Finance Bill

HL Deb 23 July 1987 vol 488 cc1486-525

11.34 a.m.

The Secretary of State for Trade and Industry (Lord Young of Graffham)

My Lords, I beg to move, That the Bill be now read a second time.

The Bill completes the package of measures announced last March in the Budget speech of my right honourable friend the Chancellor of the Exchequer. The Budget, with the two Finance Bills which have succeeded it, was set against the most favourable economic background seen by this country for many years. It provided clear evidence of the success of the Government's policies of sound finance, low borrowing and low inflation. Those policies have enabled the Chancellor in one year to cut taxes and borrowing while at the same time increasing resources for priority public services. We intend to stick to those policies, which have brought about our present economic success.

Noble Lords will recall the positive assessment of the economy which I gave in the debate on the Address. The key facts are striking. The United Kingdom economy is entering its seventh successive year of growth. From being at the bottom of the European growth league for two decades, we have now moved to the top. What we are seeing is a transformation in the performance of British industry. That transformation is based on a record of achievement and confidence about the future.

Over the 12 months to the first quarter of this year the output of both manufacturing and services grew by more than 4 per cent. and manufacturing has risen further in April and in May. Output in the construction industry, a key indicator of firms' confidence in the future, grew by nearly 12 per cent. and a higher proportion of manufacturers are expecting output growth to continue over the next four months than at any other time since the CBI began to collect that information in its present form over 10 years ago.

A further sign of industry's confidence in the future is the investment intentions survey carried out by my department, the DTI. That survey indicates a rise of about 8 per cent. in real terms in industrial investment in 1987 and a similar rise for 1988. The rate of growth of new businesses is also striking with net business start-ups averaging 500 per month for all the months of this decade.

Although the main international institutions are revising down their forecasts for other industrial economies, they have revised their forecasts for the United Kingdom up. They share our confidence that the growth of the economy will be sustained even in the face of the slowing down of world growth generally.

For five years now growth in the United Kingdom has been combined with low inflation. During last year inflation reached its lowest level for almost 20 years and it is increasingly accepted that it is set to stay low. We shall not let up in the fight against inflation, which is at the very heart of our economic strategy.

High growth and low inflation are now also being accompanied at last by a significant improvement in the labour market. Figures released last week show that employment has now grown every quarter for four years and unemployment has fallen every month for a year and by a record amount. Indeed, the fall in the unemployment rate over the last year is faster than in any other major industrial country. It is not just the official statistics that show that. Since 1983 the United Kingdom has created over 1 million jobs more than the rest of the European Community put together. That is also clear from newspapers all over the country, which have pages and pages full of job advertisements.

But while we are reaping the benefits of this unparalleled record of achievement we must hold firm to the disciplines which were needed to bring it about in the first place and which are still vital to ensure continued success. We have shown that steady sustained growth can be achieved in the long run only by strengthening the supply side of the economy and liberating the enterprise and productive potential of the British people. We have achieved that by firm control of public expenditure, by containing the public sector's demands on the country's resources, by reducing controls, by releasing enterprises from the shackles of state control and by encouraging the spread of wealth and ownership.

The success of the recent sale of the British Airports Authority in which more than 2 million people have bought shares is a further important step in that direction. All that promotes that sense of freedom and personal responsibility which gives people a real incentive to work harder for themselves and for their families. Tax reform has had a vital part to play in that process.

Lord Diamond

My Lords, the noble Lord is now talking about tax reform and has left the general economy. Will he say nothing about the trade figures which were issued yesterday and which point in a totally different direction?

Lord Young of Graffham

My Lords, I am perfectly happy to deal with the trade figures. I can well understand that the noble Lord, Lord Diamond, wishes to clutch at the only straw which may give him a little comfort in the whole of my long litany of continuing success. It is quite ludicrous to read so much into a single month's figures. For the year so far we have had a surplus on the current account and exports remain strong. The last CBI survey showed more companies reporting higher export orders than ever before in the history of the survey. Our trading position is sound. The trade performance this year is in line with recent forecasts. The current account for the year so far is still in surplus despite the halving of oil prices, which has taken £4 billion out of the current account.

As regards manufacturing industry, we have brought our unit labour cost increases more into line with those of our competitors. Indeed since early 1981 our competitiveness has improved by 30 per cent. against our major competitors. Since 1980, growth in manufacturing productivity has outstripped that in all other major industrial countries.

Most forecasters expect our share of world trade to increase in 1987. I have spent decades of my life watching our share of world trade decrease. In the last few years, it has started to increase. Manufacturing output and productivity are buoyant and 1987 is still expected to be the best year for growth since 1973. Let us look at the months to come before we start to form a conclusion about one month's trade figures.

Returning to tax reform, that is still the foundation and has a vital part to play in the whole process. The measures implemented in the Finance Act, together with those before us today, continue a key theme which we have been pursuing since 1979. The major objective is tax reduction to allow people to keep more of their own money to spend or save as they wish, and to allow companies to keep more of their own profits. We have reduced the basic rate of tax from 33 per cent. to 27 per cent. and we are committed to reducing it further as soon as we can prudently do so. Our main rate of corporation tax is now among the lowest in the industrialised world. Hand in hand with tax reduction, we have reformed and simplified the tax structure to reduce distortions, to lighten the administrative burden and to promote fair competition.

The future prosperity of our economy depends critically on continuing the process of tax reduction and reform. We must sustain the conditions for continued growth to create more jobs and support the improvements in public services that I am sure all in your Lordships' House want to see. However, that will only be possible if we exercise continued restraint in public spending in order to make room for further reductions in the burden of tax. Even continued success does not remove the need for tough decisions.

The Bill we have before us today contains a number of measures designed to continue the process of reform. In the time we have it will not be possible to mention all of the clauses of the Bill. However, I shall discuss the most important measures which are designed to improve the flexibility of the economy, to promote greater personal choice and to improve further the system of corporation tax.

Noble Lords will recall that I spoke in the Second Reading debate on the Finance Bill almost exactly a year ago about the Green Paper on profit-related pay, which was presented to Parliament jointly by the Chancellor, my predecessor as Secretary of State for Trade and Industry and myself as Secretary of State for Employment at that time. I spoke then about the need for wider adoption of profit-related pay to help to break down the "them" and "us" barrier which has so bedevilled British industry for years. I am glad to report that following the consultation period we decided to go ahead with this worthwhile new scheme to encourage the extension of profit-related pay throughout the economy.

That is a scheme which builds on success. Many successful companies already have schemes which give employees a direct stake in the future of their company through share ownership. A record number of employee share schemes was approved by the Inland Revenue in the year to June 1987. A further 210 schemes brings the total to 1,313. There is growing recognition of the importance of cash-based profit sharing or profit-related pay which owes something to the success with which these arrangements are already applied by some employers and something to the interest which has been aroused by the development of our own proposals over the last 18 months. Improving the flexibility of the labour market is a vital part of our strategy to improve the supply performance of the economy and thus increase the prospect of profits and jobs.

In essence, the advantages of profit-related pay are very simple. A part of the employee's cash pay is formally linked in value to the profits of the business in which they work. Other things being equal, higher profits will lead to higher pay, and lower profits will mean that total pay is temporarily lower than it otherwise would have been. That means that employees have a direct stake in the success of the business. It means higher pay if that has been earned by higher profits. That is the route to higher living standards which can be sustained. If business conditions are difficult, then it means greater job security.

For the employer the profit-related pay scheme can mean a more committed workforce with better incentives to profitability and productivity. If times are difficult and profits fall, then part of the necessary strain may be taken by a temporary fall in pay, perhaps as an alternative to redundancies.

Essentially, profit-related pay is about two things. First, it involves employee identification with the success of the company and, secondly, it involves pay flexibility, which is so vital to any company's competitive performance. The measures introduced in this Bill will give workers a valuable tax relief worth up to the equivalent of four pence off the basic rate. Profit-related pay will send strong signals through business units and those signals could, in the long run, have a profound effect on industrial relations and management in this country.

I believe that this scheme is a challenge to employers throughout Britain. Some 20,000 employers have already established their interest with the Inland Revenue, including 120 out of our top 250 companies. I very much hope that this number will grow once the tax relief has been enacted, and that they will follow that up and take advantage of the relief which is on offer in order to use it as a tool to help them install profit-related pay schemes. Thus, as a consequence, output, employment and productivity can rise and the whole economy can benefit.

The largest group of clauses in the Bill contain important and far-reaching changes for private pensions. The objectives are to widen individual choice, to encourage job mobility and, to ensure a fairer deal for the taxpayer. Much has already been done to widen the pensions choice. Many employers have established occupational pension schemes for their staff, with the help of generous tax reliefs. At present, over 10 million people are currently members of occupational schemes. But more can be done. There are still some 10 million employees who are not in an occupational scheme and who make no private provision for retirement. A central feature of our strategy is to bring private pensions within the reach of these employees for two reasons: to provide them with a pension of their own and to increase their independence of the state.

The new personal pensions will be available to all employees who are not in an occupational scheme; to the minority of employees who choose to opt out of their occupational scheme; and to the self-employed. These schemes will be available from next January. The legislation is based on the present, broadly similar, retirement annuities provision. But, in addition to being brought up to date, the new measures incorporate a number of new features which have been widely welcomed. The 1986 Social Security Act enables employees to contract-out of the additional component of the state scheme through a personal pension. The Finance Bill now provides the necessary tax procedures to achieve this result.

In addition, the Bill enables a much wider range of pension providers to establish personal pension schemes. As well as insurance companies and friendly societies the field will now be open to banks, building societies and unit trusts to provide welcome added competition.

The Bill also contains provisions to allow members of occupational schemes to make additional voluntary contributions to a pension plan completely separate from their employers scheme up to tax approval limits on contributions and benefits. This development has been widely welcomed, and taken together with other changes will dramatically increase the choice of how to provide for retirement. A further purpose of our reforms is to remove as far as possible the pension obstacles to job mobility. There is no quick and easy solution but the very existence of the new pension opportunities I have just described will, together with the much greater transferability of pension rights, greatly reduce its worst impact.

The changes we propose do not increase the already generous tax regime for retirement provision, but simply extend it potentially to each and every employee. However, the improvements we propose can be justified only if the tax reliefs for pensions are not abused. We felt it necessary to impose some limited restrictions to guard against misuse of the tax reliefs, particularly by a small number of very high earners. These restrictions will have no impact whatsoever on the vast majority of pension scheme members. For ordinary working people the scope for abuse has never been available.

The measures I have outlined comprise some of the main changes in a continuing process of pension reform which was initiated by my right honourable friend the previous Secretary of State for Social Services over three years ago. The proposals in this current Finance Bill build on and extend the changes made in the recent social security legislation and provide a better pension deal for millions and millions of employees, and also the millions of self-employed in this country.

The Bill contains a number of clauses dealing with the taxation of companies which I should now like to draw to the attention of your Lordships' House. These are designed to promote further the principles of simplicity, fairness and effectiveness which underlay the major reforms of the corporation tax regime which we introduced in 1984.

Noble Lords will also be aware that one of the main points of debate on the Bill in the other place related to its provisions on the tax treatment of Lloyd's reinsurance to close arrangements. The legislation is necessary to ensure that the amount of the reinsurance to close premiums can be properly scrutinised for tax purposes. The original proposals in the April Finance Bill have been revised in the light of discussions with Lloyd's. In its revised form, the clause provides a free-standing test for tax deductability which takes full account of the special nature of the Lloyd's reinsurance to close arrangements. It meets the concern which Lloyd's expressed about the proposals in their original form. The chairman of Lloyd's has said that Lloyd's regard the clause as workable and acceptable.

