxpayers' money ought to be spent upon. She will perhaps be able to explain why all these expenditures are carried out in priority over other more desirable objectives.

I take the noble Earl's point that we want to bring down inflation. May I suggest to him an immediate practical way of achieving the twin objectives of bringing down inflation and at the same time reducing taxation? All he has to do, in one simple step, is to bring the VAT rates back to what they were when his Government took office. As he will recall, inflation was running at an annual rate of 10.8 per cent. when this Government took over, and the following spring it had reached 22 per cent., of which four points were accounted for by the increase in VAT from 8 to 15 per cent. Here is the perfect solution to his problem. He could reduce taxation, which would benefit, in the main, people in the lower income groups; and he could bring down the inflation rate, possibly by between 2½ and 3 points—a very desirable political objective.

Of course, the Government will not do it. They much prefer to reduce taxation in a manner that benefits the rich more than the poor, because it is vital to their purpose to ensure the dominance of the powerful section of the community as against the poorer section of the community, including the 4 million unemployed who, I can assure the noble Earl, apart from a very few exceptions, would very much prefer to stop rotting their lives away in idleness than to draw unemployment pay.

6.48 p.m.

The Earl of Gowrie

My Lords, I was grateful for the early remarks of the noble Lord, who was nice to and about me. I think he was probably trying to shield me from the ad hominem remarks here and there—although we are quite used to them—in the speech of the noble Viscount, Lord Chandos. Unfortunately the noble Lord, Lord Bruce, rather let himself and the debate down towards the end by some rapid fire ad feminam attacks of a fairly predictable and probably cyclostyled nature and I rather lost the thread of interest in his earlier arguments.

There appears to be some instruction from on high, where the Labour Party, and sometimes the Alliance, is concerned, to refer always to 4 million unemployed. I have to say that I would greatly prefer that figure to he stretched to 10 million, 12 million or whatever the real figure of unwaged people is. It is certainly very considerably higher than 4 million. But there are not 4 million people on the unemployment register, which is the same whichever Government are in power. It is better to stick to the conventions we are used to.

Obviously quite a lot of politics is that of style and tone and we all differ culturally and artistically in the kinds of styles and tones that we like. I have just come back from a visit to the admirable and interesting socialist or social democratic—centre-Left, anyway —Government in Spain. The Ministers there were sad that they were having to take what they considered to be Thatcherite measures, but they were determined not to make any kind of virtue of them. That was a different approach in style and tone from our own.

Speaking for myself, I rather like governments, of whichever persuasion, who do spend money somewhat through clenched teeth. As a taxpayer, I do not find "taxpayers' money" an offensive term at all. I remember being rather pleased, when the present Government came into office, when my right honourable friend the Prime Minister was favourably compared by no less a figure than Mr. Philip Larkin—another person whom I admire—to Sir Stafford Cripps. Mr. Larkin said that he liked his politicians to have a somewhat austere view of public spending and he congratulated, ecumenically, both those figures on their approach.

The noble Lord, Lord Bruce of Donington, asked me—rhetorically I think, but I am happy to answer him directly—what I or the Prime Minister thought taxpayers' money should be spent on. It would not be an unfair political point to say that we have been spending it quite briskly in making up the cuts in infrastructure, as well as other things, which were imposed, by necessity no doubt, when the party which the noble Lord supports was in Government.

We have had, for instance, an increase of 23 per cent. in spending on hospitals, which followed a Labour cut of 35 per cent. Our spending on roads has risen by 25 per cent, and it went down under Labour by 33 per cent. I could go on with these rather tedious statistics. The fact is that no Government are opposed to public spending on sensible things as and when they can afford them. The argument is about what rate of borrowing or taxation at any given moment a programme of public spending can depend upon.

Overall, the debate, through being slightly shorter than our usual economic debates, has, if I may respectfully say so, been very interesting. I believe that my noble friend Lord Harmar-Nicholls was right to tease us about showing off about M0s and M3s from time to time. I have to plead not guilty myself. Although when I was answering a question from the noble Lord, Lord Beswick, I had to use a little of that jargon, I have tried to keep it out of my speech.

