Lords Sitting of 27 July 1988

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR On the Woolsack.
Prayers—Read by the Lord Bishop of Sheffield.

Disabled Persons Act: Report
Lord Mottistone Lord Mottistone asked Her Majesty's Government:
When a report in accordance with Section 11 of the Disabled Persons (Services, Consultation and Representation) Act 1986 can be expected.
The Parliamentary Under-Secretary of State, Department of Social Security (Lord Skelmersdale): My Lords, the first report is expected to be laid before the end of 1989.
Lord Mottistone: My Lords, I thank my noble friend for that Answer. Is he aware that in March of last year Mr. John Major expected to implement Section 11 during 1987 and that in March of this year Mrs. Currie proposed to implement it as soon as possible? Is what he is now saying not a little dilatory in view of the promises of his colleagues in another place last year and this year?
Lord Skelmersdale: My Lords, the Körner data on which the report will be based are delayed, as I told the House just the other day. However, the most recent data on the numbers of mentally ill and mentally handicapped people treated in hospitals are already available to the House in the Library.
Lord Ennals: My Lords, is the Minister aware that many disabled people and many of those who represent them believe that the continued delay in publishing the report under Section 11 of the Act is linked with the Government's prolonged delay in publishing the results of the OPCS survey which shows that, at 6 million, there are about twice as many disabled people as the Government had assumed? Will the Minister confirm that the review of disability benefits will quickly follow the publication of the surveys? Can he give any more information about when those surveys will be published?
Lord Skelmersdale: My Lords, there is absolutely no connection between the implementation of Section 11 of the Act and the OPCS survey which is due to be published in two halves, the first later this year.
Lord Mottistone: My Lords, will my noble friend pay particular attention to the fact that this whole process is distressing to the carers of the mentally ill and mentally handicapped and indeed to the sufferers as well? There may be all kinds of administrative reasons, but will he not take to heart the fact that people need to have this information and that there might be a little more genuine effort to produce the reports as promised in earlier times?
Lord Skelmersdale: Yes, my Lords, I take my noble friend's point. However, it is important that statistical information of whatever kind should be accurate and based on firm data. It has been agreed over the past 18 months or so that the proposals in the Körner Report will produce this data. Until they start to come through and start to be evaluated there is no point in putting a report on this or any other matter before Parliament.
Lord Ennals: My Lords, as the noble Lord has said—and no one would disagree with him—that the information should be correct, why did his two colleagues in another place indicate, first, that the report would be published last year, and then that it would he published this year? If the information is available in the Library, why cannot it be published according to the Act of Parliament?
Lord Skelmersdale: My Lords, fully annotated and correct information is not available. What is available in the Library is a continuation of the existing set of figures which have been found to be inadequate. The answers of my colleagues the Parliamentary Under-Secretary of State at the Department of Health and the then Minister of State, Mr. Major, which have been mentioned in the House this afternoon, were made before the delays in the implementation of the Körner statistics were known.

Food and Drink Intervention Payments
2.41 p.m.
Lord Mottistone Lord Mottistone asked Her Majesty's Government:
What steps they are taking to ensure that companies in the food and drink industries are receiving prompt payment for export refunds from the Intervention Board for Agricultural Produce; and what arrangements are being made for payment on account until the payment difficulties are resolved.
The Parliamentary Under-Secretary of State, Ministry of Agriculture, Fisheries and Food (Baroness Trumpington): My Lords, the intervention board has suffered extended delivery delays and technical problems in implementing its new computerised export refund claims system. Consequently, the board is urgently examining the practicability of some form of payment compensating for unreasonable delays. I hope that a further statement will be possible shortly.
Lord Mottistone: My Lords, I thank my noble friend for that Answer. Is she aware that the amount of moneys owed to food processing companies as a result of these delays is of the order of £200 million for this year? One big company is owed £2·5 million and in recent weeks has received a cheque for £2 and concurrently an invoice for £10·50. Is she further aware that the problem is cash flow, particularly for small companies and now indeed for the big companies? Some small companies have ceased taking up export opportunities because of this delay

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and because of not having the money. Although my noble friend talks about compensation, will she not take into account the fact that the problem would be solved if companies were given advance payments roughly based on that of the previous year, which could be tidied up later? If a company is owed £2·5 million, an advance payment of £1 million would not he unreasonable. Will my noble friend comment on that?
Baroness Trumpington: My Lords, in answer to my noble friend's lengthy supplementary questions, I know that these delays have had a serious effect on traders. I am very sorry about this and we urgently hope to issue a statement. With regard to the question of advance payments, the possibility of making payments on account was carefully considered. The board concluded that, owing to EC implications, it would be unwise to pursue this proposal. I can go into the EC implications if anybody wants me to.
Lord Gallacher: My Lords, has the noble Baroness seen the annual report of the board for 1987 in which it is recorded that staff turnover for that year was of the order of 24 per cent. and the shortage against the establishment was 10 per cent.? Will she not agree that that combination of figures is in part responsible for the delays about which the noble Lord, Lord Mottistone, so rightly complains?
Further, is it not a fact that there may be a case for considering moving the intervention board's headquarters from a town which is as prosperous as Reading, and which is likely to go on being prosperous, to a part of the country which is more in need of employment and where the overall employment situation would be easier?
Baroness Trumpington: My Lords, I heard what the noble Lord said in the latter part of his supplementary question. However, I must explain that, owing to repeated delays in the delivery of software for the new computerised export refund claims system, technical problems were experienced in bringing the system on stream. The delays in implementation coincided with the introduction of the harmonised custom system and the single administrative document, which created additional difficulties. None of those problems was foreseeable. There have also been staff difficulties and new staff have been taken on. However, the staff who are at present employed there are making excellent progress and the backlog is going down.
Lord Harmar-Nicholls: My Lords, is my noble friend aware that the phrase "European implications" makes it inadvisable to do this? Are we to presume from this that in purely British terms it would be helpful and good to do it, but that outside reasons are preventing us from making the advance payments?
Baroness Trumpington: Well, my Lords, I did warn you! Unfortunately payments in advance could, in Community law terms, amount to an interest-free loan constituting state aid if the trader did not
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subsequently establish his entitlement to an export refund. Should the Commission consider that a state aid of this kind existed, the amount of disallowance they might propose could be large. In that case substantial sums would fall to he met in full from Exchequer funds.
Lord Somers: My Lords, I should like to ask the noble Baroness whether it is possible that this delay is due to the computer going wrong.
Baroness Trumpington: My Lords, no; the computer has not had a chance to go wrong because it has not properly arrived.
Lord Carter: My Lords, is the Minister aware that, besides the delays in the payments of export refunds to traders, there are also considerable delays in the payments for such things as the premiums on homegrown rape seed? Is she further aware that the crusher has to reclaim the premium from the intervention board before it can be paid over to the farmer? Will she agree that with interest rates at their current level this can be equivalent to a reduction in the farmer's price of 3 to 4 per cent.?.
Baroness Trumpington: My Lords, I think that I have given many explanations as to why this has happened and I have also said that I regret it very much. However, I should like to add that there has been an increase in claims because of international activity. In the first six months of this year we paid more claims than in the whole of 1987. We are now within the target on beef, veal and cereals; sugar and milk are almost on target.
Lord Molloy: My Lords, is it not perplexing that long before these appalling delays occurred—which are irritating and, indeed, sometimes harmful—no excuse could be advanced because of the lateness of computers as computers did not exist and, remarkably enough, nor did the problems about which the noble Baroness has been talking?
Baroness Trumpington: My Lords, from 1984 until early 1988 when the current difficulties began, the time taken to pay claims in the processed goods area averaged three and a half weeks and, on average, was never worse than six weeks. That compares favourably with the legal and Commission view that a period not exceeding two months is reasonable for the complex transactions concerned, and very favourably with many other member states within this sector. The periods that I have just mentioned go back long before the computer.
Lord Mottistone: My Lords, I congratulate my noble friend on her ability to deal with this problem: she is defending the indefensible. Does she agree that her argument against advance payments was not convincing and that it was put up by bureaucrats who ought to be tamed?
Will she also agree that, whatever the complicated answer may be, the matter is worth further study in order to make quite certain that people do not fail to export because they do not have enough money to do so?
Baroness Trumpington: My Lords, I think the best that I can do with that supplementary question is to pass it over to my right honourable friend in another place.
Lord Elwyn-Jones: My Lords, how soon will computer software be harmonised, to coin a phrase?
Baroness Trumpington: I would rather not, my Lords.

Hardwood Imports
2.50 p.m.
Lord Vernon Lord Vernon asked Her Majesty's Government:
What actions they propose to take to reduce the importation of hardwoods from tropical countries.
The Secretary of State for Trade and Industry (Lord Young of Graffham): My Lords, the Government share the general concern about the depletion of the rain forests, but the major cause of forest reduction is domestic consumption for fuel, fodder and agricultural land in the producing countries themselves. International trade accounts for only about 10 per cent. of tropical hardwoods. We believe that the trade-related aspects of this complex problem are best addressed through the work of the International Tropical Timber Organisation.
Lord Vernon: My Lords, despite what the Minister said, is he aware that millions of acres of tropical forest are being destroyed annually? The size is estimated to be the area of England, Wales and Scotland. That is having disastrous ecological and environmental consequences. Does he appreciate that Western Europe is one of the main importers of some of those tropical hardwoods? Should this country not give some lead to the EC by reducing, or preferably halting altogether, those imports?
Lord Young of Graffham: My Lords, I am aware that most felling is for domestic consumption. As my Answer reveals, international trade accounts for some 10 per cent. only of the sales of tropical hardwoods. It is a difficult problem. There are complex social, economic and environmental problems involved in the shrinkage of tropical rain forests that require a global solution, which is why we believe that it is best addressed through the International Tropical Timber Organisation.
Lord Taylor of Gryfe: My Lords, is the Minister aware that the total bill for timber imports into this country now runs at £6 billion, and that 75 per cent. of those imports are in softwoods (conifers)? Will he assure us that to avoid the problem which the noble Lord, Lord Vernon, has raised this afternoon increased planting will take place in this country to ensure domestic supplies? Will he also take steps to monitor the impact of the abolition of tax incentives on the future of planting programmes?
Lord Young of Graffham: My Lords, in your Lordships' House we have questions whose main purport is that we have too much planting, followed
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by questions whose main purport is that we do not have enough. That may mean that we are getting the balance about right.
Lord Mackie of Benshie: My Lords, is the Minister aware that the increase in CO2 in the atmosphere, which is causing tremendous concern to scientists all over the world, is largely due to the reduction in tropical rain forests? Apart from leaving the matter to an international body, does he agree that it is high time that the Government set up a commission to study the problem and collate the various arguments put forward by responsible scientists? It is time that they were collated and a view taken.
Lord Young of Graffham: My Lords, dependence upon fossil fuels is not unconnected with this matter. Those people who often take a particular stand on the use of nuclear power also take a similar stand on the results of the use of fossil fuels. It is a difficult problem. It is not one that is easily settled. We believe that by using realistic energy pricing, which reflects true costs, by improving energy efficiency and by looking at other byproducts, such as chlorofluoro-carbons, which can cause similar effects on the ozone layer—the coming into force of the Montreal protocol next January will have some effect on that—we shall begin to take steps towards solving this difficult and complex problem.
Lord Cledwyn of Penrhos: My Lords, the Minister has properly stressed the importance of the International Tropical Timber Organisation. What is the British interest and representation on that organisation? What policies does his department advise our representatives to follow?
Lord Young of Graffham: My Lords, I should be more than happy to write to the Leader of the Opposition to give the exact details of what my department advises on the problem. It is a complex matter and one which I do not believe is suitable to be answered in this form.
Viscount St. Davids: My Lords, does my noble friend agree that, although the tropical rain forests are enormously important for a whole number of reasons which have been suggested today, the best place to produce tropical hardwoods is in the tropics, and that in a free world that is what should be done?
Lord Young of Graffham: My Lords, it is difficult to see tropical hardwoods being produced anywhere but in the tropics, so I agree with the noble Lord.
Lord Cledwyn of Penrhos: My Lords, does the noble Lord's answer to me mean that he does not have the information in the file in front of him, or is he saying that the information is too long and complex, in which event he proposes to send me a long document which I can read during the long Recess?
Lord Young of Graffham: My Lords, I am saying that I wish to do full justice to the Leader of the Opposition and that therefore I shall write to him fully.

Fur Coats: Cruelty Labels
2.55 p.m.
Lord Hatch of Lusby Lord Hatch of Lusby asked Her Majesty's Government:
Why they have dropped plans for cruelty labels in fur coats.
Lord Young of Graffham: My Lords, we gave careful consideration to the representations made during the consultation process. Legal difficulties were raised, and we regretfully came to the conclusion that it would not be practicable to proceed in the way originally envisaged. We therefore decided not to proceed with the proposed order and to defer further action on the matter.
Lord Hatch of Lusby: My Lords, perhaps I may ask the Minister two questions. If there are legal difficulties now, why were they not foreseen and investigated before the department made such a fuss in February about how it was going to apply the cruelty label process? Secondly, is it the case that representations have been made by the Canadian Government to protect their trappers; that one of the factors which has influenced Her Majesty's Government is that they are trying to sell £4 billion worth of nuclear submarines to Canada; and that the Canadians also have an offer from the French which they are inclined to take if the British Government do not play ball with them?
Lord Young of Graffham: My Lords, I fear that on his occasion I must disappoint the noble Lord. It is true that the proposed order was vigorously opposed by the fur trade and by the Canadians, who argued that it would destroy the livelihood of the Canadian native peoples. But it became apparent during the course of the consultation that the legal advice was that such an order, if made, was liable to be struck down as ultra vires under the Trade Descriptions Act 1968. In those circumstances, and in those circumstances alone, it was decided not to proceed with the order.
Lord Hailsham of Saint Marylebone: My Lords, does my noble friend know how many stoats have to die to make a full set of new judge's robes, and would not rabbit and nylon do even better?
Lord Young of Graffham: My Lords, I am glad to he able to assure all your Lordships that I have not had the misfortune to appear before a judge.
Lord Houghton of Sowerby: My Lords, is the Minister aware that similar difficulties arose in connection with the labelling of seal products? The Government made difficulties, legal and otherwise, Canadian and otherwise, until Europe stepped in to make it obligatory for EC countries. It accomplished what the British Government had been unable to achieve.
Lord Young of Graffham: My Lords, on this matter it may satisfy some in your Lordships' House to know that the European Commission is considering
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the possibility of action on this subject. Commissioner Clinton Davis announced on 5th July last that it is looking carefully into the idea that furs imported into Europe as a whole should bear labels indicating whether or not those who trap the animals use the leg-hold trap. That of course would obviate any difficulties under Section 8 of the Trade Descriptions Act.
Lord Morris: My Lords, is my noble friend aware that many believe that Her Majesty's Government are due the highest praise for withdrawing that order, demonstrating yet again their ability to listen to the merits of arguments and to act accordingly? Furthermore, should they need any more confirmation of the dottiness of the original idea, they need look no further than the fact that it appears to be supported by the noble Lord opposite.
Lord Young of Graffham: My Lords, my noble friend demonstrates that your Lordships' House contains at least two sides.
The Earl of Halsbury: My Lords, could the very useful concept of a cruelty label be transferred from fur coats to starred questions, particularly those of a repetitious character?
Lord Young of Graffham: My Lords, I should wear such a label with pride.
Lord Hatch of Lusby: My Lords, I am sure that the noble Lord would never accuse me of cruelty to him. However he has not answered either of my questions. If there are legal difficulties, why were they not foreseen before his department announced in February that the Trade Descriptions Act would be used for this purpose? Secondly, is it the case that the Canadian Government have threatened not to enter into the deal for 4 billion pounds-worth of nuclear submarines if this is carried through but have threatened to take up the French option, which I believe is cheaper?
Lord Young of Graffham: My Lords, I must confess that I do not share the infallibility which the noble Lord, Lord Hatch of Lusby, normally has in these matters. I was not able to see all the legal difficulties at the time when this matter was first raised. Subsequently it became clear that the order would be ultra vires. In those circumstances we did not proceed.
As regards the second part of the noble Lord's question, I did not answer it previously because I did not think it worth answering. However, if the noble Lord really thinks it is worth answering, then quite assuredly there is no connection between the fur marketing order and any sale of submarines to Canada. The noble Lord should try on occasion not to wave his prejudices about too much in public.

Housing (Scotland) Bill
3.2 p.m.
Lord Denham: My Lords, I have it in command from Her Majesty the Queen to acquaint the House

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that Her Majesty, having been informed of the purport of the Housing (Scotland) Bill, has consented to place her prerogatives and interests, so far as they are affected by the Bill, at the disposal of Parliament for the purposes of the Bill.
Bill read a third time.
Clause 36 [Damages for unlawful eviction]:
The Minister of State, Scottish Office (Lord Sanderson of Bowden)The Minister of State, Scottish Office (Lord Sanderson of Bowden) moved Amendment No. 1:
Page 22, line 1, leave out ("3rd December 1987") and insert ("6th July 1988").
The noble Lord said: My Lords, this is a technical amendment. As your Lordships will recall, during our Report stage the Government tabled an amendment to clarify the circumstances under which it would be possible for a tenant to claim damages for illegal eviction. In particular, it made it possible for damages to be claimed when a landlord should have known or had reasonable cause to believe that his conduct would be likely to have the tenant leave his home. As drafted, the revised Clause 36 would take effect from 3rd December 1987. However, because we have changed the nature of the offence it would not be appropriate to make it retrospective to December 1987.
In the circumstances, we now propose that the revised provision should take effect from 6th July 1988, the date on which the amendment was accepted by your Lordships. With this brief explanation, I beg to move.
Lord Morton of Shuna: My Lords, I can see the reason for this change. What I cannot see—and no doubt the noble Lord will explain—is why, considering it was a government amendment moved on 6th July, the Government had not thought of this point at the time they drafted the amendment. I can see that it is unfortunate to back-date illegality; therefore I have no intention of proposing it. However, surely this point must have occurred to the person who was drafting and approving the amendment. No doubt the Minister will respond.
Lord Sanderson of Bowden: My Lords, in reply to the noble Lord, Lord Morton of Shuna, I must say that it is always possible for those who are drafting legislation to realise after amendments have been put down that they may not cover the whole subject. I am concerned that this Bill should leave the House in good order so that it can be passed and enacted.
On these occasions it is always clever to be wise after the event. With that explanation I am very glad to be able to bring forward this amendment only a week after the previous amendment was passed. I hope that the noble Lord, Lord Morton of Shuna, who is himself a good lawyer, will understand that what we are looking for is the best possible interpretation of the law.
Lord Morton of Shuna: My Lords, with the leave of the House, I do not wish to stand out as a lawyer but as an arithmetician. A week after 6th July would have been rather earlier than 27th July.
On Question, amendment agreed to
Clause 58 [Application to exercise rights conferred hi this Part and offer to sell]:
Lord Sanderson of Bowden Lord Sanderson of Bowden moved Amendment No. 2:
Page 36, line 47, leave out ("as determined by the district valuer").
The noble Lord said: My Lords, in moving Amendment No. 2, I should like to speak also to Amendments Nos. 3, 4 and 5. During the Committee and Report stages we debated amendments proposed by the noble Lords, Lord Carmichael of Kelvingrove, Lord Morton of Shuna and Lord Taylor of Gryfe, on whether there should be an avenue of appeal against the valuation determined by the district valuer on a property to be transferred under the tenants' choice provisions in Part III of the Bill.
I was unable to accept the noble Lords' amendments and I continue to take the view that there should be no appeal after a valuation has been made. I undertook, however, at Report stage to consider bringing forward amendments to bring the valuation procedures under tenants' choice more closely into line with those in the right to buy legislation. I have further considered the issues involved and government Amendments Nos. 2, 3 and 4 will now offer the landlord a choice between the district valuer and another qualified valuer nominated by the landlord and acceptable to the applicant. The amendments also clarify that it is for the landlord to decide whether it should be the district valuer or another qualified valuer who should determine the market value.
This brings the tenants' choice provisions in respect of valuations generally into line with the right to buy provisions in the Housing (Scotland) Act 1987. I am also, however, taking this opportunity to bring forward Amendment No. 5 to Schedule 8 to the Bill. This will amend slightly the wording of the right to buy provisions of the Housing (Scotland) Act 1987 to make it clear, as in the first amendments which we are considering now to the current Bill, that it is the landlord who decides whether the district valuer or another qualified valuer agreed by the tenant should carry out the valuation for each right to buy application.
While I accept that these amendments do not go as far as the noble Lords opposite had earlier requested, I hope nonetheless that our bringing them forward today will be seen as a genuine attempt to reflect the concern that the noble Lords expressed in the House.
Lord Morton of Shuna: My Lords, while we have not got exactly what we asked for, it would be churlish not to accept that water dripping on a stone has at last had some effect. We are very grateful for that. We welcome these amendments so far as they go. They give the landlord some assurance that the valuation eventually achieved will be fair.
While I am on my feet, perhaps I may ask a question which is rather irrelvant to this amendment. Will the noble Lord assure the House that the amendments he proposed at the last stage to Schedule 3 will occur or be made to occur in Schedule 6 to the Housing Bill so that when Schedule 3 ceases to exist, as it is intended it should do under Clause 59 of the

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Housing Bill, the provisions moved by the noble Lord will he included in the legislation?
Lord Sanderson of Bowden: My Lords, I am grateful to the noble Lord, Lord Morton of Shuna. Yes, I am happy to give him the assurance on the latter point. I have written a very long letter to him which I do not propose to read. The letter bears out the point he makes that Schedule 3 and Schedule 6 are dealt with in the corresponding Bills.
Lord Taylor of Gryfe: My Lords, since my name was associated with the amendments to which these amendments refer, perhaps I may also express to the Minister my appreciation of the consideration he has given to the case which was put in this House and to the concessions which are incorporated in the amendments.
On Question, amendment agreed to.
Lord Sanderson of Bowden Lord Sanderson of Bowden moved Amendments Nos. 3 and 4:
Page 37, line 4, at end insert—
("() For the purposes of subsection (5) above, the market value of a house shall be determined by either—

(a) a qualified valuer nominated by the landlord and accepted by the applicant: or

(b) the district valuer,

as the landlord thinks fit.").
Page 37, line 6, leave out ("the district valuer shall have regard") and insert ("regard shall be had").
The noble Lord said: My Lords, I beg to move Amendments Nos. 3 and 4 en bloc.
On Question, amendments agreed to.
Schedule 8 [Housing (Scotland) Act 1987—Minor Amendments]:
Lord Sanderson of Bowden Lord Sanderson of Bowden moved Amendment No. 5:
Page 72, line 32, after ("tenant")") insert ("—

(a) in subsection (2)—

(i) after the word "by", where first occurring, there shall be inserted the word "either"; and

(ii) before the word "as" there shall be inserted the words "as the landlord thinks fit";

(b) ")

On Question, amendment agreed to.
Lord Sanderson of Bowden Lord Sanderson of Bowden moved Amendments Nos. 6 and 7:
Page 72, line 34, leave out first ("(a)") and insert ("(i)").
Page 72, line 35, leave out ("(b)") and insert ("(ii)").
The noble Lord said: My Lords, I beg to move Amendments Nos. 6 and 7 en bloc. These amendments are purely of a drafting nature. They simply achieve consistency of presentation with other parts of the schedule.
On Question, amendments agreed to.
3.15 p.m.
Lord Sanderson of Bowden: My Lords, I beg to move, That the Bill do now pass.
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During consideration of the Bill by this House there has been very useful and detailed debate on a variety of issues as a result of which I consider, and hope noble Lords will agree, that the Bill we have before us now is both improved and clarified. Before discussing detailed provisions it is worth emphasising the Government's overall purpose in promoting the Bill. We are determined to improve the supply of housing in Scotland, and to improve its quality as well as improving the ways in which people may exercise greater choice and control over their housing. These are our objectives and I firmly believe the provisions of the Bill will go a long way towards achieving them.
I have listened carefully to contributions both from noble Lords opposite and from my noble friends during our consideration of this Bill. Where I have considered it appropriate, or where I have considered improvement to the provisions of the Bill could be effected, I am pleased to have been able to take these contributions into account in amendments I have proposed. As a consequence of Committee debate in this House, and also as a result of discussions I and my colleagues have had with other interested bodies, I have been able to propose a number of amendments which I know have been welcomed on both sides of the House, and furth of it as well.
As noble Lords know, one of the main purposes of this Bill is to improve the statutory protection afforded to tenants. We have been able to bring forward a number of amendments to the Bill further to improve that protection. Looking first at the question of the rights of tenants of a statutory assured tenancy, the Bill has been amended to provide that, subject to certain qualifying conditions, the spouse of a tenant will have a statutory right of succession to the tenancy on the death of the tenant.
During Committee debate of the Bill there was obviously great concern that the prohibition of the charging of premiums or key money in connection with residential tenancies should continue, as it has in Scotland since 1920. I was impressed by the strength of feeling and the arguments put forward for the continuation of this prohibition; and I was pleased to be able to bring forward an amendment to the Bill to ensure that such a prohibition on the charging of premiums for regulated tenancies continues. The background in England is of course substantially different and it is not possible for the Government to extend the amendment beyond Scotland, as the House decided earlier this week.
We have also introduced into the Bill a provision entitling tenants under assured tenancies to a written tenancy document setting out the conditions applying to the tenancy which will ensure that both tenant and landlord are fully aware of their respective rights and responsibilities. The Bill introduces a number of measures to protect tenants from harassment, and I have been able to introduce further amendments concerning tenants claiming damages for illegal evictions which take the onus of proof away from the tenant and increase the amount of damages to which such a tenant may be entitled.
One of the other main aims of this Bill is through a range of measures to tackle more effectively the