The Bill puts in place a new system of accounting for and paying corporation tax, known as pay and file, which will make life a lot easier for companies of all sizes. The new pay and file system, which follows on the recommendations of the Keith Committee, will add an efficient and modern administrative system for collecting the tax. We have consulted widely with the business community, which has generally welcomed the new system. Pay and file will mean major changes for the revenue, taxpayers and tax practitioners. It cannot be introduced before 1992 but we are legislating now to allow sufficient time for all those affected to make the necessary changes to their operating systems.

The Bill also contains a measure to streamline the taxation of companies' capital gains. These gains will now be taxed at normal corporation tax rates, and qualify for set-off of advanced corporation tax. Now that we have brought the main corporation tax rate down from 52 per cent. to 35 per cent. we see no justification for a different rate on capital gains. This is a useful simplification removing the need for the present complicated adjustment. For over 80 per cent. of companies who pay at the small companies rate, the rate of tax gains will fall from 30 per cent. to 27 per cent.

After representations, we have decided that the tax rate on gains earned for policy holders of life assurance companies will remain at 30 per cent. pending the outcome of the review of the taxation of life assurance which my right honourable friend the Chief Secretary announced on 8th July. As part of our continuing programme of tax reduction and tax reform we intend to eliminate unintended or unjustified tax reliefs which can give some companies an unfair competitive advantage and cause tax rates for the majority of taxpayers to be higher than they would otherwise need to be.

The Bill contains a number of clauses designed to meet this objective. For example, we did not think it right that companies in multinational groups which enjoy dual residence should secure tax relief twice on one and the same interest payment. A further clause ensures that the controlled foreign companies legislation is not side-stepped by moving the residents of the foreign company to the United Kingdom before payment of a dividend.

In respect of the clauses dealing with double taxation relief on interest on certain overseas loans, we received a number of representations from the banks. In the light of these we have decided to double—to 1st April 1989—the transitional period before the new provision takes effect for loans which were already in existence on 1st April this year.

The measures before us today complete the programme of reforms announced in my right honourable friend's Budget. These build upon our solid record or achievement in tax reform which has set an international trend. The Bill contains important measures which will further our objectives of increasing flexibility and freedom and promoting simplicity and fairness in the tax system. The programme of tax reduction and tax reform will continue as a vital part of our strategy to liberate the energy and the enterprise of the British people. I beg to move.

Moved, That the Bill be now read a second time.—(Lord Young of Graffham.)

11.57 a.m.

Lord Bruce of Donington

My Lords, far be it from me to endeavour to be unkind to the noble Lord in any way by saying anything that will remove from him the sense of euphoria into which he has apparently mesmerised himself.

The noble Lord has given his usual recitation, uttered today, I thought, with a little weariness possibly induced by continued repetition of what he considers the achievements of his Government to be since they embarked upon their course. I am sorry to have to bring him down to earth, because the extent of euphoria now experienced by the Government is entirely relative and has to be considered against the depths to which this Government plunged the economy in 1980 to 1981, and produced the colossal unemployment that still remains with us.

Even today, after all the so-called achievements, manufacturing output in total is still not what it was in 1979. Manufacturing investment is still between 16 per cent. and 18 per cent. below what it was in 1979. So what does all the achievement amount to? It amounts to steady efforts to drag themselves out of the pit which they dug themselves. It reminds me of a saying which may commend itself to the House, the mood that is epitomised by the saying: "Hit me over the head with a hammer; it is so nice when it stops."

The noble Lord ignored one factor until prompted by the noble Lord, Lord Diamond. It is a matter of the utmost seriousness. The noble Lord said that one must not take too much notice of, or view with undue seriousness, the results of one month's trade figures. On the whole, I tend to agree. Needless to say, the figures were sufficiently bad for the City of London, which he supports so warmly, to get into a terrific panic. The City takes the matter very seriously, as indeed it might. For whatever the noble Lord may say, the future of the United Kingdom ultimately depends upon the output of its manufacturing industries, their expansion, and their competitiveness, and, above all, upon the ability to achieve again what we did until five years ago; that is, a surplus of trade on our visible account.

If one were to take by themselves the figures for this month and project them over a whole year, they would show a visible deficit of some £12 billion. I agree, however, with the noble Lord that it would be wrong and silly to try to read too much into one month's figures. Even reading them on the basis of the average for the past five months or on the basis of the last quarter, the projected adverse figure on visible trade is still either £7 billion, £8 billion or £9 billion. On can take one's choice.

What is noteworthy, and what I trust the Government will recognise if they have not already done so, is that the greater part of the deficit arises from United Kingdom trade with the European Community. There is a very close correlation. In 1986 our deficit with the European Community totalled some £9 billion. That, of course, goes beyond manufactures as it covers all visible trade. So far, in the current year, there is a similar correlation between the two. I make no pro-or anti-European point, but those who are fond of saying that 48 per cent. of our exports go to Europe might also bear in mind that 52 per cent. of our imports come from Europe. It is a point that should be borne in mind.

The lessons for the Government are very clear. The whole question of our exchange rate and interest rate policy has to be seriously considered in the course of the next two or three months and before we meet again. There has to be some further surge of Government support for manufacturing industry in a variety of ways. They certainly cannot turn it round within three months, but we would expect some constructive proposals from the Government to stimulate further manufacturing industry.

We have had the opportunity of reading the excellent little book on the campaign written by somebody with inside information of Conservative Central Office. I found it vastly entertaining and I commend it to your Lordships. There are some very interesting remarks from the noble Lord himself about which I have not time to inform the House. It is clear that the Conservative Government regards the future of Britain in terms of the City of London and in terms of its financial and other invisible services. This is where the Government's whole thrust goes, and it is to this that they are overwhelmingly committed in a variety of ways.

Lord Bruce-Gardyne

My Lords, I apologise for interrupting the noble Lord. He said that he would be looking for the Government to give further stimulus to manufacturing industry. My noble friend pointed out that the current rate of growth of manufacturing industry and manufacturing output appears to be about 4 per cent. per annum. What rate would the noble Lord regard as acceptable?

Lord Bruce of Donington

My Lords, the noble Lord knows perfectly well from his own position in the City. I have read extremely carefully his very interesting and learned contributions to the press. He knows, or ought to know, that there is a widespread view in industry that the existing capacity of British manufacturing industry which was decimated in the 1980s, is now showing signs of capacity strain. Therefore, there has to be serious consideration given by the Government to increasing manufacturing capacity. If private capital cannot do it, then public capital has to be put up for that purpose. That is my answer.

Since we are going to be away for three months, we have to consider now the question of tax reform of which the noble Lord made much mention. We have to consider in particular the position relating to value added tax and developments that may occur before this House reassembles.

When noble Lords opposite talk of the burden of taxation, they mean, of course, direct taxation. Reliefs of indirect taxation go beyond their comprehension of tax relief. If there is to be any relief from taxation, it is direct taxation they have in mind. Direct taxation is, of course—if one can put the term in inverted commas—a "progressive" form of taxation in that the extent of people's incomes and their resources is taken into account in determining at what rate they pay tax. There is some relationship—some may not think it comprehensive enough—between the tax levy and ability to pay. Indirect taxes, including, in particular, value added tax, are regressive in the sense that no matter what your resources are, no matter how poor or rich you are, you pay the same rate of tax on the articles that you acquire.

It is very interesting, in view of the Government's claim to have made such progress in the field of taxation, to observe exactly what has happened. From 1978–79 to the current financial year, the total yield in income tax has increased from £19 billion to an anticipated £40 billion per annum; that is, an increase of 110 per cent. Value added tax, on the other hand, has increased from £4.7 billion to £23.81 billion in the current year—an increase of some 396 per cent. Therefore, value added tax, the regressive tax, has increased at a far higher rate than the ordinary income tax that people pay. That of course is in conformity with the immortal words of the then Chancellor of the Exchequer in 1979 when contrary to election undertakings VAT was increased from 8 per cent. to 15 per cent. In his winding up speech he said: I shall be leaving people with more money in their pockets with which to the pay the increased VAT". Indeed, that is the philosophy of the party opposite.

That becomes of importance since, while we are away until 20th October or thereabouts, moves are afoot to increase the burden of VAT in this country. Some of those moves may be altogether outside the control of the Government. I shall have more to say about that. First, there is still the case brought against the Government in the European Court to abolish zero rating and to standardise other rates of tax on a whole series of other items but more particularly on new building construction, about which I shall say something presently.

Your Lordships will be aware that I tabled a Question for Written Answer endeavouring to ascertain the amount of the VAT levy upon the British public that would come into operation on the assumption that we lose the action. The noble Lord replied (at col. 1380 of Hansard) on 21st July: The amount of extra VAT revenue would depend on the new liability of the items to which the noble Lord refers. This would need to be determined in the light of the judgment of the European Court of Justice". The noble Lord was not able to give a figure. Therefore, we cannot make an estimate at this stage, though I am reluctant to believe that the Government do not have an estimate in mind of the amount of extra revenue that would accrue to the Treasury and therefore the eventual extra VAT impost that would fall on the British people in the event of the case succeeding.

I give an example. Let us assume that it was decided, and was enforceable—I hope that the noble and learned Lord, Lord Denning, will have some words to say about that—that about 200,000 new houses every year would be subject to 15 per cent. VAT on a low average price of about £30,000 per house, which is extremely conservative. That would increase the price of new dwellings by £4,500 per house and yield additional revenue of about £900 million a year to Customs and Excise and therefore to the Treasury. That is not an insignificant sum. Indeed, it would have very wide repercussions in the British economy in regard to mortgages and the price of what one could call second-hand houses. It would have an impact on the economy which even the noble Lord, with all his euphoria, would not dismiss as being entirely insignificant.

Therefore, I have sought to elicit from the Government the arguments they are putting before the European Court so that we can fight the case. I assume for the moment that the Government are stern in fighting the case, despite the temptation for the Treasury to lay its hands on what are clearly large sums of money. I hold the view that the pleadings should be made public. The noble Lord knows quite well by now—if he does not I shall spell it out to him, chapter and verse—that it is established beyond all reasonable doubt that the Government can and ought to publish their pleas.

There is no monopoly of legal wisdom within the Government. In fact, after looking at some of the recent actions, particularly in relation to the Official Secrets Act and various others, one wonders where the legal wisdom of the Government is.

Lord Young of Graffham

My Lords, the noble Lord will recall that I wrote to him on this matter only yesterday. I told him precisely why we were unable to allow the pleadings to come into view and that we have gone back to the Commission's legal service and asked the Commission formally to change its mind. If it does so, we shall then publish the Government's case.

Lord Bruce of Donington

My Lords, I was about to inform the House of the correspondence which the noble Lord was kind enough to address to me. I accept immediately his assurance that at a very early date the fullest publicity will be given to the pleadings that the Government have put forward. As I say, there is no monopoly of legal wisdom within the Government. There are eminent lawyers outside this House, as well as inside it, who are experts in this field. Therefore, we shall want to know the position very quickly.