I say to the House, and particularly to the noble Viscount, Lord Chandos, that I was not trying to bowl anybody out with my questions. Nor were they rhetorical. It is fair to ask critics of the Government—and under our system there should indeed be critics of the Government—the three questions as to whether growth was good, whether it was taking place, and whether it was sustainable. In answering those questions myself I was simply challenging others to come in on them.

I totted up the score and was rather glad to conclude that most speakers took up my challenge. One or two did not. I am not sure whether the noble Lord, Lord Bruce of Donington, passed the test but I will carefully read what he said in the Official Report tomorrow.

Most noble Lords took up my challenge, and most came to the conclusion that growth was a good thing, that it was taking place, and—some believed—that it might be sustainable. Others were more sceptical. I myself simply said that it would depend on our stars—our external fortunes—but also very much on ourselves.

The other point of sharp disagreement between myself and some speakers—notably the noble Viscount—is the extraordinary talk of oil as if it were a purely fortuitous bonanza. To some degree all economic raw materials or assets are a purely fortuitous bonanza. What really counts is the activity they generate and how one makes use of them. I consider that the British economy—and I am not speaking about this Government, because oil was there during the previous Government as well—has made extremely sensible use of North Sea oil. It has used North Sea oil and its revenues as a cushion to the British people during a very painful transition in their economic circumstances.

The speech I perhaps missed most in our debate today was that made in the previous debate by the noble Lord, Lord Marsh, which both time and our parliamentary conventions forbid me from repeating now. The noble Lord pointed out in that speech that the transitions from an old manufacturing, employment-intensive, heavy industry to a different kind of industry were liable to take place and were taking place anyway; nothing could stop them, and we should thank goodness that oil had made those transitions a little easier for some of the people affected by them. When this period is looked at historically, that is what we shall be most grateful to North Sea oil for.

It also seems to me, as an economist of a kind, curious to be too puritanical about imports. Imports employ many people. Numerous people are involved in the distribution of foreign goods. Foreign goods seem to me to be no more virtuous or less virtuous than other goods. It is the total balance of exchange in an economy that one has to look at when one is trying to come to a judgment. If, for example, for the interests of unemployment, import barriers went up, it would not be very long before millions of other jobs were lost to this economy which we have gained through our presence in the open societies and the real world.

I will try to contain my remarks, because I was given a good run in the opening innings. I was asked about the overall tax burden. A number of noble Lords pointed out that in overall terms tax has indeed risen since 1979. They are quite right. Our priority on taking office, as we declared, was to restore financial stability in order to bring down inflation. Our main counter-inflation policy is keeping a watchful eye on the PSBR. That is not because, doctrinally or idealogically, we think that public spending is wicked; of course we do not. It is simply because we must take a decision, as any Government must do, as to how much can be afforded and financed at any given moment.

Initially that policy meant that some taxes had to go up. However, the overall burden has been stable since 1981–82. As to the interesting challenge by the noble Lord, Lord Bruce of Donington, in respect of VAT, that first Budget is controversial still. Technically it was tax neutral. People had some money handed to them in tax rebates while VAT was increased. It may be that the Government misjudged the fact that another important part of their economic policy, a part which I believe is supported by the noble Viscount and others in the Alliance—their industrial relations legislation—had not yet taken effect. It might have been wrong not to wait for that to happen, but that is water under the bridge.

The other point I have to make about the overall increase in taxation is that of course it has taken place, but it has taken place precisely because of that same phenomenon I have just mentioned—North Sea oil. About half the total increase has arisen from increases in North Sea oil taxes. That revenue was not handed on direct to the public as some people argued—notably the very interesting commentator, Mr. Samuel Brittain—but was used to reduce public borrowing for the reasons I gave earlier. It would have been very curious indeed if during a raw materials surge of that kind the commodity had not been taxed and therefore the total tax income had not risen to some degree.