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problem of homelessness. That problem has figured in the debates we have had during the passage of the Bill through the House. We are pleased to have been able to introduce a new provision which should help local authorities make the best use of their housing resources by giving them the power, subject to consent by the Secretary of State, to make payments to tenants to help them obtain other accommodation. This benefits the tenant, who is given that modest but crucial help towards a home of his own; the landlord, who obtains a vacant house; and particularly the homeless, for whom the supply of available housing is increased.
Finally, during Report we were able to amend the Bill to allow Scottish Homes to introduce exceptions to the current prohibition on granting tenancies or other benefits to committee members or employees of housing associations or their close relatives. This is a flexible power which will enable Scottish Homes to achieve, in the light of its close knowledge of the affairs of housing associations, the relaxation which is needed in the present rules. I take particular pleasure in the fact that that part of the Bill could be amended in this House. That received a warm welcome.
I am sure noble Lords will agree that we have introduced some significant and important amendments during this House's consideration of the Bill. The contributions of noble Lords to the debate on these important provisions has been invaluable. It is essential that the provisions of the Bill clearly reflect our intention when they were drafted. I am sure as a result of debate in this House that the Bill's clarity has been improved. I pay particular tribute to my noble friend Lord Balfour for having brought forward some amendments for consideration and for having pointed to various factors in the text of the Bill.
This is an important Bill which introduces a new framework for the future growth and improvement of housing in Scotland. It will open up opportunities to tenants who hitherto have had little choice in the housing available to them. It will encourage different forms of tenure, new housing provision and house improvement.
On 11 th April on Second Reading, which seems a very long time ago, the noble Lord, Lord Carmichael, said that our first concern must be to look at the effects of the legislation on individuals as tenants or persons seeking to be housed. He asked for a positive response from the Government. I have attempted to give that positive response. I am particularly grateful to the noble Lord, Lord Carmichael, in many instances where he has made constructive criticism. I hope that we have been able to address some of the problems that he raised during the course of the Bill.
I also wish to thank the noble Lord, Lord Morton of Shuna. At times I thought I was addressing Lord Morton of CoSLA! I thank him very much indeed for the various matters that he has brought to the attention of your Lordships. I also wish to thank the noble Lords, Lord Mackie of Benshie and Lord Taylor of Gryfe, for their particular interests, and my noble friend Lady Carnegy of Lour.
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Finally, I wish to mention my noble friend Lord Selkirk and thank him for the very important contributions he has made during the course of the Bill. He has enabled Clause 43 and Schedule 6 to be redrafted. For that I should like to offer particular thanks to some people who never receive them—the draftsmen in the Scottish Office.
Everyone involved in housing fears change, which is what my noble friend Lord Selkirk said on Second Reading. That is perhaps true. An old adage states that bad news is better news than good news. There is a new refinement to the phrase: presenting news as bad even when no one can tell what its consequences will be. Perhaps at times we Scots dwell more on the dangers than the opportunities presented by change.
In the passing of this important Bill for Scotland, I can assure the House that the Government will support all positive steps to improve the Scottish housing scene. My noble friend Lord Selkirk said on Second Reading that the purpose of the Bill was right. The Government too firmly believe that it is right. I commend the Bill to the House.
Moved, That the Bill do now pass.—(Lord Sanderson of Bowden.)
Lord Carmichael of Kelvingrove: My Lords, as the Minister said, the real purpose of the Bill is stated in its Long Title:
"to confer on that body and on persons approved for the purpose the right to acquire from public sector landlords certain houses occupied by secure tenants".
The body referred to is Scottish Homes. The specific provisions for this right are contained in Part III of the Bill. Most of the remaining provisions, some of which are very important, are primarily concerned with creating the means whereby this central purpose will be realised.
The other point which has been made repeatedly on the Bill and which the Minister made again today concerns the new right to acquire houses from public sector landlords. That has been promoted as increasing tenants' choice. However, tenants' choice is very much a one-way process. Included among the limitations is the fact that new town tenants are by no means guaranteed the likelihood of being transferred to their local authority as landlord at or before windup. Scottish Homes tenants specifically may not choose the local authority as a landlord. Transferred tenants may not revert to the local authority if their new approved landlord reneges on his undertaking at acquisition. However, in England and Wales tenants will have the right to return to public sector landlords.
Tenants in a minority in block transfers of stock initiated by the public sector landlord will have no option but to lose secure tenancy status. Tenants in transferred stock will have no right to oppose landlord changes even when the new landlord is not approved.
As I said, the list of limitations is not exhaustive. However, it underlines the Government's intention to extend tenants' choice in a most restricted way. They extend that choice only because they have to do so to achieve their real purpose, which is to break up council stock and disperse control of that stock

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among people who I believe will be speculators. Everything points to a much diminished if not emasculated role for housing authorities. Although they will be left with the full range of statutory responsibilities, they will not have the means to meet those responsibilities.
There is a need for clear responsibilities to be given to Scottish Homes to accord due priority to the various problems of housing in Scotland rather than becoming hogged down in transfers of stock which add nothing to the total of housing stock. The extent to which tenants exercise their new right to choose will become clear in time. But whatever happens, the new legislation will primarily affect those who are already housed. It is much more debatable what, if anything, the legislation will do to help those who are seeking to be housed. Housing authorities will have diminished stocks and less capacity to make provision for new applicants.
Most disappointing of all is the failure to ensure that Scottish Homes will have an absolute duty to co-operate with local authorities in identifying housing needs and the condition of stock on a national and co-ordinated basis as well as on an area-to-area basis. The Government have chosen a radical way in housing. The old system was not perfect but believe that there were merits in it. The effect of the new measures should be closely monitored to ensure that overall improvement is achieved and maximum protection is afforded to those for whom the new measures are unsatisfactory or beyond their reach.
During the passage of the Bill through this House the Minister was most helpful. Part of the reason for that is that he was very much involved in his area of housing and housing asssociation matters. Due to that and to pressure from various parts of the House he was able to do a great deal about housing association payments and benefits, which was well received. Perhaps the Minister will use his influence so that the same provisions can be included in the English Bill.
There have been a number of improvements to the Bill. Key money was dealt with, as were many other points. I believe that that was largely due to the work done behind the scenes by the Minister and by the noble Earl, Lord Dundee. The Minister referred to my noble friend Lord Morton of Shuna as Lord Morton of CoSLA. He also paid tribute to the draftsmen and civil servants. It is only fair if we on this side of the House pay tribute to the Federation of Scottish Housing Associations, to CoSLA, to the organisations for the homeless in Scotland, to the Citizens' Advice Bureaux and to the Law Society of Scotland for the help which they have given us.
There are great worries about the limitations of the Bill. However, within those limits I believe that we have done as good a job as it was possible to do. I thank the Minister and his colleagues for the help that we received from them.
Lord Mackie of Benshie: My Lords, perhaps I may begin by thanking the Minister for his response to a point which I raised on our last debate. It concerned resident landlords and the fear that they might turn
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the whole affair into a business and exert summary eviction on people as a business. The long letter which the Minister sent to me has allayed some of my fears, especially since he stated that a resident landlord must be resident and have some of his family actually sharing facilities with his lodgers. That makes a big difference. However, I must say that students—one of the examples he used—are not subject to that provision. They are subject to eviction because in most cases the bargain is struck with a university. Nevertheless, that is a distinct advance. I also thank the Minister for telling me that the Scottish Development Department will study the whole question and has issued a questionnaire.
I believe that the Bill could prove to be a very good one. It may achieve the objectives stated by the noble Lord. It will do so provided that the Tory Party does not become too doctrinaire about the matter. I shall only compliment the Minister in this way. If he remains the Minister for the length of this Parliament and continues the helpful attitude he has shown to the House, he has a fair chance of achieving something.
Lord Taylor of Gryfe: My Lords, yesterday afternoon we had a long debate on the constitutional position of your Lordships' House and its general functions. It is refreshing to be able to examine the last stages of a Bill in which the House exercised its legitimate and useful function as a revising Chamber. I agree that the Bill is an important one. It deals with an immense social problem which affects many people and those who are least favoured in our community—the homeless. I congratulate the Minister on piloting the Bill through the House and on listening to the representations that were made and giving them serious consideration.
The implications of the Bill have been listed and I shall not pursue them in detail. However, its basic assumption is that it will improve the supply of houses. That is an ambitious target. I hope that the progress of the Bill will be studied to see whether that important target is achieved. The protection of tenants has always been a controversial issue in Scottish housing. As regards the abolition of key money, I am sure that the Minister has embarrassed his English colleagues in so far as he made that concession, which is being resisted in the English legislation.
As regards the care of the homeless, the Minister suggested that the Bill would make some impact on the problem. There is no specific responsibility placed on the new authority to care for the homeless. That is still a local authority responsibility. At least I share the hope that the situation regarding the homeless will be helped by these provisions and the helpful relaxation of the limitations on members of housing associations.
Like the noble Lord, Lord Carmichael, I received representations from a number of Scottish organisations involved in this field. I should like to put on record my appreciation of the detailed study that was made by community organisations which were affected by the Bill and were interested in protecting various groups—for example, Shelter, the National Federation of Housing Associations and the organisations protecting the single homeless.

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Finally, I should like to pay tribute to the Minister for the manner in which he handled the Bill. He handled it with a great deal of skill and also with a great deal of sympathy and understanding. I sincerely hope that his efforts will achieve the ambitions which he set out as he introduced the Third Reading this afternoon.
On Question, Bill passed, and returned to the Commons with amendments.

Finance (No. 2) Bill
3.30 p.m.
The Lord Chancellor (Lord Mackay of Clashfern): My Lords, I beg to move that the Bill be now read a second time.
I should like to begin with a provisional apology. The noble Lord the Opposition Chief Whip and I have an important engagement this evening in connection with my responsibilities for the magistracy of inner London. It may be, depending on the eloquence of your Lordships, that I shall not be able to stay until the end of this debate. If that turns out to be the case, I hope that your Lordships will feel that it is not for any want of desire to stay that I have not been able to do so.
It is one of the privileges of a Minister in this House that he speaks for the Government as a whole. Accordingly a Minister who has a particular departmental responsibilty may find himself speaking in this House for a variety of other departments. It is a particular privilege for me today to move the Second Reading of the Finance Bill. I have spent a fair proportion of my professional life dealing with Finance Acts, since I was the standing junior to the Inland Revenue in Scotland. I may say that I have not found them all equally easy to understand. I hope that in commending this Bill to your Lordships noble Lords will have no difficulty in understanding it. I regard it as a very important Finance Bill, typical of the quite exceptional character and brilliance of my right honourable friend the Chancellor of the Exchequer.
The Bill before us today is a substantial one. It embraces a comprehensive reform of the personal tax system, a radical overhaul of capital gains taxation and inheritance tax, and a series of measures affecting business. All of those were announced by my right honourable friend the Chancellor of the Exchequer in his Budget Statement in March.
The Government's twelfth Finance Bill, it represents a further step forward in our strategy of tax reduction and tax reform which, in my view, is helping to transform the British economy. By a combination of supply side reforms to remove barriers to enterprise, buttressed by prudent management of public finances, we have established a virtuous circle. Lower borrowing and lower tax rates allow the private sector to expand. This in turn generates higher revenue for further reductions in borrowing or taxes. Thus last year the public sector was in surplus for only the second time since the 1950s. My right honourable friend announced that in future a balanced Budget will be the norm.
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The benefits of this strategy are clear to see throughout the economy. Nine years of consistent policies of sound money and deregulation have transformed our economic performance and restored our national pride; they have given new confidence to businessmen who know that they can plan ahead without destabilising lurches in government policy; and they have raised living standards to undreamt of levels.
The 1980s have seen the United Kingdom's best period of relative economic performance since the war, with a growth record that is the envy of our European partners. Not only have we grown faster than any of the major European countries over this period—a welcome change from the 1960s and 1970s when we were looked on as the sick man of Europe—but we are continuing to outperform them this year. We are creating jobs faster than any other European Community country—with a rise in employment of over 2 million in the past five years. Unemployment has fallen for the past 23 months in succession by 835,000 in total—the longest and the largest fall since the war—and it is falling fast in all regions in the UK.
As we enter our eighth successive year of strong and steady growth, at an average rate of around 3 per cent. a year, and the sixth where this growth has been combined with low inflation, let us reflect on the fact that this has been healthy, well-balanced growth. Since 1981 consumption has grown at about the same rate as exports and more slowly than fixed investment, which has risen on average by 5 per cent. a year—many times faster than in the European Community as a whole. A broad range of sectors of the economy have benefited as a result.
Nevertheless, there are now a number of people who, far from taking pride and pleasure from our successful economic performance, are worrying that we are too successful—there is no pleasing some people! What these critics do not seem to be able to comprehend is that the improved supply side performance that has resulted from our policies (and this Finance Bill which we are discussing here today admirably takes these forward) means that British industry is much better placed than in the 1970s to meet extra demand and to operate efficiently at high levels of capital utilisation. The investment boom that we are now witnessing will provide a sure foundation for future prosperity by increasing capacity to enable us to meet further growth in demand. What is vital above all else—and on this your Lordships can have no doubts whatever—is that the Government will take no risks with inflation. Their determination in this respect is surely clear from recent increases in interest rates.
In recent weeks we have heard some doomstruck soothsayers predicting that the Budget will tip the economy over the precipice. They have claimed that yawning trade deficits, a scenario all too familiar from past attempts at demand management, will return to haunt us. This Budget is not about boosting demand; indeed the tax reductions did not reduce the overall tax burden one jot. They simply prevented it from rising. After taking account of lower tax rates, total taxes as a proportion of GDP are forecast to be the same level as last year.

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So it is clear that the Budget is not behind the higher than expected current account deficit in recent months. With government finances in balance, the deficit reflects purely private sector behaviour. In simple terms, people are saving less and companies are investing more. The very strong growth of business investment reflects the excellent performance of recent years and the prospect of continued improvements in output and profitability. The deficit is being willingly financed by overseas investors drawn to the investment opportunities here. Underlying their confidence is the Government's record and firm resolve to defeat inflation.
The centrepiece of the Finance Bill this year is a reform of personal taxation, which gives Britain one of the simplest income tax structures in the world. The basic rate, at 25p, is the lowest since the second world war and down to the same level as the reduced rate under the last Labour Government. Personal allowances have been raised by twice as much as required to keep pace with inflation. This means allowances are fully 25 per cent. higher in real terms than when the Government took office in 1979. Taken together with the increase in the basic rate limit, these measures account for three-quarters of the first year cost of the income tax changes in the Budget. They reduce the marginal tax rate of 21 million taxpayers of working age and they take three-quarters of a million taxpayers out of tax altogether. They are a further stimulus to motivation, initiative and enterprise. But, although income tax has been reduced in each of the last seven Budgets, our starting rate is still higher than that in most other countries. That is why the Chancellor has set a new objective of reducing the basic rate to 20p as soon as it is prudent to do so. I reaffirm it as a number one priority.
In addition, four higher rates of income tax have been abolished, leaving us with a single higher rate of 40 per cent. The logic of reducing tax rates is now accepted throughout the world and across the political spectrum. Many developed countries, including those with Labour administrations, are pursuing similar tax reforms. The present strength of the British economy testifies that increasing incentives is the key to improving economic performance. By cutting our top tax rate to one of the lowest in the industrialised world, Britain will be better able to attract and retain talented entrepreneurs and key professionals. By no means all those who gain from the cut in top tax rates are in the millionaire bracket. Sixty per cent. have incomes under £40,000. These are the very people on whom we depend for more jobs and a sustained improvement in living standards.
Cutting top tax rates makes sense in revenue terms too. Despite the substantial reduction in the top rate made in 1979 and the abolition of the investment income surcharge in 1984, the wealthiest taxpayers are actually paying a greater share of the total income tax take than when we came to office. That, of course, means that the rest of the population is paying a smaller share. The connection between cutting tax rates and increasing revenues is not confined to income tax. The same is true of corporation tax, inheritance tax and stamp duties. The plain fact is that, through their dynamic effects on the economy,
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lower tax rates generate more revenue in the long term, not less.
Nor is there any conflict between reducing tax rates and improving public services. The Government have been able to increase resources to priority services thanks precisely to the success of their economic policies. Central to this strategy has been cutting tax rates on individuals and companies to foster enterprise and hard work. In this way resources are created for better public services. Thus, in the Budget my right honourable friend was able, for the second year in succession, to announce a hat-trick of lower taxes, lower borrowing and higher spending on priority services while reducing the share of national income taken in public spending.
As tax rates are reduced to sensible levels, it becomes possible to strip away tax breaks and shelters whose only justification was to mitigate the absurd, penal and counterproductive tax rates of a past era. The catalogue of tax breaks to fall under the Chancellor's axe this year is impressive. The Bill goes a considerable way to remedy the under-taxation of company cars. It abolishes relief for home improvement loans, thus targeting relief on the main objective of home ownership and removing scope for abuse. It ends the use of several reliefs which were not calculated to be directly useful, and it strengthens the Inland Revenue's information powers.
Meanwhile the Business Expansion Scheme has been more precisely targeted on smaller companies. New non-charitable covenants and most maintenance payments will be taken outside the tax system, where they never really belonged. Lower tax rates have unlocked the great prize of aligning the rates of tax on capital gains with those on income, thus reducing a major source of distortion and need for tax planning.
The Finance Bill also strikes several important blows for fiscal justice. From this April only real capital gains accruing since 1982 will be taxed. This ends the taxation of purely paper gains that owed their existence in large part to the rampant inflation of the 1970s. Exempting pre-1982 gains will unlock for more productive use assets that were effectively frozen by the high tax charge that would have arisen on realisation.
Secondly, the Bill paves the way for the introduction of independent taxation of husbands and wives in 1990—perhaps the single most important innovation of this year's Budget. This will transform the tax treatment of married women by no longer treating their income as that of their husbands. By giving married women their own personal allowance, basic rate band and exempt amount for capital gains tax, the new system will give them the full independence and privacy for which they have waited so long. At the same time the Finance Bill proposals ensure the tax system continues to recognise marriage.
Company taxation was radically reformed in 1984 and now that the transitional effects have worked through, we have not only one of the lowest corporation tax rates in the world but the corporate sector as a whole is paying a lower effective tax rate than under the old system. These reforms have

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encouraged overseas companies to invest in Britain and have greatly improved the quality of investment by British firms. This year's Budget responded to business's need for stability and predictability in the tax environment by leaving corporation tax largely unaltered and by setting economic policy on a course which provides the framework for a continuation of steady growth and low inflation.
Nevertheless, there are a number of measures in the Bill which affect businesses, particularly smaller ones. The reduction in the basic and higher rates of income tax and in the small companies' rate of corporation tax will benefit unincorporated and incorporated businesses alike. The rebasing of capital gains tax, the improvements to capital gains retirement relief and the improvement to employee share schemes will also provide a major boost. The reforms to inheritance tax, which saw the threshold raised significantly and four rates replaced by a single rate of 40 per cent., mean that if a family business has to pay any inheritance tax at all, with business property relief it need never face an effective tax rate of more than 20 per cent. This is one of the lowest rates in the industrialised world. Finally, capital duty—a tax on companies raising money when they set up or expand—has been abolished altogether.
These reforms will help foster the development of an enterprise culture. Businesses and individuals are increasingly free to make their own decisions and to keep the rewards for the risks that they take. It is on their talents and energy that the future health of our economy depends. We must not stifle that energy by making it too burdensome for business to meet the demands of government. A measure of the success with which we have kindled the entrepreneurial spirit is shown by the fact that last year alone nearly 900 additional new businesses were created every week.
As your Lordships will he aware, making markets work better is a recurrent theme of government policy. Of the many measures in the Bill, one has particular significance. This is the extension of the Business Expansion Scheme to investment in companies letting property on new-style assured tenancy terms. By building on a tried and tested tax incentive, the Government are giving a kick-start to our efforts to encourage more privately rented accommodation. It is the shortage of such accommodation that has long been one of the main obstacles to mobility of labour.
The situation in the United Kingdom is in marked contrast to that in our competitor countries where often a third or more of property is privately rented. Here, where the proportion is under 10 per cent. the problem for people in search of work and who may not be in a position to buy their own homes is that frequently all they can be offered is a place on a council waiting list. Increasing the supply of rented accommodation will ease skill shortages and help reduce disparities of regional unemployment.
Since this Government came to office living standards at each and every level of earnings have increased at a rate unimagined 10 years ago. This year a married man on average earnings will be over 27 per cent. better off than in 1978–79; the same man
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on half the average will be over 21 per cent. better off. Compare that with the record of the previous administration, over the period 1973–4 to 1978–9, when the relevant figures were increases of between zero and 5 per cent. Our record has been based on a solid commitment to budgetary discipline and the re-establishment of an enterprise culture. Tax reform is an important part of that strategy.
This Bill continues to lay the ground for future progress. It gives individuals and companies an outstanding opportunity. I believe that it is an opportunity they will seize. I commend the Bill to the House.
Moved, That the Bill be now read a second time.—(The Lord Chancellor.)
3.51 p.m.
Lord Bruce of Donington: My Lords, the House will willingly understand, as I do, the necessity for the noble and learned Lord to depart rather earlier than he would otherwise have done. Perhaps I may say that, not for entirely similar reasons, it may be necessary for me also to be away from the House for a short period, and a short period only. during the debate.
I have had the honour of being in your Lordships' House for 14 years. I must say that that is the most remarkable speech that I have ever heard delivered by a Lord Chancellor. We have been accustomed to the occasional controversial, very audible, asides of the noble and learned Lord's distinguished predecessor. But we have not, to my recollection, received from any noble and learned Lord occupying the position of the Lord Chancellor, such a partisan speech as that to which we have listened this afternoon. It was a speech that I venture to suggest could quite properly have been delivered from the Benches opposite. As it is, I shall be faced with the necessity, if only out of courtesy, of having a tennis neck in looking first at the noble and learned Lord and next at the Government Benches opposite.
The speech of the noble and learned Lord was a bit of a sandwich. He dealt with certain taxation aspects incorporated in the Bill itself, although that was interposed with what was quite obviously a fairly extensive transcript of a speech prepared by the noble Lord, Lord Young of Graffham, which followed very closely on the speeches that we have been accustomed to receive from the left-hand pocket of his brief from time to time. I think it is best said that those parts of the speech of the noble and learned Lord that emanate from the down-graded Department of Trade and Industry—which is now the department of tenuous information—can be left to the noble Lords who sit behind me.
Even before we had this last Budget, was there any need to make the rich very much richer in order to pursue what I presume is the aim: to make life in general in our country, through its economic growth, more tolerable for everybody and in particular those who have the misfortune (which has not been the personal experience of many in your Lordships' House) to endure some of the worst and most degrading living conditions since the end of the war? Was there any real need to turn the screw even