I now refer to the second arm in regard to the proposed increases in VAT as comprised in the Cockfield proposals. So far I have been unable to obtain a copy of the proposals, although I hope to do so. Everyone outside the country seems to have them but not those of us in this Parliament of Westminster. Your Lordships will recall that the noble Lord, Lord Cockfield, was very loyal Member of Her Majesty's Government, who formerly occupied the position now occupied by the noble Lord. The noble Lord, Lord Cockfield, is seeking harmonisation of taxation in Europe. He has brought forward proposals for the abolition of zero rating in the United Kingdom over a whole series of items. He has also brought forward proposals for the other ratings to apply in other spheres. Once again, it is not yet possible, until we have seen the actual proposals, to quantify the impact on the United Kingdom public of the extra taxes that would arise if the Cockfield proposals were accepted, save in regard to food.

Lord Young of Graffham

My Lords, I hope that the noble Lord will forgive me for once again interrupting. My right honourable friend the Prime Minister said, as reported in The Times on 30th May and Accountancy Age on 4th June, that if the Community brought in a Community law to change our capacity to zero rate the items that we want to zero rate, the Government would use our veto against it. It is a measure which requires the unanimous agreement of all 12 members of the Community and the Government have said that we would block such a move.

Lord Bruce of Donington

My Lords, the noble Lord is kind to anticipate me. I was about the reproduce exactly the words of the Prime Minister. He must not be too impatient. He must allow me to proceed in my own way. I was endeavouring to inform the House of what the impact would be if the efforts of the United Kingdom were unsuccessful in avoiding the Cockfield proposals, or indeed if as part of a package deal VAT was traded off against some other factor that was deemed to be desirable in the United Kingdom's interests within the Community.

The imposition of VAT on food of some 4 per cent., which is the fancied figure, is one which oddly is favoured by the House of Lords Select Committee on Community matters in its report HL 127/84. I have no further commment on that. It would cost £1 billion a year. That would be 50p per week for each adult in this country. That is in addition to the 84p already paid in respect of storage and the extra cost imposed by the EC CAP structure of some £11.50 per family.

As the noble Lord said, the Prime Minister has declared herself against the proposal, or has she? I shall reproduce the question asked in the other place by the Leader of the Opposition on 16th July: The problem is the move to impose VAT on what are currently zero-rated items of considerable importance to the family budget. Does the right hon. Lady agree with the word of the Paymaster General that the Government would 'in fact veto VAT on food, fuel, children's clothing and shoes'—Yes or No? The Prime Minister replied: My hon. Friend the Paymaster General specifically confirmed what I said during the general election campaign, and that was his precise purpose". She did not say yes or no. She continued: I am well aware of the words that he used. I am amazed that the right hon. Gentleman does not welcome the fall in unemployment". [Official Report, Commons, 16/7/87; col. 1271.] A yes or no was not given. That moved the Financial Times the next day to publish a feature headed: Thatcher keeps options open on VAT". We should like to have this afternoon a precise and unequivocal answer from the noble Lord as to whether they will veto VAT on food, fuel, children's clothing and shoes.

It is no good the noble Lord saying "I have nothing to add to the statement made by my right honourable friend the Prime Minister". Either he is empowered to say yes or no or he is not. If he equivocates, the doubt which was voiced, not from Labour Party headquarters in Walworth Road, but from Bracken House, the headquarters of the Financial Times. Thatcher keeps options open on VAT". I have two principal questions to ask the noble Lord. First, I wish to know what the Government's action will be if the VAT case against them in the European Court goes against them. What will happen? Under the terms of the Single European Act and the Treaty of Rome is the European Court's decision then automatically enforceable in the United Kingdom? Is it an automatic directive to the Treasury to levy the particular sum? If that is so, it will be the first time that the raising of taxation in the United Kingdom will have been entrusted to a body outside the United Kingdom. We want to have a statement about that position.

We want an assurance that if the matter arises between now and 20th October, when we resume, Britain will withhold her vote on the Cockfield proposals under the requirement of Article 17 of the Single European Act. If the noble Lord can give us those assurances it will be helpful. We wish the Government well during the next three months. They will need it, but we are fearful, nonetheless, that nothing they are likely to do over the next three months will substantially ameliorate the plight of the majority of people in the United Kingdom.

12.25 p.m.

Baroness Seear

My Lords, the Secretary of State will perhaps be pleased to hear that from these Benches we welcome certain aspects of the Finance Bill. We do not frequently please the Secretary of State from these Benches. Today will not be a total exception to that general practice. We are, for example, obviously glad to see progress made on profit-related pay. It would be surprising if we were not glad to see that as we have been advocating it for at least 50 years, from the days of the yellow book, long, long before it occurred to the Government that it might be a good way forward.

However, repentance however late is welcome and therefore we welcome the profit-related element in the Finance Bill. We also welcome the steps taken on personal pensions, about which my noble friend Lord Banks will say more shortly. Personal pensions are valuable in themselves, and my noble friend will speak about that, but they are also valuable in so far as they are a step towards a greater degree of mobility of labour. The Secretary of State referred to that point.

There can be no doubt that in the past many forms of pension have tied people to employers when it would have been much better for the employer, the individual and the economy if a break had been made and the person concerned had gone elsewhere.

This is where we start to part company. If mobility of labour is a serious purpose of the Government—I think that the Secretary of State is aware of how important it is in relation to the economy—other things could have been contained in the Finance Bill which would have helped the mobility of labour and which in our view should have had a higher priority than some of the decisions made by the Govenment.

The Secretary of State will be aware now—he will have been even more aware in his job as Secretary of State for Employment—of the extent to which progress is being held up by inadequate mobility of labour. As he knows, it is pretty well impossible to fill skilled and technical jobs because people cannot move. That means that we must drive towards improving the availability of housing, which is seriously holding up mobility. The Buckinghamshire area, with which I am most directly connected, is a high-tech area and there is no doubt that we cannot recruit the people we require because, while one can still buy a house in the North-West or the North-East for £20,000—£30,000, one cannot buy a hen coop for that amount in Buckinghamshire.

Something could well have been done through the Finance Bill to ease the housing position. One way would have been to put more public funding into the improvement of housing, be it the building of more public housing or money made available for the adaptation of houses, so that more houses are made available.

Another improvement which could have been included in the Finance Bill, and which would have had an effect at the higher end of the housing market, would be if, as we on these Benches have always advocated, tax relief on mortgages was limited to the basic rate of tax. At present, the allowing of tax relief on mortgages at the higher rates of tax is a direct encouragement to the increase in house prices which in London and the South-East has taken off to a most alarming extent, and which is affecting mobility in a variety of ways.

In our view money devoted to that end would have been money well spent both from the point of view of individuals and of getting a much more flexible and mobile economy. I am sure the Secretary of State agrees that that has to be a major objective.

Having mentioned those aspects of the Finance Bill with which we are very much in agreement, I fear I have to say that there are many matters omitted from the Bill which we would dearly like to have seen. The noble Lord will not be surprised to hear that, unlike the Secretary of State, we believe that money would have been better spent not on the further relief of the income tax payer—the reduction of 2p on tax requirement—but, where necessary, on proper investment not only in the infrastructure, on the encouragement of investment on railway development, and on housing, but in the whole field of education and research development. It is not for nothing that very serious and responsible vice chancellors are saying that they do not know what the future will hold for their pure and applied science departments because of the failure to put sufficient money into those areas. This is an investment which is urgently needed and will not come from the private sector. If the Government consider that their present educational proposals, in particular the contract funding which is being put forward, are a sufficient solution to this, I can only tell them that there is very widespread and responsible opposition to this view throughout a great deal of the educational world. Money spent there rather than a reduction in taxation would have been a very great improvement in the Finance Bill.

When the noble Lord gave us this euphoric description of what is happening in the economy—and one understands this up to a point—he was highly selective in his presentation. We in this House believe in having as much consensus and agreement as we can. We do not believe in adversarial politics for their own sake. If only the noble Lord would sometimes agree that all is not totally well in the economy at the present time, he would find that many of us would go a long way to collaborate in order to improve matters. We all know that unemployment is falling, but our figure is still almost the highest in the industrial world. The Secretary of State also knows perfectly well that a great many of the new jobs have gone on a part-time basis to women. I have nothing against women working, and working on a part-time basis, but it gives a false picture of the degree of recovery when so many of the new jobs are to be found in that area.

Nor has the noble Lord said anything about the excessively high level of interest rates—far higher than among most of our competitors—which holds back a great deal of the kind of development that he wants. We understand why it is being done. We recognise that there are difficulties in relation to the exchange rate. I for my part believe that nothing is more important than getting stability in the exchange rate. I shall not talk again about the EMS—we understand that this affects the level of interest rates—but it is not a satisfactory position. If the noble Lord would be prepared to discuss these matters with us, it would be a great deal more convincing and satisfactory than to be asked always to applaud what the Government are doing. Not only in the Finance Bill but in the general economy it is not good enough for the Government not to recognise that there are still very serious problems indeed.

Another problem, to which the noble Lord did not refer, and which is generally agreed among all commentators to be the Achilles' heel of the Government's policy—I think that his Achilles has two heels—is not only the continuing increase in pay settlements, but where overtime earnings increase the total take-home pay and therefore increase unit costs. I know that unit costs so far have not increased as much as was feared. However, the fact remains that our increase in earnings is going up faster than that of our competitors. This, combined with the reduction in taxation, gives a real boost to imports. It is not surprising that our balance of trade is down, and that over the past three months there has been a fall of 4 per cent. in our exports. This may be a flash in the pan; it may be temporary, as the noble Lord, Lord Bruce, said. However, the policies that the Government are pursuing by putting more money into consumers' pockets through their tax deductions and by failing to control the extent to which pay increases are going up, undoubtedly encourage the increase in imports, which could have an extremely adverse effect. This is one reason why we think that the money available could have been better distributed than by putting it into the pockets of consumers. Of course if pay increases continue to go up, our competitive position will worsen. The noble Lord shakes his head. If pay increases and labour unit costs go up and those of our competitors do not, it must have a deteriorating effect.

Lord Young of Graffham

My Lords, forgive me, but our unit labour costs have been increasing at a slower rate than those of France, Germany and our principal ocmpetitors. Our competitors unit labour costs have been increasing over the past few months. I understand the concern of the noble Baroness, which the Government share, about the general level of wage settlements.

Baroness Seear

My Lords, I have already said that unit costs have not gone up as much as we feared they might, but if the trend on pay continues increasing at its present rate, this position cannot continue. I imagine that the noble Lord believes and hopes, as does the Chancellor of the Exchequer, that profit-related pay will provide a curb on wage increases and therefore will have a highly desirable effect on unit costs. That may well be so, and it has always been one of the reasons why one has believed in the advantages of profit-related pay. However, we on these Benches, who have always supported profit-related pay, have always said that it has to be done in a climate of a high degree of collaboration and consultation with labour and labour representatives.

I am a person who has been critical of corporatism. I do not like corporatism. However, I believe that one cannot have the kind of progress inside an enterprise, or in the economy as a whole, unless one carries the trade union movement with one. It seems to me to be gratuitous and an unnecessary insult to the Labour movement to have snubbed NEDO, which is a useful consultative body, and at the same time to plan to undermine the position of the MSC—to a large extent the work of the Secretary of State—by altering the balance between employer representation and trade union representation. What must the trade union movement think? What must be the effect on the kind of consensus, agreement and support that ought to be coming from the Labour movement and which will have to come if the changes that the Government wish to see are to be brought into force, if they treat the trade union movement in this way?