I will not delay the House too much with the infrastructure argument, for two reasons. First, in his inimitable and combative way, my noble friend Lord Harmar-Nicholls made a number of extremely interesting and, in my judgment, sensible points. The second reason is that your Lordships have heard me speak on this subject before. My own feeling tends to be that a lot of infrastructural improvement is going on. However, as one who served in Northern Ireland and who grew up on the borders of Northern Ireland and the Republic, I am well aware of the folly of depending, for employment reasons, on such improvement. It does not give the right kind of jobs in sufficient quantity for long enough. One should do such work on its merits, and that is precisely what the Government are doing.

I mentioned private sector investment, and the noble Lord, Lord Barnett, and others challenged me about public sector investment. It is not perhaps at record levels but is holding up fairly well. In the economy as a whole, fixed investment is running at £55 billion and certainly there is no record of neglect. I myself do not find tax cuts incompatible with public spending. It all depends on getting one's sums right and on judging the money markets right. It is a difficult job in the modern world, as the noble Lord, Lord Bruce, and others, fairly recognised. I agree that the NEDC discussion was useful. Where it can be shown that an infrastructure project would produce an economic return and an improved supply side performance, its claims will be taken into account in the forthcoming round of public expenditure discussions.

In my own small but not unimportant field I have been criticised for cutting current expenditure from some of the museums which I fund precisely in order to release that money and additional money into their repair. I think that is good housekeeping, and I hope to be able to continue the second part while not being too stringent on the first.

There was much technical debate about interest rates. Again, this is not only a matter of judgment. It must be a matter of argument; but it is perhaps a little late for me to argue it closely in winding up. I tend at the moment not to see myself as a "wet" or a "dry", a consolidator or otherwise, but to be somewhat of the Bruce-Gardyne tendency; that is to say, I think that there is quite a buoyant amount of liquidity in this economy. I certainly agree with my noble friend Lord Harmar-Nicholls that when one has the management right, the product right and the markets right, one is a little less worried about interest rates and their levels than when one does not have those things right or is losing money so that there is an additional burden thereby.

I agree, of course, that it would be nice to have lower interest rates, and I am delighted to say that they have been coming down in recent weeks. Most noble Lords have conceded that inflation will probably drop to about 5 per cent., and it would seem unlikely, therefore, that interest rates will remain at their present levels. However, we have a peculiar world where interest rates and exchange rate factors are linked. In spite of the strictures of the noble Lord, Lord Bruce of Donington, towards the end of his speech, the pound against the dollar has fluctuated about 30 per cent. this year alone, and I do not believe that that is due entirely to either the virtues or the vices of my right honourable friend the Chancellor of the Exchequer. Business and government are now living in a very different world from the one in which we all grew up so far as the movement of exchange rates is concerned.

I enormously enjoyed the speech of my noble friend Lord King, and I agreed with most of it. However, he complained about the level of interest rates, and it is only fair to say to him that similar complaints have been voiced in the past. If we had not held interest rates at the then levels, inflation would probably not have fallen to its present level. As inflation falls we should be able to ease the swings on the other side.

My noble friend Lord King mentioned taxes and pointed out (which caused me great rejoicing) that the heaviest burdens of tax are on the poorer sections of society. I consider it a failure of my colleagues and myself that we have perhaps not got this message across strongly enough. In most popular public discussions the words "tax cuts" suggest something involving wealthy people. In fact, as my noble friend Lord King reminded us, a nurse on £140 per week is paying perhaps £40 of that in income tax and national insurance. When we talk about tax cuts it is that kind of level in which we are interested.

We are also, of course, concerned about the unemployment trap, which was the subject of some debate and altercation earlier between, I believe, the noble Lord, Lord Hatch of Lusby, and myself. I am not saying—and I was not claiming in the intervention which the noble Lord was kind enough to allow—that there are not a great many people who are looking for work and cannot find it. That said, however, there are great differentials, not only between the North and South of Britain—I live on the edge of the West Midlands, and I can bear witness to that—but between job availability and whether it is worth taking a job on, in net terms.

I take a simple view. I believe that most people are highly sophisticated and intelligent in respect of their decisions on economic matters that affect them. If I am given a straight choice between earning £X a week for not doing very much or earning only £5 more for doing something unpleasant, I may decide to take up other pursuits. I think that most of us have had some experience of that in some parts of the country and the economy.