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further, even before this Budget? The people who comprise the top 1 per cent. of earners of the country's population have very substantial incomes indeed, very substantial property, and arc able to live very spacious lives. These are lives of some voluntary leisure—lives with a degree of culture and serenity which only the complete security of possession of great wealth often confers. Was it then really necessary to turn the screw even further while denying resources to other parts of the country's economy and the country's population? Was it necessary to do so while screwing down every last penny that had to be spent on bringing relief to the millions of distressed and under-privileged people of our country? Was it necessary to put another £2 billion at the disposal of those people who did not need it and who have never needed it?
My noble friend Lord Williams of Elvel addressed a Parliamentary Question to the Secretary of State for Trade and Industry asking him for some estimates in the reduction of the income tax burdens between the years 1980–81 to 1988–89 covering various categories of income. If noble Lords look at col. 1818 of Hansard of 30th June they will find the result set out. By the time that the current tax year has been taken into account, the top 1 per cent. of earners on average receive an extra £l1,470 per annum by way of relief. The average total relief of the bottom 50 per cent. of earners covering the same period amounts at this date to £230 per annum. That compares with £11,470 per annum to those who need it less than anyone else. In other words, it is 50 times as much.
However, that is on the assumption that it is an average. Within that 1 per cent. other considerations apply. Many people with very large incomes would consider it quite idiotic if they paid any taxes. If your Lordships will look at Hansard for another place for 18th May last, you will find a Question by Mr. Gordon Brown. This has some relevance to the words that fell from the noble and learned Lord's lips concerning the business expansion scheme and the latest scheme covering new enterprise zones, housing and so on. Mr. Gordon Brown asked the Chancellor of the Exchequer,
"if he will estimate the tax liability in respect of the tax year 1988 of a married man aged 51 with no dependent children who is in receipt for that year of a salary from his employer of £1 million assuming he has a mortgage of £30,000, a BES investment of £40,000, an investment of £810,000 in a new enterprise zone unit trust of which 94 per cent. is attributable to building costs and where 50 per cent. of the purchase price is borrowed in circumstances where guaranteed rent receivable equals the interest outgoing, and who makes a contribution to a retirement annuity scheme amounting to £195,000."
I regret reading out the detail, but the noble and learned Lord will understand the position very well because he knows the clauses of the Bill to which these items refer. So we have a chappie earning £1 million a year—and there are a few of them; some have been in the news recently—who decides to devote it to acquiring investments of a certain kind. What was his tax liability? Mr. Norman Lamont, replying on behalf of the Treasury, said:
"Liability to income tax in 1988-89 would be nil".—[Official Report. Commons, 18/5/1988; col. 503–504.]
Lord Graham of Edmonton: Never!
Lord Bruce of Donington: Well, my Lords, we have some estimate now of the impact of the Bill together with its predecessors. In referring once again to the figures I gave your Lordships in regard to the burden of income tax and the relief accorded to those in the lower 50 per cent. of income groups in the country, the House will agree that I indicated that they would receive a benefit of some £230 a year. What I did not say, and I hasten to correct the position now, is that that figure is completely overwhelmed by the increase in VAT that they have paid since that time. In terms of total taxation the £230 per annum is cancelled out by the extra £760 payable by way of VAT. On top of that there are increased national insurance contributions.
There we have the position: the top earners have benefited considerably. But we are talking only in terms of tax. It must be admitted, in spite of the agonised pleas of the noble Lord, Lord Young of Graffham—I shall not associate the noble and learned Lord with them—about the wickedness of pay increases now at an inflationary 8 per cent., that we do have to keep an eye on those increases because they are causing inflation. In addition to the ordinary disparity between tax reliefs one has to consider the gross disparities in wages and salaries throughout industry and commerce generally. An increase of 8 per cent. on £200 a week gives an increase of £16 a week—not very significant, many of your Lordships may feel, in view of inflationary pressures coming from other sources. However, 8 per cent. on some £50,000 a year is a totally different kettle of fish. Among managers 12 per cent. is quite common, giving an extra £120 a week. The percentage is not much more but the absolute sum is much greater. Even 20 per cent. increases have been given in the case of many managers. And those were not on incomes of a miserable £5,000 a year but on £50,000 and £100,000 a year. However there is always a difference, with which I shall not associate the noble and learned Lord, but to which I shall refer the Government.
There is a very curious distinction between those who do the work of producing physical goods and products and who supply services—which are treated as costs in the Government's mind—and those who earn these vast salaries. Some of them are quite productive, but others are engaged purely in making money out of money rather than producing any service. They are regarded as the creators of wealth. They create nothing except claims on the goods and services that are produced. The inflationary pressure is generated by them to make money out of money. They add nothing to the supply of goods and nothing by way of provision of useful services either to industry or to the community at large. These are the creators of wealth, in common with the loan sharks in Birmingham, in common with renters to homeless people of lousy accommodation at extortionate prices, and in common with all those engaged in dubious enterprises. But as long as they become rich, they are regarded as the creators of wealth.
It is not my purpose this afternoon to elaborate any further on the results in physical, human and emotional terms of the growing disparity between the excesses of wealth on the one hand and dire poverty for millions on the other. This is not the purpose of

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the debate. I shall content myself with saying only that this is not a position which we on this side of the House find acceptable. As soon as we have the opportunity of reversing it we shall not hesitate to do so.
The noble and learned Lord was, I thought, running away with himself a little; but then he had a prepared text. He referred to the prosperous and sound economy of the United Kingdom, the growing production, the rates of increase in production and how prosperous the country was. It is perhaps salutary to remember—although this will not catch the headlines—that we have barely caught up with our level of manufacturing production at the end of 1979. We are now slightly in excess of it and we still have not caught up with the level of investment in 1979. That should perhaps be salutary. To talk of a prosperous country and a prosperous economy is to utter a monstrous distortion which I should have thought, in terms of fairness and justice, ought not to have received even an indirect judicial sanction.
A prosperous economy? Of course part of the economy is prosperous—I should say it is! You can see it all over the place. You can see it in some of the best hotels in London and on the riviera at Henley. You can see it all over the place. It is very prosperous indeed. But only part of the economy is prosperous. For anyone in the United Kingdom to talk of a prosperous economy while over 7 million people are living at or below the poverty line, and while nearly 3 million people are unemployed, is monstrous. Come the time, not when we have equality—because equality cannot be achieved in this life and we are not all equal—but when every person in the country, regardless of whether he is rich or poor, can walk with his head erect, does not have to cringe for alms or rely on charity, and come the time when he can look forward not necessarily to great affluence or even substantial comfort but to a degree of serenity in life, then we can say that it is a prosperous country. People live together within a free society bound by those links which, as a nation, bound us together in the years 1939–1945 and a little thereafter but which the Prime Minister says no longer exist (the Prime Minister says that there is no such thing as society). We on this side of the House know full well that before very long we shall be in a position to give the lie to that. We know that in due course a free society with a free Parliament, whose powers are at present being progressively taken by the Executive, will once again ensure a modicum of peaceful progress in our country and with a certain if only modest degree of happiness.
4.12 p.m,
Lord Ezra: My Lords, the Second Reading of the Finance Bill affords us in this House the opportunity of taking a broad view of the economic management of the country. We have heard from the noble and learned Lord the Lord Chancellor the view of the Government. We have heard from the noble Lord, Lord Bruce, with his customary vigour and eloquence, the view of the Labour Opposition. I should like to add a few comments about some of the problems which I believe lie ahead in the
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management of the economy and which so far have not been dealt with.
To be quite fair, a number of positive things have been going on. The noble Lord, Lord Bruce, referred to the fact that there has been a revival in the activity of manufacturing industries, now at long last surpassing the level reached in 1979. There has been a growth in industrial investment. In recent months there has been a reduction in the level of unemployment. All those things are positive. However, there are also some danger signs on the horizon. On 14th July I raised a Question in this House asking whether the Government were concerned about the over-heating of the economy. In reply the noble Lord, Lord Beaverbrook, quoted his right honourable friend the Chancellor of the Exchequer as saying that:
"the economy has recently been growing at an unsustainably rapid rate and needs to slow down".—[Official Report. 14/7/88; col. 926.]
That is the view of the Government. We have a problem and I believe that we need to analyse it and see how it can be dealt with. If it gets out of control we could be back in the old stop-go situation.
There are various aspects to the question of the "unsuitably rapid growth" in the economy, to use the words of the Chancellor of the Exchequer; for instance, we have a continuing credit boom; a high level of private spending; an abnormally historic low level of private savings; and undue escalation of house prices, particularly in the South-East but spreading elsewhere in the country; and a rapidly deteriorating balance of payments. Today's figues are very depressing because for the fourth month this year we have sustained a net imbalance exceeding £1 billion.
The fundamental problem is what to do about such things as a nation. If the situation is allowed to continue, all the benefits which I mentioned earlier, and which I freely admit have been achieved, will be negated. Therefore I should like to analyse the position and indicate what might be done to stop us going back into the old stop-go situation.
I believe that the fundamental problem is that we are a nation awash with credit. That credit is creating a spending power which far exceeds our ability to supply it with goods and it explains the deteriorating balance of payments situation. When the Government first came to power in the far-off days in 1979 they attached great importance to the control of the money supply and to the surveillance of monetary aggregates. In recent times they have ceased to pay any attention to monetary aggregates. They say that they take them into account but it was noticeable that in the Chancellor of the Exchequer's speech introducing his Budget he referred to only one monetary aggregate. It is not the most informative because it does not deal with the credit situation. It was M0 which merely deals with the amount of money in circulation. The monetary aggregate which indicates the size of credit expansion in this country is M3.
Although the Chancellor did not refer to that, I should like to do so to show the problem that we now face. M3 shows not only the amount of money in circulation but also bank deposits and therefore gives

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an indication of credit. In the five years to 1986 that increased by approximately 5 per cent. per annum. During those years the Government operated a measure of indirect control of bank credit. That ceased in 1986 and from then onwards the increase in M3 has been no less than 17 per cent. This year it is running at 20 per cent. It is an indication of the way in which the credit boom has been allowed to run out of control. This is leading to the other difficulties which we now face.
The Government have deliberately left themselves with no weapon to deal with the situation except the manipulation of the rate of interest. The interest rate is a very blunt weapon because, while it may cure some problems, it creates others. It is the kind of medicine that one might have to deal with an ailment but which has such violent side-effects that they often exceed the benefits bestowed.
The fact is that if interest rates are increased continuously, it will have the effect of stifling industrial investment on which we largely depend in order to meet the ever-increasing demand, but could have very little impact on private expenditure because people are now borrowing money on their credit cards and in other ways in which they would hardly notice an increase of 1 or 2 per cent. At the same time it would bring sterling right up, would make our goods less and less competitive and therefore add to our balance of payments problems. I cannot see that using the blunt weapon of continually putting up interest rates, which seems to be favoured in some high quarters in government, would necessarily solve the basic problem; namely, how to hold back the explosion in private credit and spending.
On the other hand, if interest rates are used to reduce the value of the currency in order to stimulate exports, that will be taken as a signal for even greater private expenditure. Therefore, I believe that it is time that the Government had a look at other ways to deal with the economic problems which we face.
Of course the situation is compounded by the fact that there appears to be fundamental disagreement in government circles about how they should use this one weapon which they have—whether they should use it with the intention of creating a stable currency, which many people favour, or whether they should use it with the prime intention of dealing with inflationary risks and letting the currency fluctuate up and down. Of all the developed nations in the world we now have the most violently fluctuating monetary values in relation to other currencies and the most violently fluctuating interest rates.
Perhaps I may quote from the CBI this morning. Mr. David Wigglesworth in introducing what was otherwise a fairly positive statement on behalf of the CBI about industrial growth and investment, said:
"If high interest rates and currency instability are prolonged, it could damage business confidence and lead to a slow down in investment plans and that would not be very good for the country".
Yet we are precisely in the regime of high interest rates and fluctuating currency values which the CBI regards as very much against its interests.
Is it not time that the Government gave attention to the real problem which we face in terms of
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economic and monetary management—the credit explosion? If credit has to be moderated, why not go for credit? Why have the Government given up all the weapons which they used until 1986 to deal with this problem? Why is it that guidelines are not being given to the clearing banks to restrict the amount of credit which they create? Why is it that various technical devices such as overfunding, which I shall not try to describe but which is a technical device for limiting the amount of credit which the clearing banks can give, have been abandoned and that we have been left with the one option of the manipulation of the interest rate, which is causing such perturbation and uncertainty in financial, industrial and private circles?
I believe that is what we have to turn our attention to. It is quite wrong that sterling should now he regarded as the most volatile currency of any developed country. It is quite wrong that nobody should know from one day to the next what will happen to interest rates. I submit to your Lordships that measures are required which will tackle the basic problem at source, which is the unlimited creation of credit, which will thereby enable us to create a more stable currency at a competitive level, which in turn could moderate the level of interest rates. On that basis, we could look forward to a much better future prospect than we can at present.
4.25 p.m.
Viscount Chandos: My Lords, your Lordships' House is grateful to the noble and learned Lord the Lord Chancellor for his remarks in introducing the Second Reading of the Finance Bill. I must apologise to the noble and learned Lord and to your Lordships for arriving too late to hear this introduction, which I shall read with great care. However, I understand that he has perhaps not been quite as extravagant in his praise for the Bill, the Budget and the Chancellor as has the Prime Minister. The Prime Minister has resorted to hyperbole in her tributes to the Chancellor and his Budget recently, though for much of the past year her actions and words have sometimes suggested that she has come to bury him and not to praise him. If peace has temporarily broken out between the warring tribes of Conservative economists, the rest of us must try to form our own views as to the real achievements and effects of this Budget in the latest stage of the Government's economic strategy.
Although your Lordships' House is impotent to effect any changes on the Bill, at least we have the advantage of coming to it fresh four months after its introduction when its appropriateness can be more accurately judged in the context of the emerging statistics and developments in the economy.
Although some members of the Government have attempted to deny that the economy is overheating with notable and noble exceptions, as the noble Lord, Lord Ezra, has pointed out, there are few independent economists who do not believe that that is the case. Indeed, the Government's actions contradict their nonchalant denial of overheating, as is indicated by a 3 per cent. increase in short-term interest rates in less than three months. The new monetary realism which the Chancellor has introduced to the Government, and to which the

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noble Lord, Lord Ezra, referred, means that such corrective measures would not have been taken if the Chancellor did not believe that the real underlying economy was significantly out of balance.
The monetary realpolitik which the Chancellor has introduced since 1983 was dangerously distorted by predictable but nonetheless regrettable laxity in the run-up to the general election of last year. As the Chancellor has admitted, that was followed by a more correct loosening of credit in the aftermath of the stock market fall in October.
It was against that background that the Budget was introduced in March, and although the monetary belt had not yet begun to tighten again, and indeed the Chancellor's worries about the strength of the exchange rate led to a further reduction in interest rates, the key features of the Budget which are contained in this Bill could only risk increasing the heat and pressure in the domestic economy. It is only too clear now that the Chancellor erred significantly on the side of recklessness, and yet the only action which is now being taken is to hike interest rates half a point by half a point, causing far more damage to industry than it achieves in any dampening effect on consumer spending. Once more monetary and fiscal policies are being pursued that are in direct and painful conflict.
The Government cannot merely depend on periodic increases in interest rates to cool the domestic economy. If interest rates are pushed higher and higher either to cool the economy or to hold the exchange rate up, we will through uncompetitive exchange rates and penal costs of funding erode our industrial export performance at the very moment that it is critical that we maintain every bit of export growth that we can.
To ensure export-led growth must be the central objective of government policy, yet the trade statistics have within them an even more worrying trend than those to which the noble Lord, Lord Ezra, referred. Since 1980 the volume of imports by manufacturers has grown by 76 per cent. compared with a rise in exports of only 28 per cent. Imports during the last year have shown an 11 per cent. rise compared with a 4½ per cent. rise in exports. Of the imported goods there has been a heavy preponderance of consumer rather than capital goods. Now all of this may ultimately be containable provided that, as oil resources fall due both to lower volume and a lower price, we allow the value of the pound to fall to reflect this reality.
Artificially elevating the exchange rate as the principal means of holding back inflation was the single greatest economic mistake that the Government made when in 1980 and 1981 we lost permanently and unnecessarily a significant part of our industrial capacity. In facing now the risk of renewed inflation as a result of the Government's reckless promotion of a pre-election and post-election boom, it is vital that the same mistake is not made again.
At this point it is probably inevitable that the rate of inflation will trend upwards and whatever the Government do may at least temporarily increase that rate. A rise in interest rates feeds through
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mortgage rates into the retail prices index just as surely as an overheating economy pushes up inflation. In contrast, if the exchange rate is held stable or allowed gradually to fall to reflect the changing position of the United Kingdom economy, and if this is combined with responsible fiscal policies to constrain the level of consumption, inflationary expectations can in comparison remain low and British industry still prosper abroad.
There are two measures which even now the Government can and should take rather than wait until a more acute crisis overtakes us between now and the next Budget. The first is to stimulate savings and the second is to reduce higher income spending, People are now saving a smaller proportion of their incomes than at any time since 1979. The personal sector savings ratio stands at around 5 per cent., half of its 1983 level.
Some marginal increase in the savings ratio could be achieved, for instance, by transferring Premium Bonds into health bonds or, if the Government wish to keep Premium Bonds, by creating a new health bond. With all the national savings expertise in television advertising and a promise that the gains for the Exchequer would be earmarked for the National Health Service, this might attract considerable savings and some of that would surely be new savings attracted by the link with the NHS. Other ways must also be found to stimulate savings, though I believe we should be wary of extending new tax exemptions or privileges to achieve that.
The threat of overheating could be further diminished if the Government are prepared to address the question of those tax reliefs and allowances which continue to operate in a preferential way for top rate taxpayers. Mortgage interest relief is currently payable at whatever marginal tax rate the recipient is paying. This means that a top rate taxpayer receives relief at 40 per cent. while basic rate taxpayers receive only a 25 per cent. subsidy. Seventy-five per cent. of personal lending in this boom is mortgage lending with the frequently attacked credit cards representing a tiny percentage of the consumer credit expansion.
Confining mortgage interest relief to the basic rate of tax would be a sensible way to begin to rein back the extraordinary mortgage boom which is part cause and part effect of an economy which is overheating. More than anyone else it is first-time buyers who are hit the hardest by the mortgage boom because house prices are pushed ever higher. For a first-time home owner stretched to the limit to meet mortgage payments the Government's high interest rate policy can spell disaster.
The change in mortgage tax relief could and should be matched by a change in the way in which tax allowances are assessed. Currently tax allowances, in the same way as mortgage relief, benefit the taxpayer at whatever is their marginal rate. A rise of £100 in the allowance is effectively worth £25 to a basic rate payer but £40 to a top rate taxpayer. Tax allowances could be made the same in value for all taxpayers if they are changed into an allowance against tax rather than against income as they are currently.
That measure, together with the restriction of mortgage interest relief to the basic rate, would take

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around £1 billion out of the economy. It would cool the boom without giving the impression of panic or of wholesale reverses of economic policy from the time of the Budget. What is more, both those changes are eminently justifiable in their own right on grounds of fairness and simplicity.
The SDP budget proposals in March recommended the removal of the employees' national insurance ceiling and the consequent creation of a more logical and integrated income tax scale. That too would reduce excessive consumer spending as well as produce a fairer and more balanced division of fiscal capacity between selective but necessary public spending in health and other areas and the increase in disposable income among average taxpayers.
The reduction to some extent in higher rates of income tax was justifiable and appropriate, particularly in the international context, but an effective top rate of 50 per cent. (including uncapped national insurance contributions) would still have offered a considerable increase in incentives without the exaggeratedly biased division of the spoils which the Government chose to implement.
The integration of capital gains tax with income tax is in principle to be welcomed. It represents the most significant and radical of the measures in the Budget and in this Bill, though this seems scarcely enough to justify the effusive claims made by the Prime Minister. The reform inevitably opens new anomalies, however, and I remain concerned about the effect of the integration on an individual or a couple of modest wealth and with a modest income who benefit from a single windfall capital gain—the sale of an heirloom or a parental house—who will suffer a 40 per cent. rate of tax in a single year while in other years having no other gains to realise.
Compared to individuals and couples who can make full use of the annual exemption through realising regular small gains, the treatment is inequitable and a retrograde step compared to the previous position. I hope that the Government will examine ways of allowing such gains to be spread over a period of years, in a similar way to the concessions granted to authors, for example, in allowing them to spread the earnings from a book over a longer period than that in which the income is actually received.
Compared to the claims made for the Budget before and after its introduction, the measures in this Bill are unimaginative and have turned out to be a faulty and reckless influence on the management of the country's economy. From a mouse of a budget has emerged the prospect of a mountain of international debt and a potential balance of payments crisis that will allow this Government to stand alongside those who in earlier less oil-endowed times have presided over deficits, stop-go and other economic ills, ills which the Government have so confidently assured us were a thing of the past.
The Government may be deterred from making the necessary moves now by the fact that they may give rise to fears of crisis and collapse. In fact, the reverse would be the case. Nothing would be more damaging than if the Government precipitate economic
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troubles by avoiding action now in the mistaken belief that immediate readjustment would undermine confidence in the economy.
Noble Lords on the Front Bench opposite will be familiar with the words "Action this day". That is what is needed to correct the errors of this Bill and stave off serious and unnecessary damage to the economy.
4.42 p.m.
Lord Boyd-Carpenter: My Lords, I must share with the noble and learned Lord the Lord Chancellor and the noble Lord, Lord Bruce of Donington, the apology that if your Lordships' eloquence is sufficiently sustained over a sufficiently long period I shall be unable to be present at the closing of the debate. I have to go and say goodbye to an old friend who is giving up his post as ambassador in London; I feel bound so to do. I very much hope that the situation will not arise, but I thought it proper to mention it.
Yesterday your Lordships were discussing among other things the rights and duties of this House in respect of financial matters. It was a very interesting discussion. Today we are in an area that is perfectly clear. On the Finance Bill, we have no right to amend it and we have no right to delay it for more than a month. But we have the full right and, I suggest to your Lordships, the full duty to discuss it and to bring to bear on this, possibly the most important measure of the year, the combined knowledge, wisdom and experience of your Lordships' House.
It was in that spirit that I listened to the speech of the noble Lord, Lord Bruce of Donington. I can claim to be something of a connoisseur of the noble Lord's speeches. I have had the privilege, and very often the pleasure, of listening to them for some 40 years, and I thought today's a vintage example. That is, I think, an appropriate description. The speech bore all the characteristics of a vintage year—the year 1908—and would indeed have been thought very appropriate in another place during all the discussions in the 1906 Parliament, with the immense amount of invective delivered by the then triumphant Liberal majority (which shows what a long time ago it was) against those who were better off. The sneers then delivered against the dukes have now been delivered against people with high earnings.
The noble Lord, Lord Bruce of Donington, does not appear to understand that invective about turning the screw and cruelty to the distressed and under-privileged simply does not fit with the facts of the situation. Everybody both inside and outside your Lordships' House knows that. It is a fact that the great majority of our population today are better off than they have ever been. It is not just a question of a few people on the highest incomes. The fact is indicated by the high expenditure being undertaken by very large sections of our population; by holidays to the Mediterranean which have all but disrupted charter air services; by the presence of a car or a moter bicycle outside an enormous number of houses; and by the extent to which colour television sets and washing machines now form part of the fittings of a very large number of homes. It does not

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help a proper discussion of these matters to overlook that fact.
No one is disputing that there are people at the lower end of the scale who are less fortunate. But the fact must be faced first of all that the great majority of the population are better off than they have ever been. And they know it, which is why they support the Government. Equally, the power to relieve the less fortunate depends entirely upon the capacity of the economy to create wealth. It is no use saying that there is all this terrible hardship and ignoring at the same time the methods necessary to generate and create the wealth which has to be created if increasing improvements are to be made in their condition. That is the important point.
I look at this Finance Bill, as I have looked in the course of my life at quite a number of Finance Bills, with that concept very much in mind. Is it going to help in the creation of wealth and therefore the capacity of our society not only to provide better standards of life for the great majority but also to make available the means to give relief and improvement to the least fortunate? In the 1950s and 1960s a steady reduction in tax rates reflected in an increase in tax yields—the decreases in tax rates which we are discussing today will have the same effect—enabled the burden of taxation upon the active working population to be reduced while at the same time more resources were made available to help the poorest and the worst off. Surely that is the central point about which your Lordships are, and I am sure should be, concerned.
It is in that way that one finds the discussion by the noble Lord, Lord Bruce, of the tax position of a man on an income of a million pounds a year somewhat irrelevant. I do not think I number among my acquaintances anybody in that category, certainly no one adroit enough to adjust his affairs so that he pays no income tax on an income of that size. The noble Lord, Lord Bruce, did not appreciate as he was citing this somewhat fantastic example that he was really giving away the case against high rates of taxation. It is the inevitable effect of very high rates of taxation that people find themselves deciding to indulge in devices to lower or eliminate the burden upon them. It is for that reason that many people of very substantial incomes have left this country, gone to the Channel Islands, to Portugal and to various other parts of the world, with the result that our Exchequer has lost all revenue by way of taxation from them.
The noble Lord did not seem to appreciate that if you push personal taxation beyond a certain point you get very disappointing results: not only do you discourage enterprise and investment but you also encourage emigration of the better off. And you also encourage people of high earning capacity to practise their professions and trades in other countries where the level of taxation on high incomes is so much lower, notably the United States.
Therefore if we come back to what I know is the objective of the noble Lord, Lord Bruce, as it is the objective of all noble Lords, that we should build up the creation of wealth in this country, we have then to look at the Finance Bill from that point of view. In
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this respect I suggest that it is the best Finance Bill, if I may allow personal thoughts to intrude, for a quarter of a century. It is a Finance Bill which really makes an attempt to tackle the problems of direct taxation.
A rate of tax of 60 per cent. on the higher tranche of the higher incomes is a very high rate indeed. Some people would regard it as confiscatory. Most people would regard it as unacceptable save in moments of the gravest national emergency. Whatever view one takes, whether or not one thinks it is right to take three-fifths of some part of somebody's earnings away by taxation, I suggest that we must all consider the results. What are the results? The results must be a discouragement of wealth creation and of enterprise.
The noble Lord, Lord Bruce, poured scorn on those who make money out of money, as he so politely put it. However, the skilled, knowledgeable handling of investment and of large amounts of capital is of immense importance to the economy as a whole and therefore to the population as a whole. We have seen very often how governments—all governments—have not proved themselves particularly skilful in the way they have made investments. It is the fact that the private sector, including those people who, to use the noble Lord's phrase, make money out of money, has a considerable role to play in securing that capital is put into those projects that most need it. This is working out.
It is no use the noble Lord pretending that these policies are not working. One might say—if my noble and learned friend Lord Hailsham were here, I am sure he would say—si argumentum requiris, circumspice, which for the benefit of the Liberal Party I shall translate as "Keep your eyes open mate". It is the fact that our economy is moving successfully forward.
I know there is the point—the noble Lord appears to be overcome by this thought—about the balance of payments and the figures announced today. It is the experience of all of us who have been involved in these matters for some time that difficulties with the balance of payments are especially likely to arise at a moment when the economy is expanding. There is an increased and increasing demand for raw materials and very often for plant, machinery and technical devices. These have to be paid for a long time before the product which those imports are used to produce can be put on the market and provide a return for the money invested. There is always a time lag. If one looks back over the years even since the war one sees that periods of expansion were always preceded by some pressure on the balance of payments. I know of no reason to doubt that that is the case today.
Though the amounts look substantial and can be exaggerated by those who want to exaggerate them, as one or two people who ought to know better have been trying to do on the radio today, they are extremely small in proportion to our enormous resources and to the enormous investments which under the Government and their policy of allowing free movement of capital have been built up all over the world. These amounts are far from being formidable in that context. All of us—perhaps