As the House knows I speak by no means as an unqualified admirer of the trade union movement. We have never had a penny out of the trade union movement, and are never likely to. Nonetheless, that kind of support is essential. The Government behaviour at the present time is likely to cause alienation. There is the element of "We are the masters now" which does not go well with the kind of prosperity we wish to see.

By convention, a debate on the Finance Bill in this House is used for the discussion of general economic matters. I now wish to raise briefly one matter which it may be thought is somewhat outside the matters normally discussed under this heading. Local government finance is a very important part of the financing of the country and has a very big economic impact in the country. We debated earlier in the last Parliament the question of the poll tax in relation to Scotland. We shall be debating it again, alas, in relation to this country.

However, perhaps I may put on record something that I find quite extraordinary. We are all agreed in this House that rates as such leave very much to be desired. They are neither a very efficient nor a very fair way of raising local finance. But why in all this discussion has it been presented to us that the only possible alternative is the community tax? It is now 11 years since Sir Frank Layfield was asked to examine local government finance. In that report he came up with the statement that, a local income tax…on personal incomes, levied according to where people live, is the only serious candidate for a new source of local revenue that could give a substantial yield and at the same time maintain or enhance accountability". Those surely are exactly the objectives which the Government say they have in local finance. Why, in all the inquiry about local finance, enormously important as it is both economically and socially, has there been no full discussion about those Layfield recommendations, no discussion as to why local income tax is not to be the preferred option? I know that in the Layfield Report it was said that the cost of doing it would be considerable, that there would be difficulties in that regard.

However, that was 11 years ago. Since that time there have been enormous advances in computerisation which makes the whole issue of local income tax a great deal easier. At least in the discussion of the poll tax and in the reform of local government finance the discussion of local income tax should have occupied a prominent position as we on these Benches have always urged. I expect it is much too late, but I should at least like to put on the record that a great opportunity is being lost at a time when we are considering a basic change in local government finance; that there has been no real discussion of the option which Layfield said was the most serious option to the present system.

12.42 p.m.

Lord Boyd-Carpenter

My Lords, one of the most attractive features of the noble Lord, Lord Bruce of Donington, is his consistency. He always runs true to form, and he ran splendidly true to form this morning. He began by accusing my noble friend Lord Young of Graffham of the grave offence of euphoria, ignoring perhaps the fact that my noble friend has quite a lot to be euphoric about. But the noble Lord followed his own consistent line of grasping at (if I may mix metaphors) any straw of gloom that he could find. He even appeared to derive enormous pleasure from the fact that the City in its habitual way had reacted to certain figures in the past few hours.

I can console him, because the reaction of the City in the past few hours is absolutely nothing to what was its reaction when at one moment during the general election campaign it appeared possible that the noble Lord and his friends might be put in charge of our affairs. Then there was a very considerable reaction indeed.

Lord Molloy

My Lords, may I—

Lord Bruce of Donington

My Lords, if I may—

Lord Boyd-Carpenter

I have mentioned the noble Lord, Lord Bruce of Donington, so I must give way to him, if the noble Lord behind him will forgive me.

Lord Bruce of Donington

My Lords, I am quite sure that the noble Lord, Lord Boyd-Carpenter, would not wish to misrepresent me in any way. The noble Lord will recall that I too cast doubt upon the judgment of the City of London in this matter; that I did not accept that the reaction of the City of London to the trade figures was necessarily the correct one. If the noble Lord reads the Official Report, he will find that that is so.

Lord Boyd-Carpenter

My Lords, I am glad to hear that explanation from the noble Lord but it does not explain why in the circumstances he thought it was necessary to mention the matter at all. If he takes that view, it would appear to be wholly irrelevant to his argument. The noble Lord himself was seizing rapidly at any conceivable bit of bad news he could grasp. But I thought he went too far, though he has done it before, when he proceeded to attribute the unemployment figures solely to the action of Her Majesty's Government in, I think he said, 1980. I think he will find when he reads Hansard that that is what he said.

The noble Lord knows as well as any of us, and perhaps better, that regrettably high rates of unemployment have been common throughout our European neighbours and indeed throughout the industrial world for a good many years past, in countries and places where the policies of Her Majesty's Government have absolutely nothing to do with the case. The noble Lord really should know your Lordships' House better than to drag out that old—I shall not say "herring"—misleading statement.

The noble Lord also did not appear quite to understand the nature of taxation. He said that those who talked about the burden of taxation were concerned only with direct taxation. That is quite untrue. He also said that indirect taxation always had to be at the same rate for everybody. Again, that is not true. If the noble Lord goes outside this House to buy a bottle of beer and a bottle of whisky he will find that the rate of tax is quite different on those two delectable commodities. Indeed, if his recollection goes back, as it should, to what in my view was a much better tax than VAT, the old purchase tax, he will remember that that was deliberately graduated at different levels of tax in accordance with whether the article taxed was, or was thought to be, a luxury or a necessity. My recollection serves me, from the days when I had the pleasure of operating that tax, that on jewellery and expensive scents it was 66⅔ per cent. and on things that were near necessities it was 5 per cent. or 10 per cent. and very often zero rated.

There is nothing in the nature of indirect taxation as such that makes it, as the noble Lord suggested, regressive. His criticism, if any, should have been directed to VAT. I share his dislike of VAT. I think it is a bad tax. I believe it to be inflationary in its effects.

That brings me to follow up the point that the noble Lord perfectly legitimately raised as to the proceedings before that eclectic body, the European Court, against the British Government on the subject of VAT. It is certainly news to me that any outside body, however august, has any right to lay down what British rates of taxation shall be. It is my understanding that it is still Parliament, and in practice another place, that has the right to determine the rates of tax. It would be an interesting point if the European Commission's action before the European Court should be successful, it being directed, as I understand it, against the British Government.

What would happen? As your Lordships know, no British Government can be certain what Parliament would do. The British Government could theoretically, I suppose, be ordered to impose this taxation, but if Parliament rejected it I should have thought the matter would end there. I understand that, although he is not on the speakers' list, the noble and learned Lord, Lord Denning—who as your Lordships know has made a close study of this extraordinary subject—is to address your Lordships later. I for one am much looking forward to what he has to say on the matter.

As I said, in the meanwhile it seems to me quite outrageous that any outside body should seek to determine what British rates of taxation should be, and I hope and believe that Her Majesty's Government, noble Lords in this House and honourable Members in another place will resist fully any attempt to impose its idea of taxation upon the British people.

I come now to a question where I am afraid I profoundly differ from what the noble Baroness, Lady Seear, said about the level of taxation in this country. I am sorry that, having delivered herself of that somewhat heated oration, she immediately departed. If I may be allowed respectfully to say so, that is not quite in accordance with the practice and good manners of this House, but I shall nonetheless seek to reply to her.

She said that it would be better to encourage investment by not reducing income tax, but by using the public resources made available through making no reduction in income tax by way of investment. That argument is only sustainable if one takes the view—which I know is taken by noble Lords on the Labour Front Bench, though it is surprising to learn that it is taken by one section of the Alliance—that all good investment is made by government. There is no greater discouragement to investment, particularly investment in projects which may take quite a time to fructify, than high taxation. As I see it, one of the major purposes in reducing direct taxation is to encourage investment. One understands that those who speak for the Alliance in the present situation do so subject to certain technical difficulties, shall we say? Even then, the argument seems so astonishing that it is difficult to understand how so distinguished a figure as the noble Baroness should possibly have propounded that argument.

I should like to comment on the general question of taxation. The good features of this Finance Bill—the provisions in respect of profit-related pay and personal pensions—are all plainly designed against the background of a high rate of taxation and with a desire to alleviate the ill effects of that rate in taxation in respect of particularly meritorious causes. That is good and I strongly support those proposals in the first two parts of the Bill.

However, it does not take one away from the basic fact that the level of direct taxation in this country is still too high. In the light of the good report to which my noble friend referred—stigmatised as euphoric—and of the progress over the past few years, it is disappointing that after eight years of Conservative government we should still be taxing some part of some people's income at a rate of 60 per cent. That is a confiscatory rate, justifiable perhaps by war or great emergencies but, I suggest, not justifiable at a time when the economy is successfully progressing; nor is it calculated to stimulate that progress.

Again and again we hear about the brain drain and the fact that people with high technical qualifications are leaving this country. One of the reasons that some of them give for leaving is the high rate of taxation on their earnings. In the case of a brilliant research worker, for example, the period of high earnings is generally quite short—sometimes five or six years. I remember being told by the head of one large company that his research people were over the hill by the time they reached the age of 35. If one has a high earning capacity for a relatively short period, one wants to exercise that earning capacity in an area where one is allowed to keep a reasonable proportion of those earnings. It is a great mistake to assume that because someone has high earnings in one year he will have continuous earnings at that level for all his life. That is not our experience. I urge upon my noble friend the desirability of reducing income tax and, despite the criticisms which will undoubtedly be made, in particular reducing the intolerably high rates.

One has only to contrast our highest rates of taxation with those ruling in the United States, and then contrast the enormous expansion and wealth of the United States which has been helped by a much more sensible policy in direct taxation. I hope that we may be able to learn a little from them.

I think that we still have serious anomalies in our taxation system which discourage exactly what it is that the Government are trying to encourage. If one wants to build up a business and see that more and more spending is done through private hands rather than public hands, surely it is essential to leave more of people's earnings in their own hands. Take the question of charities. In my view, it is quite wrong to assume that all support for good causes must come from taxation and central government funds. It is better to leave people with a reasonable proportion of their earnings and to allow private charity to operate. Private charity is apt to operate much more discriminatingly than is possible for the government machine.

One has only to look over our history to see the building up of great charitable trusts over the years, such as the Nuffield Trust, as a result of people earning large sums of money and being prepared to seek to apply them in this way. In the economic sense, choice by the citizen of what he will buy is a good regulator of the economy, and from the social welfare point of view there is an enormous amount to be said for reducing excessive rates of taxation.

When dealing with the previous Finance Bill I pointed out (so I shall not weary your Lordships again) the oppressive provisions of taxation in respect of married couples. It is particularly oppressive in this day and age when the majority of wives work. The point which I made then was that, for a high earning couple, it is financially better for them to live in sin than to marry, and that is a deplorable state of affairs. I hope that the Government will regard the correction of this situation as a matter of some urgency.

The very high rate of inheritance tax and the very low level at which it begins to bite is also a matter of concern. The Government pride themselves, and rightly so, on turning our society into a home-owning democracy. What is the use of encouraging people to acquire a home if you then make it extremely difficult to pass on that home to one's family? If you tax the principal residence with the full rate of inheritance tax, you make it impossible in many cases for people to pass on to their family the homes that they have painfully and painstakingly acquired over a working life.

There is a good precedent which I commend to my noble friend. As I understand the matter, capital gains tax does not operate on the sale of one's principal home or residence. Why should not that exception be applied to inheritance tax? It would provide enormous relief to a great many families. It would also have the advantage that when a famous or stately home passes as a result of death, we should be spared the continual flurry and effort to raise funds and so on in order to keep the various treasures in this country and to keep these lovely houses together.

In almost all cases where the problem has arisen it has been because an enormous tax bill has been presented on the death of the previous owner. I suggest that it would do a great deal of good in many directions if one's principal home or residence were entirely exempted from inheritance tax.