In response to the perhaps teasing suggestion —though I suspect he meant it seriously—of the noble Lord, Lord Bruce, about the task force for jobs by my noble friend Lord Young, this is not about job creation in the conventional sense; it is about trying to identify (I have been working as his deputy on this exercise) the obstacles to employment in our economy, and to clear them away. I should have thought that that was something to which we could all respond in quite an ecumenical spirit.

A number of noble Lords mentioned the contentious (as I fully acknowledge) Top Salaries Review Body awards. Of course, a little hyperbole takes place when anything is contentious. I think that the percentage increase for one individual has been used as an indicator, as if it applied to the whole award. Under the present staging arrangements the award is nearer 5 per cent. This is a very difficult issue, and there is no good time for catch-up periods, as anyone who has been involved in a pay policy will bear witness. My own view is that one cannot indefinitely have a number of great and good figures—none of whom, I should have thought, were the most loyal and dedicated appointees from Central Office, Transport House or, indeed, wherever the Alliance is currently situated—and reject their recommendations. The noble Lord, Lord Plowden, and others, have been looking across the whole economy at what people are paid and at their hours, rates and incentives. They came up with recommendations which we ha e not even fully accepted.

I do say very passionately that as Civil Service Minister I have been worried about the morale, incentives and targets for very dedicated young men and women who are doing a very good job. I am concerned about the growing inability of the public service to recruit and retain the high calibre people that it needs. The problems in this field are changing, and so must the responses. In economic terms the money is minuscule, as are the economic effects, but I acknowledge the political and public relations effects. It was a difficult decision for the Government. I believe that the Government made a wise decision and, for what these secrets are worth, I strongly recommended that this decision should be taken in the way that it was.

It is the first time I have had the honour and pleasure of debating with the noble Lord, Lord Williams. Of course, it is very good news to us who are interested in economic debates on this side of the House that we now have on the Benches opposite no less a person than the adviser to the Shadow Chancellor. I shall read with great care what he had to say. I must say that I was waiting with a certain amount of eagerness and interest for the current advice that the noble Lord is giving to my old friend (if I may so refer to him) Mr. Hattersley, but it did not come.

The noble Lord made an extremely interesting speech, but he was wrong on one point. The Government do not have a counter-inflation policy mark 2. We have the same policy, which has always been one of flexible response, including a flexible view of the monetary aggregates—certainly there is no theology there, but all Governments have to pay attention to them—and we are at present responding in the ways I outlined earlier. In response to the rhetorical questions I posed, it could be said that we are responding fairly consistently and with some result.

We know that the right honourable gentleman, Mr. Hattersley, has been courageous and interesting in recently coming firmly out of the closet about pay policies. I was a member of a Government which operated a pay policy, and one of my first political tasks was to defend that policy and explain it at the Dispatch Box in your Lordships' House. I have to say that I was pretty sceptical about it then. It did not seem to me to have very good results; and, despite the fact that as a political animal I am delighted that the Labour Party is allying itself with pay policies because I think it will be very damaging to them, as a citizen, I rather hope that the Labour Party does not go down that course again, as I do not think it will work and the catch-up, as we see even in the last example, that I gave, is nearly always much more painful than the immediate results.

My references to Alliance divisions perhaps contained some mild teasing, but I have been trying to do some research on their economic policy. There is much that I respect, and some with which I agree; indeed some measures the Government have adopted rather in advance of the Green Paper, if I may say so. But the position on pay policy is very hedged about and very ambiguous.

Lastly, the noble Lord, Lord Houghton of Sowerby, kindly gave me notice that he would not be able to be here for the winding-up. As always, he made a witty and penetrating speech. I must say that I rather agree with the double standards that apply between the state and the individuals who finance it, and I thought his suggestions about the deductions, incentives, inducements and carrots for the unpaid tax collectors were admirable and interesting. Having said that, I do not think that I should say anything more, because I do not want to get into needless trouble with my employers. I have enjoyed the debate; I have learned a lot from it; and I look forward to returning to these issues in the autumn.

On Question, Bill read a second time; Committee negatived.

Then, Standing Order No. 44 having been dispensed with (pursuant to Resolution of 18th July), Bill read a third time, and passed.