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particularly those of my generation—are unduly impressed by these apparently large figures, but when they are looked at in proportion to the even larger figures of our overseas investments or the balance of payments problems which have affected the United States for some years, one can see that they are no more than perhaps the ordinary reaction to the beginning of a period of industrial expansion. This will be enormously helped by the tax changes made in the Budget.
It is the fact that people are inspired to work, to invest and to take risks by the knowledge that if those activities are successful they will be able to retain, use and enjoy the results of their enterprise. This goes at all levels of the scale. I wonder whether your Lordships have in mind the fact that the reduction in the standard rate of income tax means that last month the pay packet of practically every person in employment was substantially increased as a result of the reduction in the deductions by the Inland Revenue. That surely was extremely useful. It gave to those in work the additional income that they wanted without increasing wage rates, with all inflationary effect that that can have. One increases take-home pay without increasing wage rates. That must be an extremely helpful step.
There was also the great improvement in capital gains tax, which was a very unfair tax as it was operating. As the House may recall, it was introduced by the late Mr. Selwyn Lloyd on the basis that it related only to gains made within a year. It was the party of the noble Lord opposite which extended it into the instrument of oppression which it became. It is extremely good that it should be tidied up.
The adjustment of inheritance tax is surely a good thing. In this respect I hope that my noble friends will feel it possible to go further. Given the high price of houses today, it becomes increasingly difficult when someone dies to pass on his home to his children and to his successors. Unless the point of entry into inheritance tax is substantially raised, it will so often be necessary when somebody dies for his children to sell his home in order to pay the duty resulting from the high valuation put on the home.
The Government's policy is to encourage home ownership. One of the factors that moves many of us in respect of home ownership is the desire to leave one's home for one's children to live in after one's death. There is also the fact that we are continually having to deal with the problems of historic houses whose owners cannot afford to continue to occupy them because of inheritance tax. A rather curious concept was put to me the other day. Because of the proper arrangement under which there is no inheritance tax when money passes from husband to wife or wife to husband, it would be possible if one could so arrange it to retain one's home free of tax if one could manage it in this way.
When one reached a certain age one would marry a young and healthy girl and on one's death the property would pass to her. She would continue to occupy it until her old age when she would marry a young and healthy man to whom the property would then pass. After perhaps another half century he
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would look round for another young and healthy girl, and so on ad infinitum. One might have bad luck—
Baroness Seear: My Lords, can the noble Lord tell us how this is done?
Lord Boyd-Carpenter: My Lords, it is not for me to teach the noble Baroness how to attract a consort. I think that her charms are sufficiently compelling for it to be an impertinence on my part to make any professional suggestion to her.
However, that shows, does it not—it is the reductive argument; the reductio ad absurdutn—how tax falls with rather unpredictable incidence and that we ought to consider at least exempting someone's principal home from inheritance tax altogether in exactly the same way as we exempt someone's principal home from capital gains tax. There is a good precedent there and I hope that my noble friend on the Front Bench will consider that for future budgets. But it would be ungrateful at this stage to press for further improvements.
This is a very good Finance Bill; it is an historic Finance Bill. It is one that will continue the good work which the Government are doing and, moreover, it is producing a state of affairs which has benefited the great majority of the people in this country. The majority of people in this country know that and that is why they are very happy with the Government.
Lord Annan: My Lords, before the noble Lord sits down perhaps I may say this to him. It is always a great pleasure to listen to him because he is the most formidable debator in the House. Anyone who crosses swords with him does so at his peril. However, I should like to ask him this. He very properly said that a reduction in taxation will stop driving people of talent, imagination and genius abroad to emigrate. However, is it not also true that if you do not pay your dons adequately—you pay them such a pittance that they are driven overseas to emigrate, more particularly because the Government make it clear that they somewhat despise what they do—the same will happen?
Lord Boyd-Carpenter: My Lords, I admire the noble Lord's adroitness, as always, in introducing the question of academic salaries into this debate on the Finance Bill. But having a rather greater respect than he has for the Standing Orders of the House, I shall not follow his argument.
5.2 p.m.
Lord Jay: My Lords, the pleasure of following the noble Lord, Lord Boyd-Carpenter, always puts me in memory of times past. Similarly, the year 1988 puts me in memory of the year 1955, which was also a vintage year. In April of that year the Chancellor of the Exchequer made huge tax cuts which he said would encourage incentive and promote a strong economy. At mid-summer he invited us all to invest in success. However, by July it was clear that consumption and imports were increasing rapidly and the trade balance was in deficit. Also in July of that year interest rates were raised to stop the rot and there was a run on the pound in August. In October

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the Chancellor of the Exchequer brought in another budget and raised taxes all around; in December he resigned.
I know that it will be said that a great deal has changed since 1955 and, indeed, much has changed. Although I would not dream of accusing the noble and learned Lord the Lord Chancellor of rewriting history—as the noble Lord, Lord Young, does from time to time—a few of those changes are worth recording. Ever since the tariff changes involved in joining the EC in 1972 took place we have developed a large and still growing deficit in manufactured trade. Despite that, in the two years from 1977 to 1979, which is before this Government came to office—a fact which is now sometimes forgotten— unemployment fell by 300,000 and real GDP rose faster than in almost any year since 1945.
Then in 1979, after this change which is supposed to have worked such miracles, the economy was treated to a steep rise in VAT, a gross overvaluation of the sterling exchange rate and interest rates went up at one time to 17 per cent. The result was most instructive. From 1979 to 1981—this is another thing that the noble Lord, Lord Young, does not tell us—manufacturing output fell nearly 20 per cent. and all industrial output by 10 per cent. That is the steepest fall in national production in this century. Unemployment doubled in 18 months. So altogether it was an instructive economic experiment and a large slice of industrial capacity was lost, probably for good.
Unemployment then continued to rise for seven years—that is longer than any period before, at least so far as I know—until the autumn of 1986. At the end of 1986 it began to fall for two reasons which I think are now fairly clear: first, and mainly, because of the sharp drop in the sterling exchange rate in 1986 and, secondly, because of the wise abandonment by the present Chancellor of the Exchequer of all the nonsense about M3 and monetarism, which he had himself been talking about five years before.
Incidentally, as one noble Lord has already said today, M3 has been increasing at 20 per cent. in the past year, so on previous theories we ought to look forward to a 20 per cent. rise in the RPI next year. But it is clear from the dates that the main reason for the turn round in employment and output has been the influence of the lower sterling exchange rate in restraining imports and encouraging exports.
However, we have for eight years been under-using our national productive capacity by something like 10 per cent. at least. That means a total loss of national income every year of £30 billion or £40 billion. Indeed, it is simple arithmetic to say that if the rate of rise in output in 1977 to 1979 had been continued for the next eight years, our real GDP would be higher today by something between £50 billion and £100 billion. In addition, in 1988 unemployment is twice as high as it was when this Government came to power; the visible trade deficit is running at £12 billion to £15 billion a year and the balance of payments deficit is the highest ever recorded in this country, despite our oil earnings.
The crucial element in the payments deficit is a huge deficit in our trade in manufactured goods with
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the EC. We have a direct deficit with the EC in our trade in manufactured goods of over £11 billion, about two-thirds of which is with West Germany. That is due to a considerable extent to the imports of cars—of which incidentally the United Kingdom output has halved since the record figure of 1972.
With the non-EC world we have a surplus in visible trade, so that it is the deficit in trade with the continental EC which is almost wholly responsible for our huge balance of payments deficit at present. Thus I am afraid that if we judge by experience and not by theory or doctrinaireism we must conclude that the famous single market of 1992 of which we hear so much. if it means anything, will materially increase that trade and payments deficit. Meanwhile there is one salutary lesson here for those who say—and there have been some on the government Benches—that manufacturing industry is unimportant and somehow all a bit out of date. But, far from that being true, it is the British public's insatiable appetite for imported manufactured goods, including cars, which is inflating our imports and is the main single cause of the present trade gap.
But since the time when our deficit became wholly due to our trade within the EC a new doctirine has been developed which had never been heard of before. Indeed, the noble Lord, Lord Boyd-Carpenter, was moving near to it today. The doctrine is—I must say that I have never heard of it before the last 18 months—that balance of payment deficits do not really matter, for two alleged reasons. The first is that a current deficit must he balanced automatically be capital receipts. Well, that in a way is true, but it is not comforting. It means in plainer English that if one spends more than one's income one must either sell assets or borrow. That is not an encouraging thought.
Secondly, we are told that that does not matter either—here we come to the noble Lord, Lord Boyd-Carpenter—because we have large reserves. The official reserve is, I believe—the Minister can tell me if I am wrong when he replies—about £40 billion at present; but our overall current deficit is running at over £10 billion a year, as we see from today's figures. At that rate half our reserve would be gone in two years. There are then the non-government held investments overseas which the noble Lord mentioned. They are of course large and amount to about £130 billion or £140 billion; but due to the abandonment of exchange control they are in private hands. They are not in the hands of the Treasury or the Bank of England, and such investments have never been conscripted in peacetime in this country before now.
It is therefore in my view most unwise for the Government to ignore all those facts and merely to pass on. What then is the right course for the situation into which we have got ourselves? Internally of course that situation is made more awkward because, due to the abandonment of any effective regional policy, an expansion of the economy still leaves a major part of the country underemployed and causes shortages and rising prices in the congested South-East. To have 9 per cent. of the working population unemployed, an overseas deficit

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and threats of rising prices all at the same time is neither comfortable nor clever.
The Chancellor has rightly abandoned M3 and all of that, and now apparently thinks that he can control everything by interest rates. He says that of course because he has nothing else left; but how high will interest rates go to do the job which they are clearly not doing at present—15 per cent. or again the 17 per cent. we suffered in 1980? The trouble with high interest rates is that in the first place they raise industrial costs all round, they discourage investment just when the Chancellor is encouraging consumption and, more seriously, they worsen still further the current balance of payments by handicapping exports and stimulating imports even further.
It was the fall in the sterling exchange rate, as I said, in 1986 which caused the turn round in output and employment thereafter. If we are now to prevent the payment deficit getting out of hand, we must have a lower sterling rate. I suggest that the right policies are now a more prudent Budget in the matter of stimulating consumer spending, lower interest rates and a lower exchange rate. If that is true we should, above all, avoid joining the EMS at present and so give away the one control—freedom—which we have over our own exchange rate. That would be an act of unilateral disarmament, to which I am always opposed.
Joining the EMS either means a normally fixed rate of exchange, which would be damaging in present circumstances, or it does not, in which case there is no apparent purpose in it. In the medium term, with falling oil revenues, which I have hardly mentioned but about which we are all aware, and the threat of 1992, a fixed exchange rate anywhere near the present level would be untenable.
My concluding hope is that the Government will take the payments deficit rather more seriously than they do at present and meanwhile I hope that the Secretary of State for Trade and Industry, who I regret is not here today, will not come to believe in his own propaganda.
Viscount Eccles: My Lords, before the noble Lord sits down perhaps he can explain something to me. I know that I am not very good at these things, but if the economy and finances are as bad as he says they are and have been for the past eight years or so, why do the British people continue to support the Conservative Party?
Lord Jay: My Lords, I advise the noble Viscount, if I am entitled to reply, to take a look at what has happened in the United States in the past two years and to wait and see.
5.15 p.m.
Earl Russell: My Lords, perhaps before beginning what I have been preparing to say I may take the chance to answer the noble Viscount, Lord Eccles. He asked why the British people continue to support the Conservative Party. The answer is that at the last election fewer of them did than at any other election
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since the war, but under our system the opinion of the people was not reflected in another place. It is a great deal better reflected in this place. The only one of our national institutions in which my party is represented in proportion to its voting strength happens to be the hereditary peerage. Perhaps Aristotle was right when he said that the lot was the most democratic form of selection.
I should like also to apologise to the House and to the noble and learned Lord the Lord Chancellor for arriving late at the beginning of the debate. I had made an appointment with my doctor, it turned out at the same time as my doctor had made an appointment with his removal man. I do not think that I need go on.
The question I wanted to address today is the level of public spending and, above all, how it is calculated, which I believe is very much in order at the moment since to an extent when the Chancellor plans his Budget, tax cuts and public spending must appear at least as partial alternatives.
I am taking some risk here because I wish to address the subject of a communication block between the parties. Communication blocks are normally boobytrapped. Why else do they become communication blocks? I am taking a distinct risk of casting myself as the booby. During the last election it seemed to me over and over again that the parties were talking past one another. The opposition parties were constantly alleging cuts in public services and considerable damage resulting. The Government replied with a whole series of statistics purporting to show increases in public spending in real terms.
The key question at the last election was, I believe, asked by an old gentleman in the back row at an election meeting in Southampton addressed by the noble Lord, Lord Young of Graffham, whom I am sorry not to see here today. The old gentleman said, "Can you tell us what are these real terms you keep talking about?" The noble Lord made the classically correct elementary answer: the question needs to go a bit further.
Lack of communication is something that I have observed in this House also. I can recall, for example, one of my vignettes of this House, an experience which I believe is more familiar to many noble Lords than it is to me. The noble Countess, Lady Mar, asked a question about Birmingham Health Authority. The noble Lord, Lord Skelmersdale, produced a long string of statistics appearing to show increases in spending in real terms which were greeted by both parties on this side of the House with a universal groan. The noble Lord sat down looking very hurt indeed. It was apparent to me at that moment that he believed his own figures. The noble Countess, if not the noble Lord, will understand why I found that a terrifying experience.
On another occasion, the noble Lord, Lord Peston, was asking questions about university spending, and the noble Baroness, Lady Trumpington, produced a long string of statistics purporting to show increases in spending in real terms which were again greeted with the same universal groan. The noble Baroness sat down, pretending that she had not heard what had happened.

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I can understand that in the short-term, but we have to try to get a little beyond this. I think it is particularly difficult to absorb these claims of increases in spending in real terms when at the same time the Government are priding themselves on decreasing the proportion of GNP which goes on public spending and on their diminution of the public sector borrowing requirement.
One keeps coming back to the question asked by the noble Lord, Lord Callaghan of Cardiff. I join with others in wishing him a happy and good recovery. In one of his last contributions in the other place he said:
"The Government really must make up their minds whether it is their policy to make cuts in public spending and make them out to be increases or to make increases and make them out to be cuts."
From the point of view of anyone employed in practically any of the public services, these claims of increases in real terms are—to use the word in its plain and literal sense—incredible. A great many people in a great many public service professions share the opinion of the junior hospital doctors during the last election who said that this claim so plainly contradicted their experience that they were incensed.
I wish to take a few examples, although I shall not detain the House with very many. At my son's school, an ILEA school, pupils have been told that if any books disappear from the school library, under no circumstances can the school afford to replace those books, however essential they may be. That does not strike me as what one normally regards as profligacy.
The dissatisfaction seems to extend quite widely. We find that the police force, for example, was reported in the paper two or three days ago as talking of taking its pay claim to the European court. It is not only those branches of the public service which one might think were in the Government's disfavour. Looking at the debate on the Defence Estimates, which I regret to say I was unable to attend but which I have read with some care, we find the same lack of communication. The noble Lord, Lord Trefgarne, said that Government spending on defence had increased in real terms. The noble and gallant Lord, Lord Bramall, on the other hand, said on 12th July at col. 728 of the Official Report that:
"the financial squeeze in real terms is now, if anything, greater than ever".
Responses to that sort of utterance remind me a little of the family doctor who once said that he made a habit of discounting half his patients' symptoms. We are beginning to get a failure in communication because we are getting a new sort of social stratification in our political system. All the people who work in public services of any kind are on one side and all the people engaged in industry and commerce are on the other. That is something which ought to cause alarm on both sides of the House, not just on one. It is a matter which causes considerable difficulty in communication. I can understand why the noble and learned Lord the Lord Chancellor feels the need to talk about an enterprise government. It is possible that in the past people have forgotten too much the need to create wealth from which services
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must be financed. However, we must have both and we must have communication.
I come back to the question: what has gone wrong with the calculation of these figures? I am not an expert in this area; I am hoping that if I do not have it right somebody else may start suggesting what is right. Two points occur to me as well worth pursuing. One is the decision of the 1980 White Paper on public spending to calculate spending in public services in terms of the retail price index and not in terms of the cost of that service.
Perhaps I may take one example of how that operates. The cost of books happens to be something about which I know a little. Between 1981 and 1986 book prices have risen by 82 per cent. and learned journal prices by 110 per cent., compared with an increase in the retail price index of 32 per cent. So we can afford to take a figure for spending on books which is above the retail price index which we can say is an increase in real terms but which nevertheless represents a very drastic cut in the number of books we are able to buy.
I do not know how widely that phenomenon applies. I think that it applies in large areas of the health service and of the defence budget, although I take the point which the noble Lord, Lord Glenarthur, made in the defence debate, that there are some years in which the cost of the defence budget has increased less than the RPI. But the form of that statement was itself a concession of the point.
The other point which seems to me to apply in quite a lot of cases is again something to which attention was drawn by the noble and gallant Lord, Lord Bramall, in the defence debate. It is the question of the funding, or the partial funding, of pay increases. If we have an increase which appears to be genuine in real terms but does not cover the whole pay increase, then it is not an increase in real terms.
I take the point that the pay increases are inflationary. I have never had any reason to believe that public pay increases are more inflationary than private pay increases. I do not think we can contemplate running public services without any pay increases at all. So long as there are pay increases there has to be some method by which they can be financed.
That merely underlines the point made by the noble and gallant Lord, Lord Bramall, as recently as 12th July, that the only exception he could remember was the nurses' pay increase. He has since learnt better no doubt. This is quite a technical area.
The problem is also raised: where do we go from here? I am not arguing for a bottomless public purse. I know perfectly well that there is no such thing. I understand that a Chancellor of the Exchequer is likely to take a distinctly dim view of programmes which were permanently committed to increasing faster than the retail price index. However, I hope that, in turn, the Chancellor of the Exchequer understands that he cannot have something for nothing. In a number of cases—one of which I think any noble Lord who came to the House by Underground will be aware—in some areas prices constantly increase faster than the retail price index. It can be very difficult indeed to stop that. Sometimes,

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as with the cost of books, it is not at all under the control of those doing the purchasing.
The case I am arguing is the same case as was argued in the defence debate by the noble and gallant Lords, Lord Bramall and Lord Hill-Norton. That seems to me, mutatis mutandis, to be true for all the public services. As the noble and gallant Lord, Lord Hill-Norton, put it:
"Our commitments arc plainly too great and too diffuse for the money which the Government see fit to make available".—[Official Report, 12/7/88; col. 754.]
There is a mismatch between the level of spending and the level of commitments. I do not say that it is automatic as to what ought to be done with that mismatch. But I will say that I can see no political perspective from which it seems to be sensible to pick that mismatch as a deliberate object of policy. Granted the concern about inflation which I understand, there are some things such as health for which we really have to pay. We do not have much choice about it. I have never been shown any reason why £X of public spending is more inflationary than £X of private spending going on exactly the same thing. If one shifts spending from public to private, I cannot see that it would become less inflationary. If that is a mistake of mine, I hope that someone will put me right. One must consider whether it is cheaper in the long run to spend money. Very often, as with a leaking roof in one's own house, it is cheaper to spend money:
Finally, at the end of the day, one must make a political choice. That is the choice which, for all their talk about hard choices, I do not think this Government have yet made. The Government must give up the idea that they are increasing spending on public services in real terms. Granted their concern not to increase public spending, the Government must choose whether they give up that concern or whether they decide to stop some of the services existing altogether.
In 1981, for example, there was a 15 per cent. cut in the universities' budget. Instead of reducing the costs of every university by 15 per cent., it would have been a much more coherent policy to close 15 per cent. of universities and to reduce student numbers by 15 per cent. I do not say that that would have been a good policy, but I think that it would have been a more coherent one than the policy we have at present. Under these circumstances, to persist with tax cuts and claim that public spending is being increased in real terms seems to me to be a failure to grapple with the problems which are immediately and urgently in front of us.
5.32 p.m.
Lord Strathclyde: My Lords, I am the third Member of your Lordships' House who has to rise today and humbly apologise to the noble and learned Lord the Lord Chancellor for not being in my place when he rose to speak. Being the third Member I cannot really offer any excuses, but I shall make a particular point of reading what I know were his very fine words in Hansard tomorrow.
I thought that the Budget was particularly excellent and possibly one of the finest that we have seen under this Government. It crossed over all social
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barriers. Almost every single household will be better off than it was before. At last we have seen the heralding of a new phase of budget surplus and the long-term aim of a balanced budget. Those are things which Conservatives have wanted for very many years. At last when we are on the streets talking to ordinary people about what Conservatives are effectively doing for the economy, we can hold up this Budget as being a fine example of what Socialists were never able to do.
There has been a brave and courageous reform of income tax from six banded levels to two; whereas in 1979 this Government inherited 11. The Budget will lead to a more efficient system. We have seen in it a lack of complexity and, obviously, a lack of bureaucracy. Complexity and bureaucracy are no good to anyone. There are no fears now of being a taxpayer. There is less avoidance of tax and more incentive to pay it. I am led to understand that the top 5 per cent. of taxpayers now pay a third as much in real terms as they did in 1978–79.
I am sorry that the noble Lord, Lord Bruce of Donington, is not in his place at the moment because what is so nice about speaking in this Second Reading debate is that the noble Lord, Lord Bruce—
Lord Williams of Elvel: My Lords, the noble Lord was not in his place when my noble friend Lord Bruce of Donington was making his speech.
Lord Strathclyde: My Lords, I take the point very clearly that the noble Lord, Lord Williams of Elvel, has made. I did not intend to castigate the noble Lord, Lord Bruce of Donington, for not being present; I simply wanted to talk about some of the things that he mentioned. However, I can do that at another time with the noble Lord.
I wanted to speak today in order to refer to one point in the Budget about which I am confused. It concerns the aspect of capital gains tax. It is a small point and I am not sure that I shall get much support for it from noble Lords opposite, although I was very glad to hear the noble Viscount, Lord Chandos, mention very similar points. On a question of principle, capital gains tax on assets held over very many years is, I believe, an inherently bad thing. It is traditionally unconservative and promotes the seeking of short-term gain instead of long-term gain. There are for instance, the problems of the very prudent investor who perhaps over the past few years has been an investor in The Stock Exchange and who would have paid capital gains tax every April. But he gets nothing back should he have made a loss in the current year because capital losses are only allowable against gains in the current year. He is thus locked into assets, waiting for the day when they might come up again. He is held into them for taxation reasons rather than for sound investment reasons. I believe that that is ultimately bad for the country and we all suffer for that stagnation of investment.
A possible solution to that would be to make capital gains tax assessable over a period of years, or otherwise to make capital losses allowable against income tax. Further, and more specific to this Budget, by reducing the allowance from £6,300 to £5,000, the Chancellor has made it more likely that