It is often suggested that there is some peculiarity, almost eccentricity, about those of us who protest against the present high rate of taxation, but it is worthwhile remembering how new it is. If one goes back to the Lloyd George Budget of 1909, which produced the Parliament Act and our present constitutional situation, the rate of tax which outraged your Lordships' House at that time—outraged it to a point of singularly silly action, which it took—was a rate of 1s 3d in the pound: approximately 6p or 6 per cent. taxation.

Over our lifetime, undoubtedly partly as a result of the emergencies of two world wars, we have grown accustomed to very high rates of personal taxation. I should like to hear from my noble friend when he replies some indication that the Government, having dealt with so many problems, having had some success in dealing with a great many other problems, are now taking seriously the problem of the high rates of personal taxation. I believe that there is nothing that could give a greater lift to our economy, a greater encouragement to enterprise, to initiative, to the setting up of new businesses, to savings, than a drastic reduction in the rates of direct taxation; in other words, leaving people more share of the money they have earned to spend for themselves.

I would commend to my noble friend—and I should have commended it to the noble Baroness, Lady Seear, if she had come back; but she has not—that this philosophy goes back to Gladstone, who said that it was a good thing to allow money to fructify in the pockets of the people. I do not know whether the various branches of the Alliance still have a regard for Gladstone, but I think many of us on this side of the House have a respect for his judgment in that regard as in so many others. I hope that my noble friend will be able to give us just a little encouragement, just a little light at the end of the tunnel—and that tunnel leading to the Channel Tunnel.

Lord Molloy

My Lords, before the noble Lord sits down, perhaps I may say that when he made his remarks about the City he was probably quite accurate. But this tiny group of people could voice opinions which could have a deleterious effect on Great Britain's trade and industry, and on the possibility of a different government from a Conservative Government they were quite prepared to indulge in that form of treachery.

Lord Boyd-Carpenter

My Lords, the noble Lord has no right to refer to people's judgment in this regard as an act of treachery. If people with some experience of finance, having studied the election programme of the Labour Party, thought that it would have disastrous effects on our national economy, they were surely right to say so; and in my view they were dead right in saying so.

1.12 p.m.

Lord Houghton of Sowerby

My Lords, when a noble Lord has been speaking for 18 minutes and has sat down I think that other noble Lords ought to let him continue to sit. I see no point in dragging a noble Lord to his feet again after he has sat down, having made an interesting speech lasting that amount of time.

The more budget debates I attend—I think I have attended 37 of them—the greater the sense of unreality one gets of such debates in your Lordships' House. The cloud of the humiliation of 1911 has never been removed from this Chamber when we debate finance. Any observer of our proceedings would never believe, following a long and descriptive speech by the Minister and a long reply from my noble friend Lord Bruce, that before teatime the Bill will have passed through all its stages and gone off for Royal Assent. They would say, "whatever is wrong with that place? They can discuss pornography until the cows come home but they cannot discuss national finance. Sex, but not finance. Abortion, but not finance." It really gets our deliberations out of proportion.

If we are to discuss running to form and old hands, the noble Lord, Lord Boyd-Carpenter, my noble friend Lord Bruce and I are all old hands in Budget debates. So, presumably, we have some form to run to. I am a bit doubtful whether I have. But my noble friend Lord Bruce, politically speaking, runs to form in a spirit of congenital discontent. The noble Lord, Lord Boyd-Carpenter, when he is running to form, deals with his critics in a high spirit of jocular disdain. I do not know what I do when I am running to form. I have to get my form while I am on my feet, and I am not always sure when I get up what it is going to be. There is such a wide choice when discussing finance and taxation that one can really pick and choose where one likes.

I want to be serious for a moment or two on the trend of concessions in our taxation system of which this Bill provides yet another example. The first 60 or 70 clauses deal with an additional array of tax concessions to increase flexibility or to encourage something to be done—what I would call fiscal manipulation for social, economic or even political ends. We have to be careful when using the taxation system for these ancillary purposes. We have to realise the use to which they might eventually be put.

I first felt concern about this trend many years ago when the late Sir Gerald Nabarro suggested using the taxation system to encourage the installation of fuel-saving equipment and appliances. I was a little doubtful about it at the time. When you depart from taxation as a means of raising revenue for the general purposes of running the nation's affairs and trying to distribute it fairly between one citizen and another, then you open up the way to lots of digressions which will suit either pressure groups or the aims of a particular phase in our affairs. It is as if our fiscal system were made of plastic, capable of being pulled about, shaped and adjusted to events or circumstances as they arise.

We have in the Finance Bill before us the concessions for wages based on company profits. In the previous year we had concessions for contributions to charities through the pay-as-you-earn system. We have had concessions for profit sharing. We have had the enormous concessions which have grown and become magnified in the system such as mortgage interest relief.

Some of these concessions have grown to disproportionate size and have become almost an economic menace. They have had results that nobody anticipated. When mortgage interest relief was first used for house purchase in present conditions, nobody realised the effect that it would have on house prices. There is not the slightest doubt that tax relief on mortgage interest has contributed, and is contributing now, to higher prices of domestic accommodation which has become more freely available. It has become profitable to invest in perhaps the most certain investment with capital appreciation that one can make at the present time.

Once concessions have been granted, they become extremely difficult to remove. Alternatively, they become so politically important that you pursue them and enlarge them until they reach a condition of being positively unfair to the rest of taxpayers. We have to bear this in mind. I can think of possible uses of this system of tax concessions that might be made by governments of another political complexion. I mention only one as a purely hypothetical case.

Trade union membership is falling. Trade unions are in difficulties, Trade union membership in some of our newer industries is not prospering. It may be that some government may say, "We must do something to stimulate trade union membership. It is important that we have strong and independent unions, therefore let us do something to encourage trade union membership. Among other things we could make trade union contributions tax deductible and by way of increasing the inducement we could say that members of trade unions should have tax relief on their expenses for travelling to and from work".

There is no end to the bias that can be introduced into the taxation system if a government like to use the majority they have to force it through. There are no principles of equity as between one citizen and another which seem to prevent such a distortion of the system of taxation. I have been looking at the Daily Telegraph of yesterday. It was very interesting and offered some ideas which the Chancellor might have to consider in relation to a comprehensive scheme of tax reform.

One was that the totality of concessions from the burden of taxation in any individual case should be limited. There should be a ceiling to it because, it was stated, if a person of ample means and diversified activities liked to apply his interests with fiscal judgment he could get relief on mortgages and in respect of pensions; he could get relief on farming, on forestry and on business expansion. Indeed if he got enough reliefs he could reduce his tax burden to minimum dimensions. So it was suggested that the Chancellor might have to put a ceiling upon the total of the concessions available in respect of personal taxation.

Such matters may be important in connection with a review of our taxation system, but what I am submitting to the Secretary of State now is that in embarking upon this review of taxation, probably on a scale which might satisfy President Reagan, a great deal of research should be done and a great deal of information should be provided on the incidence of taxation, the effect on the citizen and the cost of the concessions so that we all know what the cost of this adds up to, because we know far too little about it.

Are there any principles of taxation left? My noble friend Lord Bruce referred to the principle of progressive taxation, but progressive taxation is by no means the only or even in some respects the principal form of taxation today. We have a progressive system, which is income tax. We have a proportionate system, which is national insurance. We have indirect taxation and we have now a new tax looming, the community charge.

Progressive taxation is based on an assumption of ability to pay, graduated accorded to means. A proportionate tax takes no account of ability to pay but makes a levy in proportion to gross receipts. A community charge will be a new feature of our taxation system: a flat rate based on a locally determined fixed charge, which we are now coming to call a poll tax. I agree with the noble Baroness, Lady Seear, that when we come to talk about the community charge probably some discussion might take place on what the possible alternatives are.

I do not agree with the noble Baroness that a local income tax is the most attractive alternative to the present rating system. There are many difficulties about a local income tax. I was on a Royal Commission that examined this very carefully indeed, and we were not impressed with the feasibility of a local income tax grafted on to the national system of taxation and possibly subject to the same reliefs all the time. Would they run in harmony or could one be different from another? There is a lot to consider in that connection.

As for the relationship between direct and indirect taxation, Gladstone talked about that; it was one of the things he said in 1888. He was playfully suggesting that he had to look at these two attractive sisters, Miss Direct Taxation and Miss Indirect Taxation. They were equally attractive sisters, he said, and he had to pay due court to both. That suggested that he had to keep them in balance and affections had to be evenly distributed.

We have come a long way since then. I am not sure that we should regard indirect taxation with the distaste that we used to. I recall that the late Hugh Dalton always explained his philosophy on this matter with loud roars of laughter. He used to say that one of the strongest cases for indirect taxation was that it was purely voluntary. If you liked to dress yourself in brown paper and live in the woods you could escape it altogether. In that sense, indirect taxation was levied according to the expenditure of the citizen. That is the theory, but when taxation is usually mounted in such diversified directions as to catch you whatever you do, there is no escape from it.

The novelty tax is nearly always a failure. The trouble with the British public is that they like what they have got used to, whether or not it is fair, and if you try to reform it the cry goes up, "How many winners and how many losers?". We are a nation of winners and losers. Everybody has to be a winner or a loser when we come to taxation, when we come to social benefit, when we come to almost any reform of any kind. It will be tough going for a Chancellor who tries to reform the taxation system to any worthwhile degree if he is going to be unduly oppressed by the numbers of winners or losers. If you cannot reform the tax system to make it fairer other than by giving concessions to all, it is a very difficult job to carry through reforms.

Those are a few random remarks on this Bill. But I hope that when the time comes we can be provided with a fairly comprehensive survey of what is involved in the totality of the tax burden on the citizen and in what direction reforms will make it all more fair. I do not think we can consider particular sectors of the fiscal system in isolation. Also your Lordships' House ought to be given greater opportunity at least of discussing these matters even though we still accept the restraints upon our power to amend the legislation which may be before us.

It is not appropriate to the importance of this subject that on the last day before a Recess that is going to last so long we are driven to pass the Bill in all its stages. I pay respect to the Minister for giving us a full dress survey of the Bill and the economic conditions behind it when, in my recollection of earlier days in your Lordships' House, a Minister would get up and move the Second Reading of a Bill like this without saying a single word about it. That was an affront to the dignity of the House. A few of us then raised questions on the Finance Bill, for example.

I went to the length of shocking the Lord Chancellor and the Chief Whip of the day by calling a Division on the Third Reading of the Finance Bill. The noble and learned Lord, Lord Hailsham, came fuming with indignation into the Chamber. The Chief Whip came across the Chamber and said that such a thing was not done, and so on. I felt the size of a pea by that time. We could not get any Tellers either. It was a horrible experience that I do not intend to repeat. I might run away with the Mace but I shall never again call a Division on the Third Reading of a Finance Bill.

At least let us have time to conduct our discussions and have a more full dress debate. I have spoken for longer than I usually speak—though I am not sure whether or not I have run to form—but I hope that the noble Lord will play a full part as the senior Minister in this House in providing us with an opportunity to discuss tax reforms whenever they come along.

1.20 p.m.

Lord Banks

My Lords, the noble Lord, Lord Houghton of Sowerby, spoke of "old hands in budget debates". I am certainly not one of those, because during the 12½ years that I have been a Member of your Lordships' House this is the first occasion on which I have intervened during the Second Reading of a Finance Bill. I wanted to do so this year because, as the noble Lord, Lord Young of Graffham, made clear, the Bill that is before us inaugurates the new pensions era. In particular, it sets out the new tax regime for personal pensions which, as we have heard, come into force next January. Pensions are controlled partly by the Department of Health and Social Security and partly by the Inland Revenue. Personal pensions stem from the Social Security Act 1986 but their attractiveness depends to a very large extent on the tax regime established in this Bill.

I have to declare an interest in that I am a registered insurance broker specialising in life assurance and pensions, and I have an additional interest in that I believe I was the first person in this country to suggest that what we now think of as Section 226 personal policies with an employer's contribution should be made available to employed persons who have no satisfactory occupational scheme. In October 1958, in an article in the News Chronicle, I proposed, first, that the basic pension should be substantially increased, and, secondly, that all those who were not covered by a satisfactory occupational pension scheme should be able to save up to 3 per cent. of their earnings in a personal pension policy and claim a matching contribution from a central account financed by a levy on all employers who did not have a satisfactory occupational scheme. That eventually became the policy of the Liberal Party in 1960 and it has been endorsed at intervals since then.

However, if that plan in both its parts—the substantially increased basic pension and the personal pension plan with employer's contribution available for those not in a satisfactory occupational scheme—had been adopted, no earnings-related scheme would have been necessary and a much simpler system would have been established. The Government's personal pension plan provides, where personal pension plans are used to contract out of the state earnings-related pension scheme, for an employer's contribution and an employee's contribution to be paid to the policy by means of central collection through the Department of Health and Social Security, which is very much as I suggested 29 years ago and which naturally I welcome.

Some three years ago, when the Government's plans for the future of pensions were not known, I put forward a plan which was approved by the social security committees of both the Liberal and the Social Democrat parties. That plan was to abolish the state earnings-related pension scheme while maintaining accrued rights under that scheme and to direct the current contracting-out rebate, which would no longer be required, to pay for a 25 per cent. increase in the basic pension. I still believe that that could be done. The new personal pensions could then be operated precisely on the basis that I suggested in 1956.

The new state, occupational and personal pensions arrangements will be rather complicated and complex. There will be defined benefit occupational schemes, some contracted in but most contracted out; money purchase occupational schemes, some contracted in and some contracted out; occupational additional voluntary contributions, some with tax-free lump sums and some without; free-standing additional voluntary contributions without tax-free lump sums; employed personal pension holders, some contracted out, some not; self-employed personal pension holders; and self-employed Section 226 pension holders, who are people who have contracts that were taken out before January 1988 but who will be able to continue to pay into those policies. I think that it will be some time before the implications of those arrangements are widely understood throughout the community.

I should like to turn to one or two specific points. The Minister mentioned that the Bill provides for an increased number of providers of pensions, and he mentioned building societies among them. However, in the past few weeks there has been a great deal of speculation as to whether or not building societies will be able to provide personal pensions, and whether the legislation is such as to make it possible for them to do so. Perhaps the Minister could clarify that point.

In future it will only be possible to have a two-thirds pension after 20 years' service with a particular employer instead of 10 years, as is now the case. It has been pointed out that that will tend to create immobility of labour among older employees. The National Association of Pension Funds has suggested that years of service with a previous employer in an approved scheme should be taken into account in computing the 20 years or proportion of those years that an individual has accomplished. An amendment in another place with that aim was not accepted, but I should like to emphasise that those who supported that concept were not at all suggesting that there should be any amalgamation of the pension schemes of the different employers.

However, as regards an employee who spends 10 years with one employer in an occupational scheme and then 10 years with another employer, it remains a fact that had he remained with the first employer he could have qualified for a two-thirds pension. Indeed, why should he not have it when he has changed his job, if the second employer is prepared to meet whatever is required in the way of costs?

As regards free-standing additional voluntary contributions, at the present time some employers provide for their employees to make additional voluntary contributions either into their occupational scheme or into another scheme which runs parallel to it. Under the new arrangement they will have to make such provision; but more than that, if he wishes the employee will be able to effect his own additional voluntary contributions scheme quite independently and separately, so that if he were paying 5 per cent. of his earnings into an occupational scheme he could quite independently of his employer put 10 per cent. into what is called a free-standing additional voluntary contribution.

One of the difficulties is that it is not possible to say precisely what the benefit will be under the free-standing additional voluntary contribution and it may provide more than the revenue limits when aggregated with the occupational scheme. If the occupational scheme were then reduced to keep within the limits, the employee himself would be subsidising his employer's scheme to a greater extent than the 5 per cent. or whatever that he was bound to pay into it.

An amendment was moved in another place which had the objective of saying that the benefits to be obtained from a free-standing additional voluntary contribution should not be restricted in any way. In other words, they should be treated exactly as personal pensions are treated. But the Government spokesman pointed out that the additional voluntary contributions, whether free-standing or not, are part of the occupational scheme arrangement and must be subject to occupational scheme rules; and that if the employee was a member of a non-contributory scheme he would have 15 per cent. which he could put into a free-standing additional voluntary contribution scheme, and it might be that he ended up with a pension rate in excess of the revenue limits. The government spokesman said that an employee could take out a personal pension if he wanted that, though of course he would have to opt out of his occupational scheme to do so.

I should like to suggest a way out. I suggest that where the aggregate exceeds the revenue limits, then the cash value of the balance in the additional voluntary contribution over what is required to reach revenue limits should be returned, less tax at a specified rate. That would be treating it rather similarly to the way in which the return of contributions to an early leaver is treated at the moment. I suggest that the rate of tax should be 20 per cent. and not 10 per cent. and that higher rates of tax above the standard rates should apply.

Under the new arrangements, Section 226 policies will he replaced by personal pensions from January 1988. The tax regime, as the noble Lord, Lord Young of Graffham, explained, will be very similar but there are some differences. Under the personal pension, benefits may be taken at age 50, not at age 60. But I understand that this will not apply to those who hold Section 226 policies. But those people may, as I understand it, continue to pay both annual premiums and single premiums into their Section 226 contract. I assume that they will be able, if in the older group for whom the contribution limits are raised for personal pensions, to pay into Section 226 contract at the new rate.

I regret that personal pensions are starting ahead of the new arrangements for contracting out of money purchase schemes—they are starting in January as opposed to April—and that it will be possible for anyone taking out a personal pension in the first three months of next year to pay an additional year's contribution and secure a 3 per cent. incentive bonus. That will tend to encourage people who have no occupational scheme to set up a personal pension, when it might be that their employer was intending to introduce in April a money purchase scheme which would be more beneficial for them.

I think it will be necessary to monitor the introduction of personal pensions very carefully, because it will not always be to the advantage of the individual to switch to personal pensions from the state earnings-related pension scheme or from an optional scheme. I think it will be necessary to apply the "best advice" principle of the Financial Services Act very strictly in this respect.

In conclusion, perhaps I may say that so far as concerns personal pensions I welcome the introduction of something resembling a plan that I have advocated for years, but I regret that it is set in such a complicated and confusing setting.

1.34 p.m.

Lord Bruce-Gardyne

My Lords, like, I think, most of your Lordships in this debate, I confess that I intend to go a little beyond the precise terms of the Finance Bill. But before I do so, I want to comment on two items in the Bill and in both cases, to congratulate the Government on what seems to me an admirable, model way of handling consultations.

I refer to the outcome of discussions about the RTC provisions with regard to Lloyd's and also to the outcome of negotiations about the treatment of capital gains tax accruing to individual policyholders. In each case it seems to me that the negotiations provided an absolute model of how sensible arrangements should work between government and Whitehall and the outside world. I strongly congratulate my noble friend and my right honourable friends on that extremely sensible outcome.

I must confess that I am not quite so enthusiastic about the profit related pay scheme, basically for the reasons advanced by the noble Lord, Lord Houghton, with whose remarks I found myself very much in agreement. We should beware of spreading ever wider the system of so-called tax expenditures. A couple of years ago, my right honourable friend the Chancellor hoisted to his masthead the slogan of fiscal neutrality. I was very pleased about that. I believe that fiscal neutrality is a splendid target to aim at. I have to say that in the instance of profit related pay, we seem to be going somewhat in the opposite direction. The same might also be said of the personal pension taxation provisions.

I agreed very much with my noble friend Lord Boyd-Carpenter. The key is not to devise new tax loopholes, but to get the rates down and to consolidate the base. Talking of consolidating the base, I want also to refer to a subject which has cropped up on several occasions during the debate, in particular, in the contributions of the noble Lord, Lord Bruce, and my noble friend Lord Boyd-Carpenter. I refer to possible reductions in zero rating of VAT.

I must confess that I was a little astonished by what I heard and, if my noble friend Lord Boyd-Carpenter will forgive me, by the outrage he expressed at the notion of external authorities imposing upon the other place the rates of taxation which should be levied on the British taxpayer. I thought that this was inherent in the 1971 European Communities Act and seen to be such. Indeed, I would venture to suggest that we have seen many instances actually in operation.

I recall to your Lordships the occasion when my right honourable friend the present Chancellor, in his Budget a couple of years ago, introduced reductions in taxation on wines and an increase in taxation on beer. There was no secret about why that was done. It was done because we were obliged by the rules of the Community to do so. I do not honestly see what else one could expect if we are going to participate in a customs union.

One of the essences of a customs union is that you abandon some authority over your autonomy in matters of tax policy. I simply cannot understand why at this late stage, 15 years on, we should be expressing outrage and astonishment that this should happen. It is to my mind of the essence of the customs union; it is clearly described as such, as I see it, in the 1971 European Communities Act.

The answer to the noble Lord, Lord Bruce of Donington, is, surely, that if the courts were to find against us in the present case we should have to get the necessary amendment to legislation through the other place. Of course that is right. As my noble friend Lord Boyd-Carpenter pointed out, the Government can only propose and the other place might dispose in the opposite direction. Then we should be in a proper pickle. If the courts decided that in specific instances our zero rating—for instance, for new building—was unacceptable under the rules of the Community and if we persisted in it, a UK taxpayer could challenge in the European Court on his own behalf. So we would be in an impossible position. Fortunately the Government have a substantial majority in another place. I imagine that they could persuade the other place to act in conformity with the conclusion of the courts. But that is no innovation. It has been the case for 15 years now; so I must confess that I was a little surprised by the outburst of amazement and indignation.

Lord Bruce of Donington

My Lords, I am grateful to the noble Lord. Will he tell us whether he has addressed his mind to what would happen if the other place rejected the recommendations of the Government or the legislation put forward by the Government in conformity with the court decision? What would happen then, and what would the noble Lord wish to happen?

Lord Bruce-Gardyne

My Lords, I must say that we would be in a very considerable tangle. We should have two conflicting positions of law, both open to the UK citizen. I must honestly say that the only logic of that position would be to exercise the sovereign right, which we have in any case, to withdraw from the European Community because such a position was not consistent with the nature of a customs union. We would be deluding ourselves if we thought otherwise.

Lord Boyd-Carpenter

My Lords, surely, in the difficult situation which the noble Lord envisages, there is a fairly simple solution. If we find ourselves unable to agree with the Community on taxation there is nothing to stop the Community bringing its taxation into line with us.

Lord Bruce-Gardyne

My Lords, I accept, of course, what my noble friend says in that respect. But we should not necessarily exaggerate our ability to convince the rest of the Community that everybody is out of step but our Jack. We should not rely on that.