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people will have to pay capital gains tax at a higher rate of income tax. That is what encourages people out of long-term capital gain into what appears at the moment to be safer and more immediate income, which is usually spent as soon as it is received.
That simply cannot be the Government's intention, as I feel that it has always been vital to encourage people to save and invest for the longest term. However, I do not want that to cast any shadow on what I ultimately believe to be the most important Budget of this Government. The benefits and the freeing effects of this Budget will be felt for very many years to come.
5.37 p.m.
Lord Barnett: My Lords, I had the pleasure of hearing the noble and learned Lord the Lord Chancellor open this debate. I wish to welcome him to our financial and economic debates and, if I may, congratulate him on his delivery. The delivery of the noble and learned Lord is always very good, but this time he did not try too hard to convince us that he believed in every single word that he was uttering. However, at the same time, I hasten to assure the noble and learned Lord that I agreed with some of the things that he was saying.
I also agreed with some of the things that the noble Lord, Lord Boyd-Carpenter, was saying. I did not agree with a lot of what he was saying, but there was, nevertheless, a little part of his speech with which I agreed. I agree that we would be very foolish not to recognise that in recent years the economy here in the UK has been doing very well. We have had higher levels of economic growth than we have had for some time. I welcome that and I believe that it is possible to sustain that, even with the current level of balance of payments deficit, as has been said.
I agree with the Government that with our levels of reserves it is perfectly possible in the short-term—I shall want to say a little more about that later—to live with even the current levels of balance of payments deficit. I also agree with the Government that it is better to see falling unemployment with levels of inflation of 5 or even 6 per cent. than rising levels of unemployment with slightly lower rates of inflation
However, I am bound to say to the noble Lord, Lord Boyd-Carpenter, and to the noble and learned Lord the Lord Chancellor that, to put it mildly, the picture that they painted failed to deal with the serious underlying problems that are there for anyone to see who looks at the situation in the economy. Some of those problems cover the area of responsibility of the Secretary of State for Trade and Industry. I very much like the noble Lord and I hope that he will not mind when I say that I consider it a grave discourtesy to your Lordships that he has not taken part in this debate. However, I shall leave it at that as the noble Lord is not present. It would have been interesting, for example, to hear from the noble Lord which side he is on in the dispute between the Prime Minister and his right honourable friend the Chancellor of the Exchequer. Which side is he on on the question of exchange rates? It would have been interesting to hear his views. I am sorry that we shall not be able to do so. On the other hand, it may be that
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he agrees with me; and perhaps the Minister, when he comes to reply, will tell us that that argument is the wrong dispute at the wrong time, in the wrong place, between the wrong people and on the wrong issue. Let me explain what I mean by that.
It is the wrong argument because, having agreed the economic strategy —the Prime Minister has told us how brilliant the strategy was; the word "brilliant" was used constantly—how can one then argue about what is, in the short term, the comparatively irrelevant problem of short-term interest rates and exchange rates? It is the wrong time because the time for disagreement was when the economic strategy was devised some years ago or at the time when the Budget was announced. The time for disagreement was when the policies were put in place. Any other time is the wrong time.
It is the wrong place because such issues should be discussed in Parliament and not behind closed doors, at Nos. 10 and 11 Downing Street—if that is where such discussions take place. Sometimes such discussions seem to take place across the Atlantic.
It is between the wrong people because the Prime Minister agrees wholeheartedly with her brilliant Chancellor. It is the wrong issue, not because the question of interest rates and exchange rates are unimportant—far from it—but because the Chancellor is in the absurd position of having a Budget in which he has distributed large sums of money to the applause of many and the thanks of not a few, and some months later he has massively increased interest rates because he is surprised that what he is doing in loosening money supplies, loosening credit and fuelling it by giving further tax reductions has resulted in a growth in consumer demand. I cannot understand why anyone should be surprised at that.
To talk about the peripheral issue of balance of payments and interest rates is to talk about the wrong issue. We should be discussing economic strategy and policy. Has it been successful in fundamentally changing for the better the problems we face as a nation? I pose that question to your Lordships because the Select Committee on Overseas Trade reported to the House on 30th July of 1985. It was an all-party Select Committee and the noble Lord, Lord Aldington, was its chairman. Perhaps I may quote briefly from the report. It is relevant to the question of whether anything has changed fundamentally. Page 83 of the report states:
"Unless the climate is changed so that steps can he taken to enlarge the manufacturing base, combat import penetration and stimulate the export of manufactured goods, as oil revenues diminish the country will experience adverse effects".
The Select Committee could not have been more right in that matter. It also spoke of:
"an adverse balance of payments of such proportions that severely deflationary measures will be needed".
I do not believe that severe deflationary measures are needed now, for the reasons that I have indicated. We have sufficient foreign currency reserves to avoid those measures. However, the Committee was speaking of the time when North Sea oil would be completely gone. In fact, we have deficits of some £10 billion this year, while we still have a fair amount of

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North Sea oil. The Select Committee was not being extravagant in its choice of language.
The Committee went on to say that:
"these constitute a grave threat to the standard of living and to the economic and political stability of the nation."
Looking at our economic situation, the success to which the noble and learned Lord the Lord Chancellor referred, and the great credit which has been given to the Chancellor in his Budget, we must ask, when an all-party Select Committee looks at the matter in that way, whether anything has changed fundamentally.
One of the criticisms which was made of the Select Committee by the Chancellor and others in disagreeing with its conclusions was that it did not come up with any solutions. Equally, I do not have a simple solution to offer. However, I know a wrong solution when I see one. Pouring money into the hands of the consumer and then being surprised when it is used to import more consumer goods because our manufacturers cannot supply them is not likely to be successful in the long term.
Although I do not agree with every figure on balance of payments deficits which was given by my noble friend, Lord Jay, I agree that the problem is not that imports of consumer goods have risen very quickly. It is much more serious. In the first five months of this year exports of manufactured goods actually fell. In those circumstances, how can anyone say that our economic policy is correct? How can it be argued that every problem is solved and we are on a lovely path to prosperity for all? The noble Lord, Lord Strathclyde, said that he is sure that people will be delighted that we now have a balanced budget. I am sure that millions of our fellow citizens will not even be aware that there is a balanced budget; they are too concerned with their own budgets.
In the next few months we may see better trade figures. I certainly hope that we shall. It will also be possible to do a little creative accounting and make them look a bit better; I am sure that we shall have some of that. However, the long-term consequences that the noble Lord, Lord Aldington, and his committee referred to have been obscured by a short-term economic success which has been used to further an ideological policy which asserts that if the extra money from North Sea oil and increasing growth is put into the hands of the people, then that will solve all our problems. That is, if you like, the opposite of the argument that the Government know best.
I have great faith in the good sense of the British people. I certainly do not agree that the Government always know best. However, I doubt whether even the British people want responsibility for deciding the fate of the British economy. I am not sure that many people anywhere would like that responsibility. I doubt whether the great majority of the British people want it. They know that there is a need for balance. They know that long-term problems will not be solved by throwing money at them, whether problem areas are in the public or the private sectors.
They also know that more money for the National Health Service, for example, would help the sick and
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disabled in our community. More money for the police would help with the problem of crime. More money for housing would help more people who are living in terrible circumstances. More money for social security would help people at the bottom end of the income scale. More money spent on road and rail transport and capital investment would help private industry more than anything which has been done in this and previous Budgets. Above all, they know that policies in that direction, while not solving everything, would be of great help both to the balance of payments and inflation, and to sustaining the levels of economic growth that we have seen in recent years. Whereas the present policy of maximising tax cuts not only widens the North-South divide—which I do not altogether go along with—it widens the public sector-private sector divide which is the most serious division which the country faces. Private industry cannot survive successfully against the background of a deteriorating public sector environment.
The worst thing about it is that the policy condemns too many of our citizens to a life which none of us should find tolerable. I have always said—and I am not going back on anything that I said when I was responsible for public expenditure—that public expenditure has to be controlled. Unlimited funds are not available for growth in public expenditure. However, that should not mean, especially in current circumstances, a steady decline in the standard and level of public services.
I am sure that Ministers and noble Lords on all sides of your Lordships' House want their children and grandchildren to grow up in a decent, civilised society. That requires a decent level of public services. We neglect those services at our peril, especially when we have an opportunity for some increase now. It seems to me that unless the present policies are reversed not only do we damage irretrievably our long term economic prospects, but we do great harm to something we all hold dear—the vital social cohesion of our nation.
5.51 p.m.
Lord Graham of Edmonton: My Lords, it is my privilege and pleasure to make a contribution to this debate and I do so very willingly. I concur with the noble Lord, Lord Barnett, in a great deal of what he had to say. His contribution, like that of my noble friend Lord Jay, comes from long experience in another place and in government at a high level dealing with the matters which are covered by this debate. I want not only to commend what they said, but also to say how much I enjoyed their speeches. I want also to contrast their view of the realities of the Budget and the underlying situation revealed by the Budget with the comments of, for example, the noble Lord, Lord Strathclyde. He said that there is not a family in this country which has not benefited in some way from the Budget. To put it politely, that is not true.
I see that the noble Lord, Lord Hesketh, from a sitting position, shakes his head. I understand that he is circumscribed in what he might have to say.
Lord Strathclyde: My Lords, I think that the term I used was "household".
Lord Graham of Edmonton: My Lords, I should be very interested if the noble Lord would care to sustain that point with statistical evidence.
One of the shams of the argument put forward from the opposite Benches is that in considering the impact of the Budget they look only at what is contained in the Finance Bill, divorcing it totally from the other measures which this Government have taken: in the field of social security benefits, child allowances and a great many others. There are 9 million families in this country who are worse off as a result of the decisions of the past three months, not only because they have been denied benefits but also because interest rates have been increased five times in the past few months. That has not only affected industry, it has also put up the cost of borrowing money and of mortgages. The £3 or £4 a week which was gained in the Budget by many households has completely evaporated in the meantime. I think that this is an incredibly mean and shabby Budget when looked at against the yardstick of the noble Lord, Lord Barnett—the social cohesiveness of this country.
I do not deny and the Government have been very proud to say that some people have done very well indeed out of this Budget. There is no denying that. But I think that it is offensive—it is obscene—when one considers the amount of money which has been poured into the pockets of those who already had a great deal while relief is denied to many others. The noble Lord, Lord Bruce, set the scene very well—and I commend him on his report. People who are already very well off did not need any more. We are told that apparently those people, who since 1979 have been given on average £10,000 a year in tax benefits, need to be given more in order to work more productively; in order to work more successfully. Others who are struggling are apparently to be denied in order to pay for the benefits of the well-off.
The noble and learned Lord the Lord Chancellor went out of his way to pay tribute to the value of the business expansion scheme as something which would encourage people to invest. He also paid tribute to what it might do for the private rented sector. I was interested in that point because those who have followed the debates in this House over the past few days cannot help but have been deeply impressed by the contributions—primarily from this side of the Chamber—exposing the absolute misery in which hundreds of thousands (if not millions) of our people are struggling to survive in rotten housing conditions.
I shall tell the noble and learned Lord the Lord Chancellor who will benefit from the business expansion scheme—a man called Nicholas van Hoogstraten. Nicholas van Hoogstraten is the modern-day equivalent of Rachman. My honourable friend in another place, Gordon Brown, quoted this, which I should like to repeat here.
Lord Boyd-Carpenter: My Lords, is the noble Lord not aware that to quote from speeches made in
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another place in the current session is permissible only in respect of Ministers' speeches?
Lord Graham of Edmonton: My Lords, I was not going to quote what Gordon Brown said, I was going to quote what he said that somebody else had said. I am out of order once removed. Let me see if I get away with it. Perhaps I may tell the House what a firm of accountants said the business enterprises scheme would do:
"Rachman, one suspects, would not have been slow to take advantage of the scheme had it been around in the sixties".
I simply say that Nicholas van Hoogstraten will not be slow to take advantage of that scheme.
Whatever the laudable objectives of the noble and learned Lord the Lord Chancellor, the Government and others in setting up the scheme, it will be used primarily by those who have the power to make the lives of those who are living in abject conditions miserable as a device to make their lives even more miserable. It is a device which they will take advantage of with relish. It is all part of the strategy of the Budget.
When the noble Lord, Lord Strathclyde, and other noble Lords who think like him, point to people being a miserable pound or two better off as a result of the Budget, they forget that in the past few weeks there have been a number of other changes. There have been rises in electricity which will affect those households; there have been rises in water charges, prescription charges, and in gas charges. If the Government have their way there will also be charges for having one's eyes tested or one's teeth checked as well. So when one talks of the impact of the Budget one has to put it in perspective.
I think that one of the sad things about the Budget is that it could have done so much. What it has in fact done is to make the rich richer and the poor poorer. We have a Government whose motto is not "God helps those who help themselves" but "God helps those whom he has already helped". In this instance, I think that the Government should be condemned.
The greatest crime of all has been that the Government have failed to address themselves to a number of issues. The noble Earl, Lord Russell, drew attention to one of the almost inconsequential circumstances in which this rich and burgeoning country apparently finds itself; one of the minutiae—of children being able readily to have access to books of a good standard for their education. There is an inhibition there. What about building decent hospitals? I do not deny that new hospitals have been built but what about building more, and what about building more houses?
From listening to our debates on housing, it strikes me how great are the divides in our society. There are those who are adequately or well-housed and those who are not. I have some news for noble Lords opposite: there are now far more people who are not adequately housed than there ever were or than ever the Government are likely to acknowledge. I do not assert that the Government do not know about them or that they ignore them, but those people do not get a fair crack of the whip when it comes to enjoying the good things of life.

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This Government say that they believe in investment, but if Britain had invested its North Sea oil revenues in the past few years internally in the same way as Japan has done, there would have been £350 billion more invested in British industry. If we had invested at the same rate as Germany, it would have been £100 billion more. Even by Labour Government standards, if investment had been at the same level as it was under the previous Labour Government, we should have had £50 billion more. The Government may well believe that the way to induce us all to work harder is to reward those who already have more than most, but I doubt whether that is true. This Budget was born out of greed, founded on indifference to the poor and erected on selectivity toward the rich. How can one justify allowing 1 per cent. of the population to become increasingly rich by giving them in the same Budget an equal amount of money as 15 million families received? That is inequitable and unjust. It is the way that this Government continue to manage our affairs.
I should like to take this opportunity to say a few words about somewhat different matters. The Minister will recall that during the comparable debate last year—I think it was the present Minister—I asked him to thank the Chancellor of the Exchequer for the changes that had been made in that year's Budget which benefited the friendly societies movement. In the closing minutes of my speech I want to claim his attention not only by repeating that sentiment but also by asking him to take fully on board the fact that there are small financial institutions, such as friendly societies, which could benefit from a little more encouragement from the Government. The financial services industry still operates within the powers and legislative framework that were laid down over 100 years ago. It has been modernised and there is now the Financial Services Act, the Banking Act and the Insurance Companies Act. But the friendly societies movement still operates within a framework that was instituted over 100 years ago.
Perhaps the Government will give more recognition to the friendly societies which want to play a bigger and more important part. They have a good record for encouraging thrift and prudence which is not just of benefit to their members, although friendly societies have many members. There are 400 individual societies with a membership of 7 million. I believe that the Government could look profitably at the work of small and financially prudent organisations such as friendly societies. They have recently made a submission to the Chancellor about ways in which it may be possible for the Government to provide them with tax incentives such as those given to insurance companies. I can certainly tell the Minister that should he look favourably upon that submission, his answer will be very well received.
Another interest of mine that I have declared on other occasions is my link with the Co-operative Movement. That movement is grateful to the Government for their amendment to Schedule 7 of the Finance Bill which ensures that the beneficial changes to capital gains tax calculations which are outlined in Section 94 of the Bill are available to industrial and provident societies.
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Schedule 7 lists the enactments which qualify transactions to be regarded as "no gain/loss" disposals. The Co-operative Movement asked that the merger of Co-operative Societies should he specifically qualified by the acceptance of that amendment. They are not asking for any special favours, nor for a new status so far as concerns the merger of Co-operative Societies. The status asked for by the Co-operative Movement is already enshrined in the Income and Corporation Taxes Act 1988. The movement wanted the existing status to be repeated in Schedule 7 of the Finance Bill. They believe that its absence from the schedule was an oversight. I pay tribute to the Chancellor and his advisers because I believe that when these matters were drawn to his attention in Committee in another place the appropriate steps were taken.
The matter is a of special concern to the Cooperative Union whose membership is made up principally of retail Co-operative Societies. Those societies regard merger with each other as prime business strategy, partly to avoid the closure of any small society that may be in trouble but mainly to enable the economies of scale enjoyed by large societies.
I appreciate that I have made special pleading for a body with which I have a very long association. I hope that the Minister will recognise that there are certain aspects of the taxation system which bear down heavily on Co-operative Societies in comparision with other organisations. I hope that he will be able to say something kind in his remarks at the end of the debate.
6.7 p.m.
Lord Peston: My Lords, normally when one speaks at the end of a debate one feels rather fed up because all the good points have already been made. Certainly they have all been made from this side of your Lordships' House so far as I am concerned. I am slightly surprised at the lack of participation of noble Lords from the other side of the House. I should have thought that noble Lords opposite would have been queueing up to say how marvellous was this brilliant Budget.
Tonight I am not upset about speaking after many other noble Lords; nor am I concerned about not having anything new to say on the topics that have already been raised. I should like to concentrate on just one matter; namely international monetary reform, which is a theme that I believe to be relevant to the issues that confront our country now and will certainly confront it in the next few years.
I should like to start by considering the question of flexible exchange rates and go on essentially to argue why it would be right to move back to a fixed exchange rate. First, let us consider the case made for flexible exchange rates. The simplest argument assumed that we had a current account deficit caused by our country's price levels being too high. It was then argued that it was easier to deal with such a deficit by allowing a market-led devaluation rather than by having a policy-led intervention in order to try to reduce prices, because such a policy-led

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intervention would require a large and persistent rise in unemployment.
Another way of putting the case for flexible exchange rates is to say that the exchange rate would simply adjust continually to offset price rises. Therefore in a world of flexible exchange rates there would be no external financial crises. Central banks would not need large reserves of gold and hard currencies in order to preserve any particular parity. A particular aspect of the case for flexible exchange rates was the argument that a floating rate would insulate the economy from external shocks—we should be protected from what was happening in the rest of the world—because the whole burden of adjustment would be borne by the exchange rate. That was also supposed to mean that this country could pursue an independent monetary policy and that in that way we should have no difficulty in maintaining full employment. One final by-product of the case for flexible exchange rates or floating rates is that they would obviate the need for protection and help to preserve free trade.
That is the case, as briefly as I can state it, for flexible exchange rates and of course that case has just one slight difficulty, which is that it is not borne out by the facts. Exchange rates in the era of floating rates have not moved to offset movements in relative international prices. There have therefore been substantial shifts in so-called real exchange rates. I do not wish to horrify the noble Earl, Lord Russell, but apart from real public expenditure, there are also real exchange rates that we have to take into account.
However, there have been substantial shifts. These involve substantial changes in the international competitiveness of British industry brought about by floating rates. They have affected the structure of industry. Because of that, they have on occasions given rise to current account deficits or exacerbated the deficits that we have. We all now recognise that national economies, and our own economy, have not been insulated from external economic effects. It has been the case continually in the flexible exchange rate era that central banks have felt constrained by what is happening in the world at large.
In other words, countries in the floating exchange rate era—for example, the last 15 or more years—have felt themselves to be just as interdependent, just as affected by what happens in the rest of the world, as they were in the fixed exchange rate era.
Another aspect of our economic experience during the flexible era has been that, almost by definition, we have lived in a period of much more unstable currencies than we had during the Bretton Woods regime. Indeed the changes in actual exchange rates in this period have been quite massive. Daily changes of 1 per cent. are by no means rare. Monthly changes in exchange rates of 5 per cent. are by no means rare. Those are large changes. We compare them with the level of profits that exporting firms would hope to earn.
What is the explanation? Why have flexible exchange rates failed in the world economy? The explanation is very simple. It is to do with
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international capital mobility. That is the nature of the problem. Most of the early theory of flexible exchange rates concentrated on the current account of the exchange rates. I do not say that there were a lot of idiots around. I have given lecture courses over a great many years on this subject. I can assure noble Lord that for a long time I too concentrated solely on the current account of the balance of payments when I was discussing the question of flexible exchange rates. But that was an error.
It is simply not the case that the shocks to the world economy are due largely, or even mostly, to changes in the world's propensity to buy from us or to sell to us. The shocks to the system that we need to take into account are shocks due to the great mobility of international capital; and the fact that capital moves from country to country for purely financial reasons.
The problem that has confronted us—and I give our country as an example, but it has been true of many countries—is that an inflow of funds to our country causes sterling to appreciate. The effect is to make our exports dearer in world terms and our imports cheaper in sterling terms. The effects of this capital mobility therefore are to move the current account into deficit and in particular to threaten those firms producing tradeable goods.
The fundamental point that occurs here is that the adjustment is asymmetric. The excessive rise of a currency damages a tradeable, or potentially exportable, section of the economy. When the exchange rate moves back again—as sometimes happens—those sectors of the economy have gone out of existence. They therefore do not immediately bounce back to take account of the subsequent depreciation.
Some economists have argued that speculators would operate to reduce this exchange rate volatility; that essentially we live in a world of speculators who would buy and sell currencies in a way that would stabilise international financial markets. One difficulty with that view—and again it is one that has dawned on us only in recent years—is that the scale of international capital movements is so large that speculators simply do not have funds that they can use to arbitrage in this matter. But there is a further problem. The way that speculators operate in foreign exchange markets, far from dampening down fluctuations in currency values, seems to exacerbate them. Indeed we have all now become used to worrying about so-called speculative bubbles: currencies that simply move in a particular direction because the speculation is feeding on the fact that speculators expect other speculators to assume that the currency will move in a particular direction. These bubbles build on each other. This factor added to the instability.
Perhaps I may pause for a moment to remark about our current circumstances. There seems to be a great danger at this very moment that a speculative bubble is developing in the sterling:deutschemark rate which again could be extremely deleterious to our economy during the next few months, and longer. Financial markets generally in this era have been much more volatile. In other words, it is not merely the exchange rate that has been volatile. Interest

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rates, share prices and share yields have been more volatile. Although not excluding the foreign exchanges, it is hard to believe that any of this volatility reflects real forces or fundamentals. It is hard to believe that it reflects it in the short term, but I have some doubts as to whether this volatility reflects it in the long term either.
One particular aspect concerns the Stock Market crash of 1987. What is interesting about that is that it does not seem to have had a major effect so far on most economies. There are some American economists whom I respect who still believe that it is about to happen. However, they suffer from the same illness from which I suffer: the economist's natural pessimism. It does not appear that we shall have a major world crash connected with that Stock Market crash. That means that the world stock markets had become seriously out of line with reality beforehand if in crashing they do not then have a further effect on the world economy.
If noble Lords have any doubts about the nature of the foreign exchange markets, I suggest that the appreciation of the dollar, for example, from 1983 to 1985 casts serious doubts on both the efficiency of foreign exchange markets and the rationality of foreign exchange dealers.
The best example of a floating exchange rate problem—and here I come to our immediate position—is the policy dilemma facing the Chancellor of the Exchequer at the present time. I have a few words to say on that. I say this with trepidation because I do not wish to ruin the Chancellor's career—although it would be difficult to do that because he has done so well. However, what little I know about the controversy between the Chancellor and his right honourable friend the Prime Minister is that the Chancellor seems to have some glimmering of understanding of the economy and economics. It is hard to see that whoever is advising the Prime Minister has any understanding of this matter whatever.
The problem that faces the Chancellor is one that has already been mentioned. It is that the Chancellor is short of policy instruments. He is in that position from his own decision. He is needlessly short, but he is short of policy instruments. He needs a policy instrument to tie down the rate of inflation. His problem is that of naive monetarism, which has died. Indeed, it has died two deaths. First, it is apparently more difficult to control the money supply than even the most extreme Keynesians among us believe. I never hesitate to remind noble Lords opposite that those of us who did not believe in controlling the money supply were infinitely better at doing so than noble Lords opposite or their honourable friends, who believe in it but do not seem able to carry it out. That is one death.
The Government have had appalling luck. They do not seem able to find any measure of monetary conditions that they can keep under control. I am an economist who believes in my subject. There must be a measure of money control that the Government could follow, but I cannot find one at the moment.
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However, the second interesting death of naive monetarism is that the key to it, so we are told, is to keep public finances under control. The Government have to some extent kept public finances under control. We no longer have an apparent fiscal deficit and yet, despite that fact—whether it be sterling M3, M2, M4, M Zero or MO (I am never sure what we are supposed to call it)—they all go drifting in any way they will. Unfortunately any way that they will is upwards. Therefore we end up with the points that noble Lords mentioned that the only inflation-controlling instrument left appears to be short-term interest rates. But there are grave doubts about the effect of short-term interest rates on inflation. They put up the value of sterling and that directly mitigates the rise in price levels because of the influence it has on the way import prices are measured. And that is offset by the house mortgage effect.
But putting up interest rates is potentially disruptive to the real economy. It makes exporting less profitable and the demand effect is much more likely to occur on business investment than on consumer expenditure.
All that leads me to two conclusions that I should like to outline. The first is that we really need to move forward on international financial reform. Most economists though not all, have come to the conclusion that we must move back to the era in which nominal exchange rates are fixed. One does not mean by that a precise return to Bretton Woods. That system was too rigid, or at least it would be so for the present day, and some countries, not least our own, were optimistic about the exchange rate targets they could keep to. What we need now are some broad bands within which currencies can and should move without formal devaluation—certainly wider bands than Bretton Woods allowed. I belong to the so-called adjustable peg school of thought, which believes that the mid-points of these bands should be allowed to move gradually and automatically in line with market forces. As we got the benefits of relatively fixed exchange rates which would help to tie down the inflation problem of the economy, we should also have the benefits of showing some rational response to market forces.
I come to one last reform. Having listened to what I thought was a quite brilliant speech from my noble friend Lord Jay, I part company with him at this point. I at least—I must emphasise "I" (our side of your Lordships' House is no less disunited than noble Lords opposite)—believe that the time has come for us to go further and take an immediate decision to join the European monetary system. This has nothing to do with leaving the EC. We shall not leave the EC. One can produce many diagnoses of what the consequences of joining the EC have been, but we are not moving. We are in and have to make the best of it. If we are to make the best of a challenge in 1992 then EMS is part of the key to that. I particularly emphasise on the trading side the enormous benefits we gain to the extent that we can invoice our trading in sterling. We should not underestimate the benefits to us when we are writing invoices in sterling and not in other currencies. If we are not fully in the EMS and fully committed to it there is undoubtedly an exchange risk that foreign importers will find from