However I want to turn, as a number of noble Lords have done, to the economic background to the Finance Bill referred to by my noble friend in his opening speech. I should have thought that his description of the condition of expansion, indeed the boom in the economy today was nothing other than a statement of fact and one with which it is frankly impossible to disagree. As regards the latest trade returns, it seems that some of the argument is a little old fashioned. The noble Lord, Lord Bruce of Donington, insisted that the City had overdone its reaction yesterday. I agree however, with my noble friend Loyd Boyd-Carpenter that the noble Lord then seemed to suggest that there was perhaps something pretty nasty lurking in the woodshed.

Of course we all remember the days back in the 1960s when the fate of governments hung on monthly trade returns. I remember Nigel Birch once predicting the moment when the noble Lord, Lord Wilson of Rievaulx, would greet a freak good month's trade returns by summoning the Household Cavalry, organising a flourish of trumpets and emerging himself wearing what Nigel Birch described as his "Anguilla Star".

Certainly in those days trade returns were watched with tremendous anxiety. But those were the days of fixed exchange rates. If we had a series of bad trade returns we were then liable to have a massive wave of speculation against the currency leading perhaps to the humiliation of a false devaluation. But all that has now gone. In the free and fancy world of floating exchange rates, there is no real reason why there should be dramatic emotion about any particular month's trade returns or even a series of bad trade returns. For goodness sake, the United States through the early 1980s was running an enormous and rapidly accelerating trade deficit as it still is. For many years that was accompanied by a rising dollar and the great strength of the dollar on the foreign exchange markets.

In themselves the trade returns of today are not things about which we should indulge in panic or despair. What is true and what would worry the City to some extent is that they may be symptoms of something else, in particular symptoms of a propensity to draw in imports because industry is approaching the limits of capacity or because of the scale of the current boom in personal credit.

I wish to refer to personal credit. It is the one point where I continue to have small worries in two respects; from a prudential point of view and the potential impact in due course on the rate of domestic inflation. As regards the prudential position, I find preoccupying the scale of lending to the personal sector. The Chancellor has rightly pointed out that it is overwhelmingly in the form of housing finance. However it seems to me that that finance is increasingly geared to a higher valuation of housing property which may be 100 per cent. and in some cases may even be in excess of 100 per cent. The ratio of loans to individual income has risen very substantially in the last few years. Of course that is fine so long as house prices continue to rise. We tend to assume that this is bound to continue ineluctably as we have known that phenomenon for most of our lives.

It is worth reflecting that in some parts of the country within the last four years the value of prime agricultural land has fallen by up to 50 per cent. That has happened in four or five years. It would have been regarded equally as unthinkable until a few years ago.

I do not see that there is any reason to assume that we could not have a substantial adjustment at some stage in housing prices. Some of the borrowing would then look prudentially pretty unsound. The more immediate question is whether we are not in some danger of seeing the current credit boom spill over into inflation. I know that the so-called broad money aggregate has now been dismissed from the vocabulary of our concerns. It is a dial which whirls around without connection to the engine, so we are told. I hope that is true; but I am bound to say that if it should turn out that the dial had some connection with the engine one should be worrying a bit about the speed.

That is not all. There is also the scale of lending both corporate and personal from the banks, and the acceleration in the price of real assets, both houses and shares. So far it is true we have not seen another factor which I know is the one which the Government have been watching very closely—any significant pressure on the exchange rate. Presumably, if that were to materialise, there would be some move towards a hardening of interest rates to correct the pressures which might materialise. My noble friend said in his opening remarks that we were determined to maintain a tight hold on inflation. But we need to watch it and to make sure that monetary conditions are such that we are not preparing for some significant acceleration in prices within the next 12 to 18 months. I hope I am wrong on that.

1.49 p.m.

Lord Graham of Edmonton

My Lords, the debate on the Finance Bill in your Lordships' House is clearly very different from Finance Bill debates in another place. In the context of things, not least the need to be economical with time, one needs to dip into the lucky bag and bring out one or two points upon which one wishes to make what one hopes will be helpful contributions.

I am bound to say that I listened with a great deal of respect to the speech made by the Secretary of State in introducing this debate. I took particular note of what he said on two points. The first was the profit-related pay aspect and the second was the question of the changes in personal pensions. The Minister will recall, as I do, one or two of his phrases such as, "this will provide wider choice" and "it will be a fair deal for the taxpayer". He also drew our attention to the way in which banks, building societies and unit trusts were now likely to enter a field hitherto not open to them. He told us that the changes would remove obstacles to job mobility and provide a better deal for millions.

I do not dispute the general thrust of trying to induce, by means of encouragement in one form or another, more and more people who have hitherto not been prudent enough or had the opportunity to enjoy a pension to do so. I recall that when I began my employment at the age of 14 with the Newcastle-upon-Tyne Co-operative Society one of the greatest attractions for my mother was that there would be a pension at the end. Fifty-one years on, she felt that that would be a good thing.

We all know that there were not that many companies or firms which had company pensions at that time. I therefore simply wish to relate the views of the Co-operative movement, in whose service I have been for many years. I declare my interest today openly, honestly and proudly. I am sure that the Minister knows that the Co-operative movement has a substantial stake in its pension provisions. It is worth recalling that there are currently over 100 Co-operative pension schemes with current assets exceeding £1 billion. Those schemes are responsible for some 80,000 members and some 30,000 pensioners. The vast majority of schemes are self-administered, contributory final salary arrangements which are not used for contracting out.

In connection with the changes in Clauses 18 to 57 and to Schedule 2, I wish to draw to the attention of the House matters which are not of stupendous importance but which may be capable of improving personal pensions. We believe that there are disadvantages in the occupational and company pension field. I am very grateful to have been present when the noble Lord, Lord Banks, spoke earlier. He spoke from long experience and although he and I do not speak from the same brief, I am certain that he has been talking to many of the same people who have put their points of view to me.

We need to recall that Clauses 18 to 57 deal with the new tax regime for personal pension schemes and that they are available to employees who are not members of an occupational pension scheme and to the self-employed. However, it will not be possible to have a personal pension and a company pension at the same time. The previous Finance Bill, which came out in March 1987 before the general election, appeared to allow members in contracted-in company pension schemes to have a concurrent personal pension provided that only minimum contributions paid by the DHSS were invested in it.

Alas, in the Bill which we are debating today, the limited co-existence of occupational and personal pension schemes has been specifically blocked. We understand that the principles involved have been argued. The noble Lord, Lord Banks, alluded to unsuccessful amendments in another place. I hope that the Minister will feel able to say some kind words about those arrangements as they proceed. The introduction of the amendments from the Finance Bill of March 1987 to the present Bill appears to give rise to needless complications since it does not make it clear what happens if an employee opts out of an employer's scheme during the course of a tax year.

I ask the Minister whether, if the employer's scheme is not contracted out of SERPS, the employee is entitled to a payment from the DHSS in respect of the whole or a part of the year? If the latter is the case, that would appear to conflict with DHSS proposals and to pose considerable administrative problems. The logic that existed in the earlier Finance Bill is still valid now.

The noble Lord, Lord Banks, quite properly dealt with the anomalies that exist in respect of additional voluntary contributions. Clause 58 and Schedule 3 amend the current tax legislation concerning occupational pension schemes to implement the proposals originally announced on Budget Day. The Bill imposes heavy burdens on company schemes. Although the Co-operative movement welcomes the wider introduction of additional voluntary contributions, it is strongly of the view that people should have the opportunity to take out a personal pension, or freestanding AVC, without foregoing the security of occupational schemes. I am sure that the Minister and his advisers intend saying something on that same point, which was made by the noble Lord, Lord Banks. I should be grateful if he would take that on board.

Perhaps I may quote from a document provided by the National Association of Pension Funds Limited which is a respected body. It strongly condemns the arrangements in the current Finance Bill concerning personal pensions. It argues for two solutions. The first would ensure that freestanding AVCs should be as freestanding as personal pensions so that the benefits are not aggregated with those of an occupational scheme. A case for that was made at greater length and very cogently by the noble Lord, Lord Banks, when he spoke earlier.

In respect of the change from 10 to 20 years as the minimum period during which a pension benefit of two-thirds of final salary can be obtained, it also has a solution. It is to allow pensionable service in former schemes to be included when calculating the 20-year qualifying period. In equity, and particularly bearing in mind the desire of the Government and the Minister to encourage not merely high salaries for those who earn them but also people to make prudent arrangements for their retirement and old age, I should have thought that those matters could be looked at very closely indeed.

I think that the Minister is entitled to a kind word as regards the Government's plans in respect to profit-related pay. It is not an easy matter to get right. However, I am a firm believer that those who help to make the profits should be entitled to a share of the profits they have helped to make. One can argue that a fair pension is a fair return for such profits. But we know that the whole nexus of giving to workers, shareholders and managers is geared to encouraging people either to work harder or to work better. The particular concern is to give them a share of what they are earning. Perhaps the Minister can therefore take on board that, while I give a general welcome to making sure the workers get a better share, we need to make sure that it does not dilute the security that workers enjoy. I realise that the Minister was careful to point out that the more profit that is made, the greater the likelihood that work would be retained, and that more work retained would mean fewer redundancies. To that extent, the workers get a share of the profits. The case made out by the Minister concerning a fair pension for those who have helped to create profits and wealth will be warmly welcomed throughout your Lordships' House. Certainly I welcome it, and I speak on behalf of the Co-operative movement. We shall want to make sure that the arrangements that the Minister makes are fair and equitable. I hope that he and his advisers will take on board the fact that at the moment members of company pension funds, when considering the new arrangements, feel they are going to be at a disadvantage. We want to see that everybody who benefits does not do so to the detriment of others.

2 p.m.

Lord Denning

My Lords, my name is not on the list of speakers. However, during the course of the discussion, a matter of profound importance has arisen. I refer to the imposition of value added tax on so many goods and supplies which are made on our people and of which a goodly slice is payable to the European Commission.

First, I deal with the proposals that are in hand for taxing and levying VAT tax on many more items. It is said that the tax will be levied on children's shoes, clothing and the like. It is still only a proposal, and we do not know the details. However, the White Paper issued by the European Commission indicates that by the year 1992 they hope to achieve the completion of the internal market. Naturally enough they will want all VAT tax to be harmonious throughout all the member states. A significant sentence in the White Paper indicates they will, if need be take proceedings against the member states in order to ensure that harmonious tax is levied throughout the Community. I understand that the Prime Minister and the Paymaster General have stated that they will use their veto against some of the proposals in order to express objection to them going through.

I particularly want to deal with VAT, which is at present leviable throughout the United Kingdom and which this Parliament has zero rated—that is to say, no tax is payable on the construction of new houses and buildings; on petrol, and so forth, supplied to businesses, or on new services and the like. In other words, in the schedule to our own value added tax we have zero rated all those important items.

The European Commission have said according to their directive we had no right whatever to zero rate those items. They have accused us, before the European Court of Justice, of inserting the zero ratings wrongly in our own statute. They have accused us of breaking the Treaty of Rome. They ask the European Court of Justice to declare that the statute of this country is invalid under their law. My Lords, is that permissible?

The question has been raised before by the noble Lord, Lord Bruce of Donington, as to what are the pleadings in the case. We should like to know what is the precise accusation against the United Kingdom. We should like to know what defence is being put forward on our behalf. The Government say that they will fight the case, and fight it vigorously—but can they know all the right points that should be taken? I gather from what the Minister has just said that at last they are proposing to allow us to see the pleadings in this vitally important case. It has taken a long time to drag the pleadings out.