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sterling-invoiced documents. For that, if for no other reason, I suggest that we should be within the European monetary system. It provides a basis beyond that for European monetary co-operation. It provides a basis for European fiscal co-operation.
However that does not mean that it solves all our problems. I am aware that within the EMS there is still the problem of the exchange rate floating against the dollar. I do not doubt that what happens in America strongly affects what will happen in the rest of the world. But the fact that choosing an improvement still leaves one with problems is no reason not to choose that improvement. I am also aware of the extent to which Germany would dominate the EMS. Germany dominates Europe anyway. But the way to deal with that is to be part of it and to use our power to offset the dominance rather than to shrug and to say that we shall not join.
I conclude by saying that there are no simple solutions to international monetary reform. It is a matter of balance. But I can think of fewer more sensible decisions that this country could take at this time than an international monetary move to join an exchange rate system which would give a lead to more general international financial reform.
6.25 p.m.
Lord Houghton of Sowerby: My Lords, I wish to pursue the matter that I raised at the time when the House was asked to agree to all stages of the Finance Bill being taken on the same day. I wish to introduce into this discussion upon it—that is the relationship between your Lordships' House and the House of Commons—matters of finance, public expenditure and administration. There is an element of urgency in this, I believe. From my point of view I have been dealing with this matter now for several years and I believe it to be of great importance to the future of your Lordships' House I do not believe enough interest is being taken in how relations between your Lordships' House and another place may develop as a result of the growing assertion of confidence and strength on matters of public affairs in your Lordships' House.
The noble Lord, Lord Boyd-Carpenter, alluded to what happened yesterday, which was quite important. The Local Government Finance Bill came back from the Commons. Some of us had wondered when the community charge was included in the Local Government Finance Bill whether that Bill would be certified as a money Bill under the Parliament Act 1911. If one reads the Parliament Act 1911 one realises why the Local Government Finance Bill was not certified as a money Bill because the Parliament Act specifically excludes from its provisions,
"any taxation, money, or loan raised by local authorities or bodies for local purposes."
That seems to exclude from the provisions of the Parliament Act a Bill which authorises local authorities to impose a certain type of community charge.
Consideration by this House did not remove the privileges of the House of Commons on matters of
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taxation and public expenditure. It was those privileges which were raised in the message given to your Lordships' House yesterday on matters relating to the community charge which have been subject to decision adverse to the Government in your Lordships' House. These concessions which we decided in the Bill should be granted to certain sections of the community—concessions against the full community charge—the Commons sent back with a single response, saying in effect: "This is an intrusion on the ancient privileges of the House of Commons and that is sufficient for us to send it back". Back it came and your Lordships accepted the return on the terms upon which the House of Commons sent it to us. So, even though the Parliament Act may not apply to a Bill in the terms prescribed by the Parliament Act, underlying all activities are still the privileges of the House of Commons on matters of taxation and public expenditure.
I should like to refer in passing to a few lines in the preamble to the Parliament Act 1911. They are sometimes lost sight of and probably in many cases not even remembered. They state:
"And whereas it is intended to substitute for the House of Lords as it at present exists a Second Chamber constituted on a popular instead of hereditary basis, but such substitution cannot be immediately brought into operation".
There was a promise of the reform of the House of Lords well over 70 years ago. The Parliament Act is the same age as the Official Secrets Act. On Friday this House will put the Official Secrets Act through the mincer. At long last the Government say that it must be reformed but there is no "long last" about the Parliament Act. We hear nothing about it and your Lordships do not say much about it either.
From my point of view the urgency is this. It will shortly be 40 years since I made my maiden speech in the House of Commons sitting in this Chamber. I was then over 50 years of age. One does not have to be very good at arithmetic to concede the point that my time to pursue this and other matters is running out.
Lord Boyd-Carpenter: It does not look like it.
Lord Houghton of Sowerby: That is why I am going to make the best of it while I can. The second urgency from my point of view is the pending implementation of recommendations of the Keith Committee on administration and enforcement of inland revenue. The Keith Committee reported in 1983, having been charged with the duty of looking at the administration and enforcement of taxation and at two areas of self-government in this country. One area was the Customs and Excise; the other was the Inland Revenue. The recommendations have been under review for some years.
In 1986 the Finance Act introduced many changes into VAT and the powers of the Customs and Excise. As I have said in the House on previous occasions, in 1986 Parliament erected within the compass of administration of VAT a separate code of punitive law wholly in the hands of the Customs and Excise. It did not require a separate Act to do so partly because there was no precedent for it and partly because the ethos of the Customs and Excise is more authoritarian and independent than that of the

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Inland Revenue. The Customs and Excise touches on traders, business people, smugglers, drug traffickers, exchange control breachers and so forth. It does not deal with the millions of citizens at large in the same way as the Inland Revenue.
The Customs and Excise has its new powers following the Keith Report. The Inland Revenue is about to receive its new powers. The first instalment of the Keith recommendations appears to be in Chapter 5 of the Bill, which contains several clauses increasing the powers of the Revenue over the citizen. The Keith Report contained 99 recommendations relating to tax administration. They are set out in an appendix to a pale blue book which was published by the Inland Revenue in 1986. Not all require legislation; some can be implemented by administration. Not all have been accepted. I believe that one recommendation of the Keith Committee came close to re-erecting the stocks and putting tax delinquents in them to be pelted by the more honourable members of the community; the virtuous members of the community. It was not quite so brutal, but the recommendation was to publish the names of those who had reached terms in respect of fraud or gross negligence in their tax affairs and who had settled with the Inland Revenue by paying cash instead of going to trial for a criminal offence. I am glad to say that the Inland Revenue rejected that recommendation. It was a quite astonishing recommendation but that was not the first time that it had been made. It was first made by a Select Committee of the House of Commons in 1905. Many more of the recommendations are more relevant to tax administration and will come along.
When I was in the House of Commons I pressed continually for the separation of the complexities of administration and of tax avoidance from the main taxing Act. In the past the Finance Bill has tended to be a taxing Act and for that reason it can be certified as a money Bill without complications. As soon as it began to contain a number of recommendations relating to the powers of the Revenue over the citizens, and penalties to boot, the question arose as to whether it was part of a taxing Act.
It was not until 1970 that the Inland Revenue, with a large accumulation of changes in adminstration becoming necessary must have asked the Government to introduce a Taxes Management Act. That Act was not certified as a money Bill and it was not inhibited in its passage through your Lordships' House. That Act has not been consolidated into the income tax Acts; it is still separate. Every new clause in Chapter 5 implementing the recommendations of the Keith Committee is an amendment to the Taxes Management Act. These are not amendments to the income tax Acts; they are amendments to the Taxes Management Act and cover administration.
I shall not go into all of the proposals, because I wish to establish the principle. However, one of the proposals was that in future every citizen is under an obligation to the Inland Revenue himself to declare his own liability for income tax and not to wait for the Inland Revenue to send him a tax return to fill out. He must take the initiative. He must not only declare his/general liability to 'income tax but he is under an
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obligation to declare at any stage thereafter any new source of income. He just do so within 12 months of the end of the year of assessment or be liable to a penalty of 100 per cent. in addition to the tax which he may have left unpaid.
What is that but a war on the black economy and on moonlighting wages? That is what it is. We shall see how it works out, bearing in mind that a large proportion of workers assessed under Pay As You Earn are not sent a tax return to complete for three, four of five years because the Inland Revenue is saving time by not having a lot of paper to deal with. The returns may not be sent out for completion and potential and actual taxpayers may be unaware that they must report a new source of income whether they return a form or not.
Whether it will make any practical sense depends on how it is to be administered. That is difficult to know. We do not always know what the reaction of people will be to the new phases of bureaucracy nor how unpopular officials can become when there are put into their hands new tools which, if not used with tact and consideration, can lead to a great deal of criticism.
What am I asking? I have already asked this unsuccessfully in the past. I ask the Government to give an assurance that in the implementation of the remaining Keith Committee recommendations, they will introduce amendments to the Taxes Management Act and keep them free of the inhibitions of being included in a money Bill. That is what I ask. if they are to have a step by step approach to this matter, it will go on for years. The public will be asked to take its nasty medicine a spoonful at a time but it will be difficult to measure the cumulative effect of all the new strictures and controls which will be put over the taxpayer until they are in full operation in years to come.
Otherwise, if the Government say that it is not convenient to do it that way, perhaps they will take steps to ensure that we have an opportunity to discuss in Committee parts of the Finance Bill such as Chapter 5 to send them back to the Commons for anything that we believe should be reconsidered without the Commons sending them back claiming their ancient privileges because this House should not be imposing a charge on the citizen and should not be involved in public expenditure. How else are we to get free of the incubus of the Parliament Act and the privileges of the House of Commons being used in matters which relate to the freedom of the citizen?
We should consider that the power of entry and the status of the legal authority to give a power of entry is decided in the House of Commons. It is taken out of our hands because it is in the Finance Bill. It was not in this House that the power of giving a certificate of authority for entry by the Inland Revenue was taken out of the hands of the magistrate and put into the hands of the circuit judge. That should have been done before it was done in the House of Commons when they saw the outrage aroused by enabling the Inland Revenue to go about its raiding operations—very detailed and penetrating they could be—on the say-so of a magistrate. I do not wish to denigrate magistrates but their certificates are given

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far too freely and one has only to think of Cleveland for that.
In those circumstances, I am pleading for some restoration, if it is that, or some establishment of the right of your Lordships' House to protect the citizen from any excessive bureaucracy in the administration of our tax affairs. These are not revenue issues. This is a question of how the bureaucracy shall control the citizen. It may be a revenue matter in the sense that it involves recovery of tax arrears, but there are other means for that.
Perhaps I may remind your Lordships of what has happened recently. Tax is now deducted from bank interest. Tax is now deducted from all interest payments at the rate of 25 per cent. However, the taxpayer who may have to bear taxes of that kind on interest received has no means of recovering the money if he is tax-exempt, any more than the building society investor can recover the compounded tax embodied in the interest which he receives on his investment. That is a tax on all incomes. There are no exemptions from that. The Revenue now has a grip on interest payments which it has wanted for years and has never been given by any previous Government. The banks nearly went beserk when Gaitskell decided that they should give a return to the Inland Revenue of interest credited in their accounts—something which they have now had to do for a number of years. However, the grip is growing: pay as you earn, tax deducted at source, tax charged upon interest whose recipient may be exempt but who is given no power to recover it—tax which is supposed to be an income tax based on a progressive scale but which is a block deduction at the current or compounded rate of tax.
This amounts to something in which, in my view, we should take an interest. The House of Commons is too pressed at Budget time to give attention to these matters. If we were given some relief from the prohibitions of the Parliament Act, I believe we should be rendering a public service and I do not think that the parliamentary system should deny that. I do not believe that the 1911 Act should be continued in its present form for that purpose. Heavens above! Is what passed in 1911 to stand for all time as the dark and forbidding shadow of the mistakes of the past? If we can revise the Official Secrets Act, I should think we could revise the Parliament Act; and that is what I have stayed here to say.
In conclusion, there is nothing sacrosanct or automatic about certifying a Finance Bill as a money Bill. Twenty-four Finance Bills since the war have not been certified as money Bills because the House of Commons was prepared to rely on its ancient privileges to stop the House of Lords tampering with matters of expenditure.
I do not wish to raise problems between this House and the House of Commons on matters which it might be thought should rest in the hands of an elected Chamber. However, I believe that we should have a reasonable opportunity to look after the interests of the citizen. If we get a comprehensive Bill dealing with the Keith recommendations so that we
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can see the balance as between the rights of the Revenue and the rights of the citizen, if we can put it in one composite piece and look at it from one citizen's point of view, then I believe that will mean another Taxes Management Act. We can deal with that after the time of the Budget. We shall not be faced two days before the Summer Recess with the need to get the Finance Bill back within the month stipulated under the Parliament Act.
I beseech your Lordships to take an interest in the future of the House of Lords on these and other matters. Otherwise, trouble will accrue, difficulties will arise and we shall not know where we are because not the Conservative Party, not the Labour Party nor any other party knows what it would do with the House of Lords. The one reason why I am curious to live until the next General Election is to see, if a Labour Government come in, what they will do with this place. One thing I can tell you that they will not do: they will not abolish it. They dare not. Indeed, the public would wish this House to enhance its powers and prestige. I believe that many members of the public say, to coin a phrase, "We are safe in the hands of the House of Lords".
6.48 p.m.
Baroness Seear: My Lords, let us go onwards from 1911 to the Finance Bill of 1988. As I was partially responsible for raising the storm yesterday, it is reasonable that we should have the consequences today.
There were many matters in the speech of the Chancellor of the Exchequer with which one has to agree. There is no question but that in recent years the economy has recovered in many ways. There is no question but that many people, although by no means all in this country, are feeling more prosperous and are glad to feel more prosperous. I do not know whether that is the reason that the Government have a majority of over 100 seats in. the House of Commons. I cannot bear to disappoint the noble Lord, Lord Boyd-Carpenter. I shall make the point that they achieved it only on a minority of votes, which does not suggest the kind of enthusiasm which we have been led to believe exists in the country by speakers on the Government Front Bench. However, that is for another day. Let us stick at present to the Finance Bill.
There are one or two other points in the Bill which have not yet been referred to and with which I agree. I should like to comment on them. It is satisfactory, although it does not go far enough, that for the first time a Finance Bill has taken a substantial step in the direction of recognising the separate employment of married women. It has moved in the direction of the individual being taxed in his or her own right as a citizen rather than being treated for tax and, one hopes, ultimately for benefit on the basis of marital status. It is interesting that no one else has commented on that substantial change, though the Lord Chancellor referred to it this afternoon.
Having said that, as I see it the Finance Bill represents a sadly lost opportunity. There has not been a Budget for a very long time in which the Chancellor of the Exchequer has had an opportunity

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to carry out changes on a substantial scale; changes he has not been able to make in the past because he has been restricted through lack of funds. For the first time, as the Chancellor himself proclaimed with justifiable pride, he had far more resources than expected. This meant that he was far freer to make changes than he has been with previous Budgets, or have his predecessors.
Given that opportunity, what did the Chancellor decide to do? He had, as I said, a considerable amount of resources. He could have had even more resources if he had taken one or two measures which would have brought him in additional funds and therefore enlarged the opportunities open to him. For example—here I agree with the noble Viscount, Lord Chandos—he could at least have taken a step in the direction of restricting mortgage interest relief by limiting it to the basic rate of tax. It is extraordinary that, along with all the other benefits which have been showered on the better-off in our society, when it comes to the purchase of property they should have this additional advantage. It is true that the benefit is not as great with the tax rate at 40 per cent. than when it was at a much higher level. But it is still a substantial additional benefit over the standard rate tax payer. That would have brought in a considerable sum of money for the new developments that the Chancellor wished to pursue.
In addition—and I believe no one has mentioned this today—he could have cast a far more severe eye on excise duties. In a country increasingly worried by excess drinking and increasingly anxious about the effects of tobacco, it is extraordinary that in Budget after Budget these to some people desirable and to others less desirable commodities get off as easily as they do. There would have' been considerable public support for an increase in duty on those items because there is a heightened awareness of the increasing dangers to individuals and to society as a whole from the abuse of drink and tobacco. That is another lost opportunity.
However, those are not the lost opportunities to which I primarily refer. The Budget is a powerful—probably the major—instrument in the hands of the Government for their economic policy and to some extent for their social policy. Therefore, surely a Chancellor of the Exchequer in framing his Budget has to ask these questions. What is the major economic target at which I should be aiming? What is it that above all we should be trying to do? How can I so shape the Budget that I move in the direction in which I wish to go?
Surely the overwhelmingly important economic issue for this country is to increase the competitiveness of the British economy. We are moving—it has frequently been said, but it cannot be said too often—into a global economy. We are facing competition from the rising Pacific countries. We shall feel more competition, we hope, as other developing countries increase their outputs. One need only pause for a moment and think of what the effects will be if China and Russia take off economically. Moreover, as well all know, we are moving to the single market in 1992. Therefore, what can be more important economically, and therefore in the long
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run socially, than to increase the competitiveness of British industry?
Faced with that overwhelmingly important challenge, what has the Chancellor done? As the noble Lord, Lord Barnett, said, it is quite extraordinary that, in wanting to increase competitiveness and to make British goods easier to sell overseas, he has poured money, and therefore purchasing power, into the hands of the consumers. He is then astonished because the consumers spend that money. I do not know where the Chancellor of the Exchequer has been all these years, but has he never encountered the fact that when people have money they are inclined to spend it? The result of spending it of course is that, instead of improving our competitive position, the Chancellor has worsened it. Faced with that fact, what does he do? Having made the original error of encouraging people to spend, suck in imports and disregard the enormous importance of savings and investment, he deals with it by putting up interest rates.
As an instrument for seeking to improve the competitiveness of British industry, I can think of few instruments more blunt than the interest rate. It immediately puts up prices, reduces the ability of our industries to sell overseas, increases the prices of our imports and makes it far more difficult to maintain our position in international markets. On top of all that—and this is one reason why it is more difficult to sell overseas—he puts up the exchange rate just at a time when we want it down in order to sell overseas.
If those are the economic policies of the second Chancellor of the Exchequer to hold a first-class honours degree in economics, I do not know what it says for economics. It is certainly an odd way of dealing with the central problem in the longer term. However, as we have remarked so often, the Government are a very short-term government. If they can get a few more businesses set up, if they can see a few more people in employment, then everything is all right. But the Government are not asking themselves what will be the effect of these actions over the next five, 10 or 15 years. That is what should be considered. Since the Conservative Government take the line that they will be in office well until the 21st century, I should have thought that they would be interested in the longer term effects.
The Government have thrown away the best opportunity they have had of dealing with the competitiveness of British industry. They have thrown it away by the profligate encouragement of expenditure when the requirement was for the available money which was at last in the hands of the Chancellor of the Exchequer to be used to encourage both private and public investment. Instead the reverse is the case—savings are down and expenditure is up. There must be a variety of ways in which private saving can be encouraged. The noble Viscount, Lord Chandos, may or may not be right in expressing doubts about additional tax incentives to encourage savings. However, there was la loi Monory in France, which encouraged people to invest, with tax incentives for private investment. Surely more could be done, if not by an instrument of that kind, in some other way to give people the encouragement to save more.

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Of even more importance is public investment—public investment aimed at increasing the competitiveness of industry. There should be public investment in the infrastructure; for example, in the railways. Those noble Lords who travel frequently on British Rail, as I do, must be constantly reminded that it is a most uncomfortable way to travel due to the state of the track. That cannot be good for the way in which goods are moved from one part of the country to another. That is just one simple example of the need for public investment in the restructuring of industry, encouraging people to update their industry and to use the most up-to-date high technology developments that are available.
I mention also investment in people. We have spent far too many weary hours of this long, cold summer on the question of education. Too many people regard it as a consumer good. It is a consumer good, but it is also far more than that; it is an investment in people. One has only to read the accounts of what goes on in other countries. They spend money on developing people to get them up to the standard required: more people stay on at school, more money is spent on vocational training and more people go into higher education. Look at the Japanese figures. This is not being done by those governments exclusively because they believe in cultural values and the human values of education. It is being done because they see it as a hard-headed investment.
What are our Government doing? They will be cutting back on the investment in people by the various ways in which they have devised the new education processes, just at the time when above all else that is what we need. Along with that investment in people is the investment in research. At last there was a surplus to be spent. That surplus has not been spent; it has been squandered.
7.2 p.m.
Lord Williams of Elvel: My Lords, it is always rather difficult to wind up from the Dispatch Box debates on the Finance Bill because many of your Lordships seek to range far and wide. It is quite right that you should do so because the Finance Bill itself ranges very far and wide.
I agree generally with a number of things that have been said today by noble Lords on all sides. In particular, I agree very much with what the noble Baroness, Lady Seear, has just said. I shall try not to repeat those things with which I agree.
I cannot help noticing, as one of my noble friends noticed earlier, that the number of Conservatives speaking in support of this Bill is relatively limited. There have been two from the Conservative Back-Benches. Indeed, if I look across the open spaces—I see a noble Lord has just come in—there are not many on the Conservative side who seem to regard this as an extremely important debate. On this side we regard it as an extremely important debate. In addition, I understand that the noble Lord, Lord Young of Graffham, who should have been introducing the debate, is detained elsewhere, and we have had the benefit of the noble and learned Lord the Lord Chancellor, who gave us the wisdom of his views on economics. He has had to leave his place, as
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he said he would, and the noble Lord, Lord Boyd-Carpenter, has also had to leave. I understand that; but it does become rather like being a member of the orchestra in Haydn's Farewell Symphony, where gradually each member of the orchestra walks out. In the end probably the noble Lord, Lord Brabazon, and I shall find ourselves alone, talking to one another!
We have the advantage—and we must be fair to the Government; I always try to be fair to the Government—of receiving this Bill in late July. Therefore we can take a somewhat retrospective view of the Budget and its consequential Finance Bill. If I may paraphrase what my noble friend Lord Barnett said, it is a somewhat nostalgic view because what we were told at the time of the Budget was rather different from what we are learning now. Also to be fair to the Government, I must say that we have to be careful in interpreting the statistics which we receive from day to day. Indeed, even this morning a further set of statistics have come out, on which I shall comment later. But I do not wish to base too many conclusions on statistics which are inevitably bound to be in an area of uncertainty.
Nevertheless, there are major questions about this Bill and the policy which it enshrines which have to be asked and which the Government have to answer. I would put those questions in this manner. How is it possible that we are now talking about overheating when there are somewhere between 2 and 3 million unemployed and when the public services are in a state of disrepair, as the noble Baroness, Lady Seear, has just described and as the noble Earl, Lord Russell, described earlier? How can it happen that with that number of unemployed we are now starting to talk about overheating?
Secondly, how does it happen that we are now talking about a resurgence of inflation? After all the things we have suffered over the past few years in pursuit of the Government's objective (which I understood was to be a reduction in inflation to zero per cent. per annum) how are we now talking about a resurgence of inflation?
The third question which must be answered is; why are we now facing a balance of payments deficit which is quite disastrous, however the figures are wrapped up?
There are other matters which have been raised in the debate. My noble friend Lord Graham of Edmonton questioned the whole basis of the Government's Finance Bill; the policy, and the question of fairness. My noble friend Lord Bruce also asked questions about that and whether there was any morality in this operation. My noble friend Lord Houghton of Sowerby introduced what to me was quite a novel element as to whether we should be enabled to change the management of taxes in some way. The noble Lord, Lord Boyd-Carpenter, introduced, apart from a Latin tag (the pronunciation of which I would not entirely agree with) the whole question of whether a reduction in personal taxation was an incentive to hard work. There have been many arguments in this House over that, and I am sure they will continue. In his absence, I do not wish to comment on that.

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To get back to the major points: the Chancellor now accepts, as the noble Lord, Lord Ezra, said, that the economy is growing a little to fast. With anything between 2 and 3 million unemployed it is growing a little too fast. Indeed, it is probable that domestic demand is accelerating at something over 7 per cent. in the first half of 1988. CBI surveys show a lower proportion of firms working below capacity than at any time in surveys of this type since 1958, so we are knocking up against capacity restraints and a higher proportion of firms claiming that plant capacity is liable to limit output since 1973.
There is no doubt that there is an investment boom. Obviously that is the result of perceived capacity restraints. While welcome in the long term—it is always good to have an investment boom that will encourage and produce greater output later on—the fact is that on one informed estimate the current surge in investment will add 1·2 per cent. to potential supply in 1989, while adding to the growth in demand temporarily. So we have the problem that there is an investment boom but it will take time for it to pay off; and the low savings ratio to which a number of noble Lords have referred does not really help to finance that investment boom.
There is official concern about the resurgence of inflation. Will the figure be 5½ per cent. or 6 per cent. by next year? The money figures are appalling, as a number of noble Lords have pointed out, but we have stopped paying attention to the money figures. Commodity prices have risen by more than a quarter since the middle of 1987, property prices continue to soar, and, in spite of all the attacks the Government have made on trade unions over the past few years, there is no evidence that the problem of excessive wage and salary increases has been solved. If the rate of increase in productivity is falling—and in the whole economy it may be down now to about 2 per cent.—while average earnings are rising at something over 8 per cent. the result will be inflation.
If the Government's only answer is to raise interest rates to the point that will grind the economy down to suppress inflation, as my noble friend Lord Jay asked, will the figure be 17 per cent., 18 per cent., 19 per cent., 20 per cent. or 25 per cent.? If that is the only instrument they can use as a result of what the Chancellor said—I am fearful about the future of our investment boom as that is one thing that will cut it off.
On overheating and a resurgence in inflation, there is official concern. The third point on which apparently there is no official concern at all is on the balance of payments. We hear that the balance of payments deficit is a sign of strength. I suppose the corollary is that when in the early 1980s North Sea oil was at its peak and we were running a balance of payments surplus that was a sign of weakness in the economy. If it is a sign of strength and if it is partly due to the expanding economy and we are all moving into the next century onwards and upwards, how does it happen—I am sorry to criticise in his absence the point made by the noble Lord, Lord BoydCarpenter—that the problem is not in imports of capital goods, because in the past three months the biggest increases have been in consumer goods, but in
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exports? That is the major problem in our balance of trade.
One can follow the trend in imports given the propensity of the economy to import as consumer demand grows, but it is very difficult to say, in spite of the comment today in the DTI press release on the balance of payments, that export volumes are other than totally flat. As long as that happens we shall continue to have an increasing balance of payments deficit.
It is no good having recourse to what the noble Lord, Lord Young of Graffham, has said on many occasions, that exports of services will pay for the deficit in our visible trade, because the performance of invisibles is very disappointing. That is fiat too. Noble Lords will remember that last year the estimated invisible surplus was £900 million per month. We are now down to estimates of £500 million, and even that may be optimistic. It is probably true—and again I am being very cautious on the statistics—that we are still losing our share of world trade in services. So services will not get us out of trouble.
The Chancellor said in a lecture to the Institute of Economic Affairs that the external deficit,
"will narrow automatically as the gap between private savings and private sector investment closes once more".
That is an heroic stand, and I suppose that we must all accept that the Chancellor is an heroic politician. However, there is an alternative possibility that the balance of trade figures show an inherently poor underlying industrial performance in this country. In other words, there has been no supply-side miracle except for the North Sea. A recent NEDO report on the electronics industry in this country seems to bear out that latter conclusion rather than the automatic adjustment that the Chancellor is now expecting.
Time will tell. I have said many times to the noble Lord, Lord Young of Graham, that time will tell whether he or I or the Chancellor or I are right on this. I know where my money will be. As for finance-ability, this is an irrelevant argument, as my noble friend Lord Jay pointed out. Once a current account deficit is of the order of 3 per cent. of gross domestic product, which is where it is running in current terms, no amount of overseas assets in the world, publicly or privately-owned, will give protection from what happened to the Americans when they ran a balance of payments deficit of the same proportion of their domestic product. People will simply stop financing it, and then one has to mobilise the private assets, or raise interest rates to a ridiculous degree, or expect a serious devaluation.
In the light of this, what is the effect of the Bill? The noble Baroness, Lady Seear, quite rightly said that the Bill had put a good deal of money into the pockets of relatively few people and that a good deal of money was out there waiting to be spent. In retrospect—and I agree that we are talking with hindsight—what was required was a tighter fiscal policy and a looser monetary policy to allow an exchange rate depreciation. What we had, and what we have in the Bill, is a looser fiscal policy—the higher rate tax cuts accounted for nearly half the Budget stimulus—and a looser monetary policy,

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which is now being rapidly tightened in response to the inflation threat. The balance of the Bill seems to be quite wrong. The short-term problem is unsolved and the long-term problem is aggravated.
We have quite a paradox. The Government show concern about overheating and inflation but little concern about the balance of payments trend. Our concern is less about overheating and inflation—the former because it can be dealt with by a tighter fiscal policy than the Bill provides for, and the latter by more direct action than simply ratching up interest rates—and more about the balance of payments since it is not easy to see what can be done about it in the short-term other than by a major devaluation and possibly a serious contraction of domestic demand. It looks as though that is where we are heading.
That we should be in this position while still enjoying the benefits of North Sea oil, benefits which were undreamed of 15 years ago, is a matter for astonished perplexity. In short, this Bill represents an economic policy that is hitting trouble. It is unfair. It will aggravate social divisions. It is complex and tortuous. It is not a Bill which your Lordships should support.
7.19 p.m.
The Parliamentary Under-Secretary of State, Department of Transport (Lord Brabazon of Tara): My Lords, we have had an interesting debate on the Second Reading of the Bill. I shall try, without exceeding my time limit, to answer as many points as possible but noble Lords will understand if I cannot answer every one.
My noble friend Lord Boyd-Carpenter said that we had a vintage performance this afternoon from the noble Lord, Lord Bruce of Donington. I see that the noble Lord is now leaving the Chamber, which is unfortunate because I was about to refer to what he said. However, other noble Lords, in particular, the noble Lord. Lord Graham of Edmonton, made some of the same points.
Several noble Lords asked why it was necessary to cut taxes for top earning people. This is a world-wide trend even in certain socialist countries; for example, New Zealand and Australia. They have lowered their top rates of tax because they have discovered, as we have, that it works. It is essential to lower the top rate of income tax to prevent emigration and encourage the return of talented but footloose professionals.
Certain noble Lords asserted that the poor are getting poorer. However, I can say to them that those on the lowest incomes are steadily becoming better off; the bottom 10 per cent. of the population had an increase of over 8 per cent. in their real incomes between 1981 and 1985—those are the latest available figures. That increase is more than the average for the whole population.
So the poor are not doing badly if you contrast the high tax policy of the last Labour government, which not only stopped the rich getting richer but kept the poor poor, with the present Government's policy which has increased living standards at all levels of earnings. I reiterate the figures which my noble and learned friend the Lord Chancellor gave in his
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opening speech; that is, that this year a married man on half average earnings will be 21 per cent. better off than he was in the last year of the Labour government. His living standard increased by only four per cent. during the period of the last Labour government.
I agree with what my noble friend Lord Strathclyde said. He said that everyone gains if Britain becomes a more prosperous and productive economy. That was the real point of the Budget and of this Bill. The less fortunate especially have everything to gain from a more successful economy. It means low inflation, higher living standards and better public services. That is the lesson of the past nine years. The lesson is that you do not make the poor richer by making the rich poorer.
The noble Lord, Lord Bruce of Donington, was scornful of the benefits to be gained from our financial services and invisible exports and such industries. Some noble Lords opposite still seem to believe that the only way you can earn an honest penny is by getting your fingers dirty in a factory. But we do excel at the provision of financial services. London is still a world centre, if not the leading centre in the world. In 1986 the City contributed the best part of £10 billion to our balance of payments.
The noble Lord, Lord Ezra, and other noble Lords, concentrated especially on the overheating, or alleged "overheating", of the economy and the need for credit control. I welcome the noble Lord's comments on the strength of the economy which were confirmed only yesterday by the CBI's latest survey. As my right honourable friend the Chancellor of the Exchequer said, the economy is currently growing at a rate that could not be sustained in the medium term; but it is not overheating. The Government's determination to keep downward pressure on inflation is evidenced by recent interest rate rises. To urge the reintroduction of credit controls, as the noble Lord, Lord Ezra, did, is a red herring. Past experience has suggested that such controls are soon circumvented, and with the increasing financial sophistication of recent years that would be even more likely now. Perhaps I may just quote what the Governor of the Bank of England had to say on the matter in March. He said:
"I do not think that the re-imposition of credit controls is really a practical proposition in the modern context, largely because of the impossibilty of the enforcing of it. One may introduce some regulations but it would be possible for borrowers to bypass it in one way or another, even by going off-shore".
The noble Viscount, Lord Chandos, said basically that my right honourable friend had made a reckless Budget judgment. I do not agree with that view. The tax cuts did not cut the overall burden of tax at all. When I say the tax burden, I mean the total tax as a proportion of gross domestic product. In a growing and successful economy, it is possible to cut tax rates while leaving the burden unchanged. The public sector borrowing requirement is in surplus for only the second time since the 1950s; public spending is under control and falling as a proportion of GDP. Fiscal policy is highly responsible.
I do not know whether it is the policy of the noble Viscount's party to raise taxes at present, or whether it would have been at Budget time, but nevertheless

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he made one or two other suggestions such as the abolition of the upper earnings limit on national insurance contributions. I can say to him that that would increase the marginal rate of tax for over two million people. It would undermine the Beveridge contributory principle and could lead to a dramatic increase in expenditure on the state earnings related pension scheme.
The noble Viscount, and indeed the noble Baroness, Lady Seear, urged us to put a limit on the mortgage interest relief to the basic rate of taxation. I hear what they say. However, all I can say is that if that is one of the policies of the SDP and of the Social and Liberal Democratic Party, it does not seem to be getting them very far at present. The £30,000 limit on relief already provides an effective ceiling and restricting the relief to basic rate would draw more people into higher rate tax, and a reduction of higher rates of income tax of course means that there is less of a gap in the relief.
The noble Lord, Lord Jay, and other noble Lords, talked especially about manufacturing and the balance of payments. The noble Lord made some interesting comments on the erosion of the manufacturing base and the balance of payments position. Of course the noble Lord will be aware that manufacturing industry is flourishing, as the CBI's latest survey showed only yesterday. Indeed, in the first half of this year, manufacturing output will be higher than in any other half year on record.
As to the balance of payments, the deficit we are now experiencing is also a reflection of the strength of the British economy, in particular a strong growth in investment which will increase industrial capacity and be of long-term benefit to our trade position.
Lord Jay: My Lords, does that mean that as our economy gets stronger still, the balance of payments deficit will be even larger?
Lord Brabazon of Tara: My Lords, no; not necessarily. As a great deal of the deficit in the balance of payments is being used to finance investment in manufacturing productivity, and so on, in the medium term it will be greatly to our benefit.
The noble Lord said that many of our overseas assets are in private sector hands and are therefore not at the behest of the Government. That of course is true. However, they are an indication of our credit-worthiness which foreign investors can see, and they are confident in the underlying strength of the UK economy, so that they are content to finance the current account deficit.
I certainly agreed with one remark made by the noble Lord, Lord Jay, when he said that he disagreed with unilateral disarmament. Of course that does not have much to do with the Bill before us, but at least I know where one Member of the Opposition Benches stands on the issue—which is more than one can say about the Opposition Front Bench at present.
I thought that the noble Lord, Lord Barnett, was slightly unfair in his remarks about my noble friend Lord Young of Graffham when he criticised him for his absence, as did some other noble Lords. I should remind the noble Lord, not that he needs reminding,
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that this is a Bill from the Treasury; it is not a Bill from my noble friend's department. As we have no Treasury Minister in the House, my noble and learned friend the Lord Chancellor was able to open the debate, and your Lordships have the privilege—if that is the right word—of me winding it up. As the noble Lord was not able to ask my noble friend Lord Young of Graffham where he stood on the disagreement between the Prime Minister and the Chancellor of the Exchequer he asked me instead, although I am quite certain that he is not nearly so interested in my reply as he would have been in the one that my noble friend would have given. I ask: what disagreement?
Lord Williams of Elvel: My Lords, would the noble Lord care to exercise his privilege and tell the House where he stands on the issue?
Lord Brabazon of Tara: My Lords, I was just about to deal with that. As I said: what disagreement? I must tell the noble Lord that there is no disagreement on the most important point; namely, the fight against inflation. The fight against inflation is paramount. Both of them agree, and so do I, that monetary policy should remain tight. That means higher interest rates and a strong exchange rate at times like the present when our economy is growing faster than its long running trend rate of growth. It also meant lower interest rates last October when everyone was concerned about the threat of recession following the Stock Market crash. The fact that there did not appear to be a recession following the Stock Market crash last October is a considerable achievement not only for the managers of this country's economy but for the managers of other Western economies.
The noble Lord, Lord Graham of Edmonton, concentrated on the business expansion scheme proposals for housing. We have debated the Housing Bill at some length over the past few days and have several more days of debate to come, tomorrow and later in the year. There are safeguards on the relief offered. It will be available only for assured tenancies which give the tenant indefinite security of tenure. That underlines the Government's wish to encourage the continuing provision of rented property. Secondly, there will be limits on the value of each let property to prevent relief going to companies specialising in expensive properties. Finally, the relief will not be available for slum properties. The Bill specifically excludes substandard properties by reference to standards already laid down in law, so there are safeguards in the scheme for rented housing.
The noble Lord also talked about friendly societies. I can assure him that the Government are well aware of the valuable role that they have played, especially in helping the less well off members of society. We are keen to encourage them to continue that work. For that reason we shall of course consider carefully before next year's Budget the recent representations that the friendly society movement has made to us. I was grateful to the noble Lord for the remarks he made about the changes that have been made which affect co-operative societies. He also mentioned some rather detailed points about which I might have to write to him. When winding up

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this debate it is always a pleasure to answer one or two questions which refer to the Bill itself. It is not all that usual.
The noble Lord, Lord Peston, in an excellent lecture on economics, for which he is noted, talked about the flexibility of exchange rates. I noted with interest his plea for fixed exchange rates. I am sure that my right honourable friend the Chancellor will agree that floating exchange rates have not proved ideal and that large fluctuations in exchange rates have proved damaging to business confidence and economic performance and have not reduced international economic interdependence. That is why he is more interested in a relatively stable set of exchange rates. However, the noble Lord, with all his economic expertise, will appreciate that one cannot fly in the face of market sentiment for any length of time. I agree that the Government can try to counter the effects of destabilising speculative activity which does not reflect basic economic fundamentals; but untimately exchange rates must be part of the overall aim of economic policy, which is to maintain the downward pressure on inflation. In particular, noble Lords can be in no doubt that the Government will not allow a depreciation of exchange rates to accommodate firms that pay excessive wage increases.
The noble Lord was keen that the Government should take us into the exchange rate mechanism of the EMS. The noble Lord, Lord Jay, did not hold that view. The noble Lord, Lord Barnett, held that view when I last heard him speak.
Lord Jay: My Lords, as the Chancellor also disagrees with the Prime Minister on that, we are more or less even.
Lord Brabazon of Tara: My Lords, I did not say that there was anything wrong with different views being held on the opposite side of the House. I know very well the views held in that corner of the House, although neither noble Lords nor the noble Baroness mentioned them.
Baroness Seear: My Lords, when I sat down I remembered that it was the other thing that I wanted to say.
Lord Brabazon of Tara: My Lords, I am afraid that what I am leading up to saying will not be exciting. It will only be the same as I have repeated at Question Time on many occasions; that is, we shall join when the time is right. It is not the immediate panacea—
Lord Peston: My Lords, I have of course been sitting waiting for that precise statement. I am glad to hear it. When the Minister or one of his noble friends is going to make a different statement on the EMS, will he write to some of us ahead of time so that we do not suffer an excessive degree of shock?
Lord Brabazon of Tara: My Lords, it may not be possible for me to write to the noble Lord. I suspect that when the time is right and we join, it will be something that has to be done in some secrecy so that it does not have an effect on the exchange markets. It
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will be a sudden announcement. However, if it happens during my time, I shall endeavour to give noble Lords at least some advance warning.
I turn now to the forthright speech of the noble Lord, Lord Houghton of Sowerby, which at the beginning was in many ways a continuation of the debate held at great length yesterday afternoon. I am not as qualified to answer all of it as is my noble and learned friend Lord Hailsham and other noble Lords who took part in that debate.
The noble Lord asked why amendments to the Taxes Management Act were included in Chapter V of the Finance Bill. Precedent was accepted by the second report of the House of Lords Select Committee on Practice and Procedure in 1977. There are other arguments against including those provisions in a Bill other than a Finance Bill. They are mainly that the management matters dealt with are so closely related to the enforcement of tax liabilities that it would go against common sense as well as precedent to exclude them from the Finance Bill. There are also other reasons. I cannot give the noble Lord the assurance that he seeks that if further changes are contemplated we shall have a separate Bill.
The noble Lord asked why it was possible to look at changes in the Official Secrets Act after approximately the same amount of time as the Parliament Act 1911 had been in place. There is considerable pressure from all sides of the House and from outside the House for changes in the Official Secrets Act, but, apart from the pleas of the noble Lord, Lord Houghton of Sowerby, I have not detected much pressure for changes to the Parliament Act.
The noble Baroness, Lady Seear, made some interesting remarks. She gave us praise for our economic success. However, she asked why when we at last had the resources to make changes we did not use them in a different way. We have the resources this time around to do what we have done because of the sound policies that we have adopted over the past nine years. She asked why we had not taken the opportunity to raise excise duty on alcohol and cigarettes. Of course health is only one of a number of considerations in the Budget judgment. Revenue, inflation and employment arguments are also important; but overall taxes, duty and VAT have risen substantially in real terms since 1979. On alcohol they are up by 12 per cent. and on tobacco by just under 50 per cent.
I appreciate that there is a problem with alcohol abuse at the moment. It is one that is recognised by the Government. I would however make this plea. Just because a few people cannot look after themselves with alcohol, the rest of us should not have to pay through the nose for a drink. The noble Baroness said that the Budget should have tried to improve the competitiveness of British industry. The best way to do that is to reduce inflation, and government policy has that as its prime aim. That is why UK manufacturing industry has broadly maintained its share of world trade since 1981 following decades of decline. That is the most reliable all round measure of the health of British competitiveness.

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The noble Baroness criticised us for a lack of public investment at the moment. She used the example of British Rail. I can assure her that British Rail is currently investing more than for many years. On the roads too investment is up by 30 per cent. in real terms since 1979. Those are just two examples.
The noble Lord, Lord Williams of Elvel, talked about the resurgence of inflation; he was worried about that happening. The Government's sound policies will ensure that there is no resurgence of inflation, but we cannot avoid fluctuations. For instance, the rise in mortgage rates will cause a temporary blip. Nevertheless, inflation is on a firm long-term downward trend.
The noble Lord also criticised us for the apparent overheating of the economy, accompanied by high unemployment. The economy is not overheating. It is just growing above the long-run trend and needs to slow down a bit. The benefits of strong growth are spreading gradually.
Lord Williams of Elvel: My Lords, will the noble Lord repeat that statement slowly so that we can appreciate it?
Lord Brabazon of Tara: My Lords, I am happy to repeat it. I said that the economy is not overheating. It is growing above the long-run trend and needs to slow down at the moment, but that does not mean that it is overheating. The benefits of this strong growth are spreading through to all the regions. I agree that unemployment is still too high in some regions. That is why growth needs to be sustained and why above all inflation needs to be kept low. The investment boom will help to sustain growth, without overheating, at a healthy rate and will further reduce unemployment.
To summarise, the Bill contains a number of important reforms. Foremost are the changes to personal taxation. The goal of a 25p basic rate of income tax has now been achieved and a new target of 20p basic rate has been set. Four higher rates of income tax have been abolished, leaving just one higher rate of 40 per cent. The radical overhaul of the taxation of husband and wife will ensure independence and privacy for married women, correcting an anomaly that dates back to 1805. I was grateful to the noble Baroness, Lady Seear, who was appreciative of those changes. The proposed changes to the capital gains tax will further simplify the tax system, releasing resources previously tied up in tax planning.
Over the last nine years the British economy has re-emerged as an example to the rest of the world. The growth rate consistently outstrips that of our European competitors. Last year it even outstripped that of Japan. Only yesterday the CBI reported that:
"British business is in better competitive shape than at any time since the Second World War, with manufacturing industry currently enjoying the longest period of sustained productivity growth of the post-war period".
Central to that success story has been the Government's record of sound economic management. I believe that this Finance Bill will further enhance that record and I therefore commend it to your Lordships' House.
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On Question, Bill read a second time; Committee negatived.
Then, Standing Order No. 44 having been suspended (pursuant to Resolution of 21st July), Bill read a third time, and passed.

Electricity (Financial Provisions) (Scotland) Bill
7.45 p.m.
Lord Sanderson of Bowden: My Lords, I beg to move that the Bill be now read a second time.
This Bill makes provision for the statutory limit on the borrowings of the Scottish electricity boards to be increased from £2,700 million to £3,000 million. Because the boards' plan and operate the generating system jointly the limit applies to the total outstanding borrowings of the two boards taken together, including any borrowings from abroad and temporary borrowings.
Borrowings against the existing limit of £2,700 million amounted to £2,615 million at the end of June, including temporary borrowings of £130 million. The proposed new limit of £3,000 million is based on projections for 1991, which show the level of borrowings peaking at around £2,760 million towards the end of this year. From around mid-1990 borrowings are expected to fall steadily as the benefits of the boards' investment in Torness begin to flow through to the business. The proposed new limit is therefore sufficient to meet the boards' expected requirements, with a contingency cover of about 10 per cent. It is therefore unlikely that in the foreseeable future there will be any need to increase the borrowing limit. In this Bill we are taking the opportunity to repeal the power to amend the limit by order. Of course if for any reason the board's borrowings look set to rise above the new limit, fresh legislation would be required and there would be a further opportunity at that time to review the board's performance in relation to the borrowing limits.
The main reason for the boards' borrowing is the need to finance capital expenditure. In part this expenditure is met from internal resources and at March 1987 approximately two-thirds of the boards' current cost net assets of £7·5 billion were financed internally. But many of the boards' investments are very large and the assets have long lives. It would not be reasonable to assume that the boards could find the necessary internal resources without having recourse to borrowing.
Obviously Torness nuclear power station has been by far the largest investment in recent years. The station, which will cost £1·8 billion, is now nearing completion and reactor I began to supply electricity to the grid in May this year. Full commissioning of both reactors should be achieved by the first half of 1989 and, as I have already mentioned, as the benefits of this low cost output begin to be realised the boards' borrowing requirement will start to fall.
However new power stations are not the only capital projects carried out by the boards. Existing power stations require refurbishment, while the

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maintenance and upgrading of their extensive transmission and distribution lines are other major areas which require outlay of capital by the boards. The South of Scotland Electricity Board, for example, spends over £33 million a year on expanding its distribution network. The north board will be investing around £32 million in connecting the Western Isles to the mainland system by submarine cable and is spending a further £23 million a year on refurbishing ageing distribution and hydro assets. Excluding Torness, total capital expenditure for both boards in 1987–88 was £170 million and is planned at £180 million in the current year.
Other important factors when considering borrowings are the level of the boards' costs and their prices. The boards are to be congratulated on their success in holding down costs while delivering a high level of service to their customers. Both boards emerged well from the recent Monopolies and Mergers Commission inquiries, which concluded that they are skilled in the management of their main function of electricity generation and supply and that they deserve their good reputation for the efficient conduct of their business. The commission, however, noted several areas where further improvements might be made.
As far as prices are concerned since 1983 average tariffs in Scotland have fallen by 9 per cent. in real terms and domestic prices, which have fallen by 7·5 per cent. over the same period, are below those in England and Wales.
This Bill will enable the boards to borrow the sums necessary to finance their day-to-day business and their investment programme. I commend the Bill to your Lordships.
Moved, That the Bill be now read a second time.—(Lord Sanderson of Bowden.)
Lord Morton of Shuna: My Lords, normally a Bill such as this to increase the borrowing limits of a profitable and, as the Minister has said, well run, well managed industry would be passed in very much less time than the two and a half hours which the other place took to discuss the matter. Everything the Minister has said is an illustration—and many more could be given—of the ridiculous nature of the Government's proposals for privatisation.
As the Minister has said, there is a well run, well managed and efficient monopoly which over the years has pursued a very careful social policy. That policy has provided electricity in less populated areas and by doing so has managed to distribute industry around less populated areas. That apparently is now to be changed in some unnecessary way. The Government are to substitute some private monopoly for the public monopoly.
We have discussed many times in this House why there should be a great advantage in having a private monopoly rather than a public monopoly. But that is apparently what we are to have. That appears merely to suggest that the short-term view will replace the long-term view that the two electricity boards have taken in the past. We are to have the kind of short-term approach that this Government apply to
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everything. An example of that was the way they forced the closure of the pulp mill at Fort William, and then a few years later they had to spend vast sums of government money in grants in order to build another pulp mill at Irvine. They closed the smelter at Invergordon which was newly provided and then spent years regretting that it was no longer there.
Now there is the intended closure of the Dounreay plant, with disastrous effects on industry in the north of Scotland. It just seems that the whole of the Government's attitude to the privatisation of electricity is entirely irrelevant to the real needs of Scotland. I have taken this occasion to make that point clear while in no way seeking to oppose this Bill.
Lord Sanderson of Bowden: My Lords, I thank the noble Lord for speaking and giving the matter before us—the passing of the Bill—his blessing. I am not surprised that he took the opportunity to raise the question of privatisation, although it is not strictly concerned with this Bill, but it was very much a feature of the debates in another place on this matter. As he knows very well, the Government firmly believe that the requirement to operate in the private sector will provide added incentives to and sustain pressure on the boards further to improve performance and minimise costs to the benefit of customers and shareholders.
The Government's aim is to build on the strengths of the boards. The proposal for two companies, each responsible for generating, transmitting and distributing electricity in its own area, reflects the success of the present structure of the industry and is well suited to the circumstances of Scotland. Obviously, a great deal of preparatory work is required to shape the proposals in detail, but discussions in which the boards are closely involved are progressing well.
Noble Lords will be aware that my right honourable friend the Secretary of State for Scotland announced last week in another place his decisions on the reorganisation necessary to give effect to the White Paper's intentions on the structure of the companies. I commend his decisions to your Lordships. They ensure that two viable utilities will be privatised and that the necessary reorganisation will be achieved with the minimum of disruption within the industry. By virtue of the contractual arrangements which are being negotiated between the boards, each company will have available to it the full generating mix at present in the Scottish system-nuclear, hydro, pumped storage, coke, coal and gas/oil. This will make them the envy of the utility world and very attractive investments.
Each company will continue its present expertise—the south company in nuclear and thermal stations, the north company in hydro expertise. The decisions of my right honourable friend continue to recognise the importance of hydro assets to the consumers of the north of Scotland. He has made it clear that the benefit of the hydro assets in terms of the very low running costs will continue to be enjoyed by those consumers. This will ensure that the company is able to pursue a common tariff policy within its area—in other words a continuation

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of the social clause—despite the very high distribution costs in the more remote areas. It will ensure that these tariffs continue at levels compatible with the rest of Scotland. It is the Government's intention to bring forward these proposals to enable the industry to be privatised within the lifetime of this Parliament.
As regards the remarks of the noble Lord, Lord Morton of Shuna, about the pulp mill in Fort William and the smelter in Invergordon, I draw his attention to the fact that Invergordon is designated as an enterprise zone. I just wish to remind him that at the time when these mills were closed, the inflation rate and the economic outlook in the late 1970s and the early 1980s were such that they gave very little confidence to industrial investment.
I am happy to say that now we see a return of pulp mill production at Irvine next year. I should just like to draw the noble Lord's attention to the fact that the eonomic situation, which has been debated at great length in the past hour or two, gives some confidence to industry that investment is worth while in Scotland.
Lord Morton of Shuna: My Lords, does not the noble Lord remember that the closure of Invergordon was related to the Government's control decision on the pricing of electricity? Their insistence on increasing the price of electricity unnecessarily was one of the reasons for the closure of the mill at Fort William.
Lord Sanderson of Bowden: My Lords, the Government, like any other institution, have to bear costs in mind. It was costs that closed the Invergordon smelter.
On Question, Bill read a second time; Committee negatived.
Then, Standing Order No. 44 having been suspended (pursuant to Resolution of 21st July), Bill read a third time, and passed.