The Commission declined for weeks and months to let the people of England, or this Parliament, see the pleadings. That is quite contrary to all our concepts in English law. Under English law the pleadings of the parties should be made open, whether they are written or oral argument. Everything must be done in open court. No party is allowed to make secret and confidential communications to the judges. It would be rejected at once. Therefore, we ought to be able to see the pleadings, whether written or oral, which are being laid before the European Court of Justice against us, and in our defence. I gather that at last the European Commission may consider that point.

However, a more important point than the pleadings concerns the nature of the order that is sought against us. It is sought to declare that a statute of this Parliament was invalid and contrary to the Treaty of Rome. The European Commission issued a directive and said that we have not obeyed the treaty and we have not implemented it properly. Our Government will say—and I shall support them—that we have implemented it correctly. The Parliament not the Government—have implemented it in the value added tax of 1983. The European Commission have gone through the schedule to that very Act of Parliament and have said "this is wrong," or "that is wrong," as though they could criticise and condemn our own Acts of Parliament. They are going much too far.

If they continue in this manner the sovereignty of this Parliament is being challenged. The Commission have no right whatever to seek to declare invalid the Acts of Paliament of the United Kingdom. In the course of the discussion, the noble Lord, Lord Bruce of Donington, passed me a note with the following question: If the European Court rules against us in September (it is due for hearing on 14th September) what can we do if the decision becomes automatically applied?". My Lords, what can we do? I say that so far as concerns the United Kingdom, the European Commission is inferior and the European Court of Justice is inferior to our own courts. We still have sovereignty in this country over Her Majesty's courts and sovereignty over the law which is to be applied by our courts. We are not to be dictated to by a European Commission or a European court as to what our laws should be.

"What is to be done?" asks the noble Lord, Lord Bruce of Donington. What is to be done if the European Court says, "Oh yes, you are to levy value added tax on these new houses and buildings and the like and it does not matter what is in the Act". My answer is that if the European Court says that, then it has no jurisdiction whatever to make such a law apply to our own country and our own laws.

I say that Her Majesty's courts are still superior. The Attorney-General can go to our own courts and say that the European Commission and the European Court of Justice have exceeded their jurisdiction; they have gone beyond the jurisdiction properly attributed to them. Our own courts, right up to the House of Lords, can issue a judicial review to those bodies which are exceeding their jurisdiction in this way. That is my answer to the noble Lord, Lord Bruce of Donington. We have a remedy in our own courts and the Attorney-General ought to take it if need be. I return to the fundamental issue. How long we have fought for the principle that no tax whatever should be levied upon the people of England except by the sanction and the authority of this Parliament.

Lord Bruce-Gardyne

Would the noble and learned Lord allow me to interrupt?

Lord Denning

I do not mind. I shall let you steal a minute. I should like to say that as a fundamental principle.

Lord Bruce-Gardyne

I apologise for interrupting the noble and learned Lord. Can he explain to us how he sees a customs union operating if the individual national parliaments within that customs union can, at their entirely unfettered discretion, impose taxes on goods which pass across the frontiers which may deflect trade within that customs union? How can that be compatible with the operation of a customs union?

Lord Denning

That is the very point. I can understand the argument of the European Commission, and I can understand what the views of the European Court of Justice may be. I can understand that it may make it difficult for them to enforce.

The point I come back to is English law and not Community law. In this country the law of England prevails. May I repeat that no tax can be imposed or levied upon our people except with the sanction of Parliament. What is being challenged is the authority of Parliament which passed the Value Added Tax Act of 1983. If it is to be altered, it must be altered by the free will of Parliament.

Let us be persuaded, if need be, by the European Commission or whoever likes to persuade us, to impose higher taxes; to impose value added tax on new houses, and so on. Let us be persuaded of that and let the Government be persuaded of it, if need be. Let it be brought before Parliament to sanction. That is the only way—not to command or force us—but to persuade us, if need be, that we ought to change our Act, and in those circumstances that we ought to go ahead in accordance with all the customs unions. Let it be by persuasion and not by force. Let the Government submit to all proper persuasion but do not let us be taken to a Court of Justice and be accused of breaking our own treaties. In other words, I would still support the sovereignty of the Parliament of this country and the sovereignty of the courts.

2.13 p.m.

Lord Young of Graffham

My Lords, we have had a very good debate on the Finance Bill; indeed, if the trend continues, in a few years' time I can see that we shall be having days of debate on the Finance Bill. Of course, the contribution from the noble Lord, Lord Bruce of Donington, was yet another marvellous example of accusing me of euphoria. I shall not go into that. Other noble Lords have explained to the noble Lord opposite that I was merely reciting what is actually happening in the world.

The noble Lord asked one or two interesting questions and said that the Government should take steps to stimulate manufacturing industry by investing public capital—perhaps even to restore the nationalised industries, and I know not what. Surely, if we have learnt one lesson, and one lesson only in the decade of the 1980s, it is that manufacturing industry is restored as soon as the manufacturers themselves pay attention to design, delivery and the quality of the goods that they manufacture. That is not a function of government, no matter how much they might wish to influence it. Government can assist manufacturers, but they must do it themselves. Quite simply, the manufacturers are doing it themselves, and that is why performance is getting better.

Noble Lords opposite—I suspect that they have not read the Finance Bill because their comments did not have much to do with it—built a castle in the air about their fears of the imposition of VAT on certain items. Indeed, they set off a chain of thought that was followed by many other noble Lords. The Prime Minister has said time and again that for Europe to change the zero rating basis of VAT would require the United Kingdom Government's agreement since it must be a unanimous decision. The Prime Minister has said, and my colleagues have confirmed it, that the Government would apply our veto. Therefore, that proposal cannot come about.

I am grateful to the noble Baroness, Lady Seear, for her welcome both to profit-related pay and to personal pensions. I am well aware that there are now frequent occasions on which the noble Baroness welcomes some of the actions taken by this Government and I am quite happy to accept that welcome when it does come. The noble Baroness referred to mobility of labour. Of course mobility of labour is essential at a time when there are increasing signs of skill shortages across the nation. That is why we propose to decontrol the rents of new lettings. That will help restore a private rented sector and the extension of assured tenancy so that we can allow more people to move around the country.

I venture to disagree with the noble Baroness in one or two areas. First, unemployment is, of course, still too high. It will always be too high until we can get it down way beneath the present figures. However, it is lower today than it is in France. We should also occasionally take note of the fact that while it has been going down in this country for the past year, unemployment has been going up almost everywhere else in Europe. That at least shows a trend in the right direction. One of the reasons why I believe unemployment is going down in this country is that, although our earnings are increasing, our unit labour costs are putting us in an increasingly competitive position.

I make one small point. Consensus itself is not an abstract virtue. It does not exist by itself. It is very good to agree, and it is very good to agree with as many people as possible in society when we propose to introduce new taxes. Indeed, when we looked at profit-related pay it was in a Green Paper and we had extensive consultations with the trade unions as well as employers. The results bear all the hallmarks of listening to those consultations and I believe that there we show the benefits of consultation.

As regards Neddy, there will still be four meetings a year and many of the little Neddies will be operating. Therefore, I believe that we shall have a more effective organisation as a result of that.

To take a final theme on consultations, I refer to the community charge. We issued a Green Paper in January 1986 entitled Paying for Local Government which carefully examined the case for local income tax. The Green Paper demolished that case. Local income tax would put up to 14 pence in the pound on top of national income tax. Again, it would be paid by only 20 million out of 35 million voters. Therefore, it would not make much difference to bringing back responsibility to local government.

I am grateful to my noble friend Lord Boyd-Carpenter for his reminiscences about purchase tax. Indeed, there are times when I look at purchase tax with faint envy, but that is going back some way. I am grateful to my noble friend for asking how one manages to encourage investment by increasing tax. It is only as we have managed to reduce taxes that we now begin to see investment continuing. However, I accept the gentle admonishment of my noble friend about the tax rate of 60 per cent. I will ensure that his wise remarks are passed to my right honourable friend the Chancellor of the Exchequer and I will persuade him to read those remarks with great care. I hope that we may see results in the years ahead and that we can continue with our acknowledged aim of reducing the burden of taxation on individuals. I shall also pass on my noble friend's suggestion about principal homes being exempt from liability to certain taxes.

I always listen with great interest to the noble Lord, Lord Houghton of Sowerby, and I am grateful to him for wisely drawing attention to the dangers of using the tax system for non-fiscal purposes. When he quoted Gladstone in 1888, he did it with such force that I thought that perhaps he had been there at the time. I gather that he had read about it. He took us down an interesting path. He looked at the many different ways in whch we can raise taxes. The fact that Hugh Dalton may have described indirect taxes as purely voluntary does not seem to be relevant in today's world of VAT. I find it difficult to avoid paying VAT. There are not many items on which it is not charged.

I am grateful to the noble Lord, Lord Banks, with his great depth of experience in the insurance world. I must confess that I did not follow the detail of all his points. I shall pass on the many points that he made to those who are more concerned with the matters and ensure that they are looked into. The noble Lord asked whether building socieites could provide pension services. The answer is: yes in theory, but there are some difficulties. However, those difficulties are being discussed; the Finance Bill provides for that. However, the technical difficulty of the definition of deposits within a building society is being investigated. I hope that those difficulties can be overcome before much longer.

The noble Lord and the noble Lord, Lord Graham of Edmonton, asked whether years of previous service with an employer could be taken into account. That issue has been discussed extensively in another place and was rejected there. Alas, I think that that is the final answer, but I shall pass on a copy of the noble Lords' speeches and if I have any further information I shall write to them.

I am grateful to my noble friend Lord Bruce-Gardyne. I am happy to accept his congratulations on our consultations over recent changes in the tax system. I shall pass them on to those who consulted. I am always worried when those who sit behind me agree with those who sit on the other side of the House. My noble friend agreed with the noble Lord, Lord Houghton of Sowerby, and I shall therefore pay considerable attention to their remarks. I shall read them with great interest. I am also grateful to my noble friend for what I shall describe as his mature reflections on yesterday's trade figures. I am sure that when we meet again in some three month's time we shall see that those figures have not set a new trend. I listened with great care to my noble friend's views on personal lending and its effect on inflation. Although I shall be deprived of hearing from him for the next three months, I shall no doubt have the opportunity to read his views from time to time, and no doubt his theme will be continued if the figures do not change.

I am grateful to the noble Lord, Lord Graham of Edmonton, for his welcome for the principles of profit-related pay. I shall read his remarks about portable pensions with great care. Alas, I do not think I can offer him much help over years of previous service. He raised a number of points into which I shall look. If I may, I shall reply to him.

I am grateful to the noble and learned Lord, Lord Denning. I am sure that during the course of a long and distinguished career the noble and learned Lord would not have been overly amused by anyone who wished to break the rules of his court. In doing what we have done about the pleadings, we are of course following the procedures of the European Court. I am sure that he would be the first of your Lordships to affirm that the rules of the court must be followed. However, I hope that before much longer the terms of our pleadings will be available. I hope that before we meet again the court's decision will have come and gone and that once more the fears about the imposition of VAT willl have disappeared by the autumn.

It has been a good debate. I am glad that we have two Finance Bills this year and that we have been able to conclude the agenda which my right honourable friend the Chancellor of the Exchequer set at the time of his Budget Statement earlier this year.

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

Then, Standing Order No. 44 having been suspended (pursuant to Resolution of 16th July), Bill read a third time, and passed.