Code of Recommended Practice on Local Authority Publicity
7.57 p.m.
The Minister of State, Department of the Environment (The Earl of Caithness)The Minister of State, Department of the Environment (The Earl of Caithness) rose to move, That the draft code laid before the House on 30th June be approved [32nd Report from the Joint Committee].
The noble Earl said: My Lords, Section 4 of the Local Government Act 1986 provides for the Secretary of State to issue codes of recommended practice as regards the content, style, distribution and cost of local authority publicity and such other related matters.
The 1986 Act requires that before issuing a code the Secretary of State shall consult the local authority associations and any local authority with which consultation appears desirable. Extensive consultation has taken place over the past two years
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with the local authority associations and a number of other bodies concerned. During these consultations no fewer than five drafts of the code have been considered in detail. This demonstrates both the extent to which we have endeavoured to take local government with us on the drafting of the code and our willingness, where appropriate, to make amendments designed to allay their concerns. I would not claim that the local authority associations now welcome the code with open arms, but as a result of these consultations and the amendments that have been made there are now few areas of disagreement about the content of the code.
The 1986 Act provides also that a draft of the code shall be laid before each House of Parliament for approval. The draft that we are debating today has been approved in another place. The introduction to the code explains its status and scope. We have considered at length in this House during the passage of both the 1986 and the 1988 Local Government Acts the appropriate status of this code. As a result, Section 4 of the 1986 Act was amended by Section 27 of the 1988 Act to require local authorities to have regard to the provisions of the code in coming to any decision on publicity. This does not mean that the code is a series of rules and regulations which local authorities must adhere to in all cases. On the contrary, it sets out principles of good practice to act as a benchmark against which authorities must judge their publicity proposals. In each case they will need to consider whether the publicity that they propose to issue is in keeping with the principles set out in the code. If it is not, they will need to consider whether special circumstances exist which justify departure from the code.
Paragraph 5 of the introduction to the code explains that it is not concerned with the statutory ban on party political publicity, but rather with all publicity which local authorities are empowered to issue. Of course observant of the principles of good practice set out in the code would ensure that a local authority did not contravene that prohibition.
The introduction to the code also acknowledges the vital role that local authority publicity has to play in the interests of ensuring local accountability. It welcomes good, effective publicity, aimed at improving public awareness of a council's activities. It explains that the purpose of the code is to set out principles of good practice which will ensure that local authority publicity decisions are properly made.
A final point that I would draw attention to in the introduction to the code is paragraph 8. This paragraph, together with paragraph 43 of the code itself, explains that it will not effect the ability of local authorities to assist charities and voluntary organisations which need to issue publicity as part of their work. Local authorities are, however, called upon in giving such assistance to take into account the principles contained in the code. To the extent appropriate, local authorities should incorporate the relevant principles in any published guidance for applicants for grants and make observance of that guidance a condition of the grant. Where appropriate, local authorities should monitor the observance of the guidance.The extent to which any such monitoring is necessary must remain a matter

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for the local authority concerned. But in the Government's view prior vetting of all publicity by assisted voluntary organisations would be unnecessary.
The main body of the code is divided into nine sections. These deal in turn with the subject matter of local authority publicity—its cost, content, style and dissemination; particular considerations to be taken into account with general advertising and recruitment advertising; publicity about members of the authority; the timing of publicity; and assistance given to others for publicity. I do not propose to give a detailed summary of each of these sections. I am sure that noble Lords interested will have familiarised themselves with them. Taken together, the principles of good practice set out in the code provide an essential and comprehensive yardstick against which local authorities should judge their publicity proposals. We intend that, as soon as parliamentary approval is forthcoming, the code will be brought into effect by issuing it under cover of a circular to local authorities. I have no hesitation therefore in commending it to the House.
Moved, That the draft code laid before the House on 30th June be approved [32nd Report from the Joint Committee].—(The Earl of Caithness.)
8.3 p.m.
Lord McIntosh of Haringey: My Lords, we are grateful to the Minister for bringing the code before your Lordships' House. Let me say at the outset that, in accordance with convention, we shall not oppose a code which has been approved by the other place. I notice that the Minister in his speech glossed over the fact that the amendment to the 1986 Act which was made by the 1988 Act was an amendment to the decision reached by this House that such a code should not be obligatory on local authorities. The words "have regard to the code" as a condition in the 1988 Act were imposed by the Government against the judgment of this House when it considered the 1986 Act.
The Minister is correct in saying that the code has, in going through all its drafts to the present sixth version, dealt in detail with some of the drafting points which caused disagreement between the local authority associations and the Government. He is also right in saying that the associations take the view that the final version does not have many of the defects which were present in earlier versions, although their opposition to it concerns a number of specific aspects of the code as well as the principle on which the code is based. However, I wish to deal with the principle first. That is the most important aspect of the code.
In imposing the code the Government are saying in effect that local authorities cannot be treated with the same degree of freedom and allowed to have the same responsibility as the Government assume for their own publicity actions. I am aware that in this country local authorities are the creatures of government. However, that does not mean that in every respect local authorities ought to be treated as inferior to government departments and agencies.
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If local authorities had been asked to agree to the convention which was drawn up by the Cabinet Office for government publicity, there might have been less dispute about the matter. That convention was referred to by the Parliamentary Under-Secretary in another place only last week. He said:
"The Government lay down conventions on publicity and advertising for themselves". [Official Report, Commons, 20/7/88; col. 1225.]
I have looked up those conventions and I have the first two pages of the note prepared by the Cabinet Office for the Standing Committee on 1st May 1985. The conventions are extremely straightforward. They are nothing like the seven pages of the present code. That note says, first, that the:
"subject matter should be relevant to Government responsibilities".
I shall read the parts which are underlined as being the essence of the case. It says, secondly, that:
"content, tone and presentation should not be 'party political'. The treatment should be as objective as possible, should not be personalised, should avoid political slogans and should not directly attack (though it may implicitly respond to) the policies and opinions of opposition parties or groups".
If I thought that local authorities were being given the freedom which the Government apparently have implicitly to respond to the policies and opinions of opposition parties or groups, I should be a good deal happier to know that local authorities were being treated on the same terms as government departments and agencies. That is not the case. Section 2 of the 1986 Act provides a complete ban on party political publicity, with which I agree. However, if local authorities should be prohibited from responding, implicitly or otherwise, to the policies and opinions of opposition parties or groups, then so should central government.
The amount of money being spent by central government in the promotion of their policies, to which some of us vehemently object, is a thousand times more than the amount of money being spent by local authorities on publicity, political or otherwise. In that respect, the Government are behaving in a totally unbalanced way and in a way which does not reflect creditably on their record as a partner with local government in assuring the good government of this country.
The third point of the note of the Cabinet Office is relatively uncontroversial. It reads:
"distribution of unsolicited material should be carefully controlled".
Much of that is reflected in the local authority code. We do not disagree with it. The final point is that the costs should be justifiable. The note says:
"The Government are accountable to Parliament for the use they make of public funds for publicity, as for any other purpose. The Accounting Officer for the Vote concerned has a particular responsibility to the Public Accounts Committee".
Once again, we agree that comparable powers exist for the district auditors. We believe that they should have those powers over local authority publicity as they do over other local authority expenditure.
If the code was confined to those elements and if local government was treated in the same way as central government, we would have much less objection than we do to the way the code has been drawn up. However, we have a combination of elements in the code which are merely patronising.

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They are teaching local authorities how to wipe their own noses. They are repeating things which everybody knows about value for money, and when to use media advertising and when to use other forms of publicity. All of those elements could well have been left out had there been a sensible discussion between grown up people.
In the code there is a combination of that kind of patronising, quite irrelevant and unnecessary paragraph with other aspects which are just plain wrong. For example, paragraph 4(iii) says that:
"in areas where central government, another tier of local government, or another public authority have the primary service or policy responsibility, local authorities should issue publicity only on matters that are directly relevant to their own functions".
That sounds all very well but it neglects the fact that local authorities have the duty to be the voice of their communities. They are concerned when other authorities close hospitals in their areas because they have to make provision for the public health services when hospitals are closed. They are involved when transport services are cut in their areas because they arc concerned with the mobility of the people who live there. There are many other examples of cases in which it is entirely proper for a local authority to comment on and to publicise changes in the services provided by other people—by central government, by private industry or by anybody else. To neglect the responsibilities of local authorities to be the voice of their community is to neglect one very major function in the work of local authorities which the Government ought to appreciate and welcome.
I shall not weary the House with the other detailed objections concerning the code. However, to summarise, it ought not to have the force that it has; it ought not to be as detailed as it is; it ought to have been a voluntary code which was readily available from the local authority associations of all parties; and it certainly ought not to be presented to Parliament in the detail in which we are now having to consider it and be the responsibility of Parliament.
8.15 p.m.
Lord Harris of Greenwich: My Lords, perhaps I may say at the outset that I believe this code to be a profound mistake. It is undesirable because it represents yet another heavy-handed intervention in the affairs of local government.
As we all know, and as the noble Lord, Lord McIntosh, has reminded us, although the local authority associations prefer the present draft to the version of five drafts earlier they do not like it. That is the view of all the political parties represented in local authority associations, including the friends of the noble Earl. On the other hand, Conservative councillors have had to become accustomed to having their views ignored by their friends in the Government. The code represents another example of that approach.
When the Government tell the House that there have been a number of glaring examples of local authorities misbehaving and producing party political propaganda at the ratepayers' expense, they are entirely right. I have drawn attention to a number of such episodes myself. Five years ago I pointed out
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to the noble Earl's predecessor—the noble Lord, Lord Bellwin, who was then Minister of State in the noble Earl's department—that we had evidence that
the local authority in Islington intended to use a drafting error in a small government Bill then going through Parliament to spend £100,000 of public money on a Left-wing broadsheet. We said so in the Chamber. The noble Lord, Lord Kilmarnock, and I went to see the noble Lord, Lord Bellwin. We produced evidence from the solicitor's department of Islington Borough Council that the council proposed to do just that. The noble Lord, Lord Bellwin, told us that nothing could be done. The Government had to have their Bill on time and he was entirely opposed to introducing any amendment at that stage.
We came back to the House and put down an amendment. The Government Whips were used to vote down that amendment, which was an extraordinary procedure. It may well be that the noble Earl was one of those who trooped cheerfully through the Lobby in favour of the original form of words in that Bill which, I repeat, it was absolutely clear from evidence that I presented to the Minster would be misused.
The noble Lord, Lord Boyd-Carpenter, agreed with us. The noble and learned Lord, Lord Rawlinson, agreed with us. To do the Labour Party justice, five of its members came into the Lobby with us, despite the fact that Islington was a Labour-controlled authority.
What happened? The council produced its broadsheet, which was a fairly crude piece of party political propaganda, and the broadsheet went bankrupt. It cost the ratepayers of Islington £100,000.
The Government are quite keen on surcharges when councillors are involved. I wonder whether they feel it appropriate in cases of that sort that Ministers in the Department of the Environment should be surcharged themselves for such an episode of gross irresponsibility. There has not even been an apology from the noble Earl's department and I am quite sure that one will not be forthcoming this evening.
This example indicates that when talking about blatant political propaganda it is probably wise for the noble Earl to examine some of the episodes which have been debated in this House on a number of occasions over the past five years and on which the government response was highly unsatisfactory.
In the circumstances of the Islington case, and as a result of a number of other episodes of a similar character—although Islington was undoubtedly the worst—I agreed with Widdicombe that there should be a clear, explicit, statutory prohibition of publicity for party political purposes. Indeed, I believe that on a previous occasion the noble Lord, Lord McIntosh, said the same. I think that that is entirely right. But of course the code we are discussing this evening goes far further than that.
Perhaps I may give an illustration of what will happen as a result of the code. A district council decides that it wants to oppose a new road scheme. It believes that the scheme will do grievous environmental damage to its community. The council may decide that it wants to hold a number of public

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meetings to discuss the matter and express its views to the local community. It may well be, and often is, that all the political parties represented on the local authority will take exactly the same view. It will therefore not be a matter of party political dispute.
However, if one turns to paragraph 19 of the code, the last sentence says:
"local authorities, like other public authorities, should not use public funds to mount publicity campaigns whose primary purpose is to persuade the public to hold a particular view on a question of policy".
What conceivable advantage to the public interest is derived from a form of words of that kind which will prevent perfectly well-meaning local authorities from taking a view on an issue of high public importance to their local communities and holding the kind of meeting which in a normal democracy would be entirely appropriate? It seems to me a thoroughly daft idea. However, unhappily, it represents the Government's blunderbuss approach to the whole question of local government publicity.
On the other hand, it has to be said that despite the Government's enthusiasm for legislating against their political opponents in local government, they apply very different standards to their own conduct. There was the interesting incident last year in which a leaked memorandum was published in the Guardian emanating from the Department of the Enviroment in which Mr. William Waldegrave's special adviser, Mr. Patrick Rock said:
"As you know, you will be presenting the keys to the 10,000th Wandsworth tenant to buy his home. The date for this has been brought forward so that favourable publicity can be generated before a vital byelection".
There was then the usual hunt for the mole in the Department of the Environment, which had the predictable result.
The memorandum described how the ceremony would be brought forward because there was to be this local authority by-election on 19th November which had great significance for the political control of Wandsworth Borough Council. That therefore is the position of Ministers in the Department of the Environment and their advisers: let us use public resources to receive favourable publicity for a Conservative candidate in a local authority byelection.
What does paragraph 43 of the code say about local authorities which are tempted into similar paths of unrighteousness? It reads:
"Particular care should be taken when publicity is issued immediately prior to an election or by-election affecting the authority's area to ensure that this could not be perceived as seeking to influence public opinion, or to promote the public image of a particular candidate, or group of candidates".
Which of the two arguments of the Government would they like us to take seriously? Would they like us to regard their position as that of paragraph 43 of their code or would they prefer the advice given by Mr. Rock to Mr. Waldegrave, which of course, was acted upon and which undoubtedly assured favourable publicity for a council candidate in a by-election at the behest of the leader of that council, Mr. Paul Beresford? I am sure that the noble Earl will be eager to tell us which of those two approaches he favours.
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Finally I turn to paragraph 39 of the code:
"The functions of a local authority are discharged by the council corporately. It is therefore inappropriate for public resources to be used to publicise individual councillors".
I think that it would be very difficult for any reasonable person to disagree with the sentiments expressed in that sentence. In the following paragraphs 40 to 42 there follows a list of exceptions—committee chairmen when they wish to speak about a particular development, and so on.
One question in particular arises because I think that it is a mistake, if I may say so from these Benches, to suggest that all wickedness is entirely the creation of Labour councillors in London. I turn to the interesting case of Lady Porter, who is the Conservative Leader of Westminster City Council. Let us assume that she is asked—as I am sure that she will be asked on many future occasions—to meet the press at a council press conference in order to discuss the strange affair of the sale of those cemeteries for a few coppers. All noble Lords will recall Lady Porter's surprise that that exciting new notion of privatisation did not receive the wholehearted and enthusiastic support of the local community, of the relations of those who were buried there and of the Dutch Government, some of whose nationals who had been killed in the war were also buried there.
We are all looking forward—and I am quite sure that the Department of the Environment, which is very keen on value for money, likewise is looking forward—to reading the reports of the various inquiries that are now taking place into the curious matter of Lady Porter, the sale of the cemeteries and their repurchase.
Lord McIntosh of Haringey: My Lords, I am fascinated by what the noble Lord has said. I understood that the only inquiry that had been allowed by the City of Westminster was an internal inquiry. I did not know that there was to be an independent inquiry.
Lord Harris of Greenwich: My Lords, I think that the noble Lord can be reassured that various other matters are now being looked into. He will not be altogether surprised to hear that apparently some councillors in Westminster were not too enthusiastic about having too detailed an inquiry. However, I understand that continuing investigations are being carried out and I think that it is right that they should take place.
I hope that there is nothing in paragraphs 39 to 42 of the code to prevent Lady Porter's large team of public relations advisers—indeed, there are a remarkable number in the City of Westminster —from being able to organise council press conferences as soon as it becomes possible to do so following the various investigations that are taking place.
Finally, let me say this. I think that this code is a rather trivial document. In the long term it may not have the damaging effect on free speech in local government as was no doubt intended by some of those who were responsible for drafting it. I hope that its effect will at worst be marginal and that sooner or later this Government will stop nannying local

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government. Similarly, I hope that some of the more foolish local councils will stop conducting themselves in a way that only brings discredit on our system of local government and offers an opportunity for even greater intervention from Whitehall.
8.26 p.m.
The Earl of Caithness: My Lords, I was grateful for some of the things that the noble Lord, Lord McIntosh of Haringey, said.
Lord McIntosh of Haringey: Which things, my Lords?
The Earl of Caithness: My Lords, I was just about to say. The consultation exercise that we have gone through was one of the things, and he said that there had been improvements, as indeed I said when I opened this debate—and at least the noble Lord was courteous.
We have heard the assertion made by the noble Lord, Lord McIntosh, that we are seeking to impose one set of rules for local authorities and quite another for central government. That is not true. Both central and local government have a duty to explain their proposals to those who are affected. There is no question of the code seeking to impose restrictions on local authorities that are more onerous than those observed by central government publicity.
Although it is difficult to make direct comparisons because of the fundamental differences in the constitutional position, we have ensured that the code is as consistent as possible with the longstanding conventions followed by central government. The spirit of the rules is similar in both cases and requires, for example, that in cases in which controversial subjects are given publicity, care is taken to concentrate on facts and explanation rather than on persuading the Leader to take a particular point of view on an issue of policy. Following that up, I would just say to the noble Lord, Lord McIntosh, that some of the phrases quoted by the noble Lord are in fact in the code and I refer him to paragraph 13. The noble Lord, Lord McIntosh, went on to say that the code is patronising. The code is meant to cover all aspects of publicity and it would be wrong to be selective.
Both the noble Lords who spoke in this debate were concerned that the code would prevent publicity about proposals for schemes affecting their areas. There are no grounds for concern that the code will in any way inhibit local authorities' efforts to provide information about any proposals that will have a direct impact on their functions. Paragraph 19 of the code makes clear that publicity campaigns can provide an appropriate means of ensuring that the local community is properly informed about a matter relating to a function of the authority and about the authority's policies in relation to that function and the reasons for them.
In reply to the noble Lord, Lord Harris of Greenwich, I should like to say that it is important that public funds should not be used to mount campaigns whose primary purpose is to persuade the
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public to hold a particular view on a policy issue. Again, as regards the point that he raised about the road scheme, should a district council wish to oppose a road scheme and want public meetings to be held, the code will not stop that process.
Paragraph 19, to which I have referred, also states that a local authority can explain its policies and the reasons for it. If the reasons are good, they will be persuasive; if not, it should not try to use advertising techniques to sell its views.
The noble Lord, Lord McIntosh, reminded the House of the code produced by the local authority associations. I remember that we had discussions on Clause 27 earlier this year on the Local Government Bill. I am aware that a draft code on publicity was prepared by officers in main associations in December of last year. In my view this served only to reinforce Parliament's decision to place responsibility for preparing the code with the Secretary of State.
At first sight, the association's draft code bore some resemblance to the Government's draft code. But I see little point in taking up time in the House tonight with a line by line critique of the document. Suffice it to say, although it appeared to cover some of the important matters included in the Government's draft, it excluded a number that we believe to be essential. More importantly, its provisions were written in such vague terms that I saw no prospect that local authorities would be pointed to good practice in any meaningful sense. That is the purpose of having the code in the first place.
Finally, I think that the noble Lord, Lord Harris of Greenwich, dropped well below the normal standard that he sets himself. He quoted an event relating to a memorandum from a political adviser. That is not the usual standard of the noble Lord. That had nothing to do with publicity as defined for the purposes of the Act and the code. No DoE press notice was issued.
Lord Harris of Greenwich: My Lords, the noble Earl must try not to be pompous when embarrassing political disclosures are made from his own department. I was merely asking him to reconcile the approach disclosed in that memorandum, and the action taken thereafter by his colleague, Mr. Waldegrave, with the paragraph in the code which precludes local authorities from behaving in precisely the same manner.
The Earl of Caithness: My Lords, I should hate the noble Lord to class me as being pompous. I was merely saying that he had dropped below his normal standards.
On Question, Motion agreed to.

Pesticides (Maximum Residue Levels in Food) Regulations 1988
8.32 p.m.
Baroness Trumpington Baroness Trumpington rose to move, That the draft regulations laid before the House on 12th July be approved [33rd Report from the Joint Committee].
The noble Baroness said: My Lords, these regulations implement the powers in Sections 16(2)(k) and (1), 16(15) and 24(3) of the Food and Environment Protection Act 1985. They have been drafted after extensive consultation with all interests affected. Your Lordships will know that my department, on behalf of the departments responsible for these regulations, issued a first consultative document in October 1986. This proposed the principle of a statutory system of control for pesticide residues in food. It met with widespread support and, as a result, a second consultative document was issued in April this year proposing specific maximum residue levels for a number of pesticides used on a range of important items in the diet. Comments on this second consultative document were again overwhelmingly in favour of a statutory system, and the result is the regulations that we have before us.
The regulations are designed to achieve three things. First, they will provide a check that farmers and growers are observing good agricultural practice in the use of pesticides in this country. If pesticide users follow the instructions on pesticide labels—as
they are legally bound to do by the Control of Pesticide Regulations 1986—they should have no difficulty in complying with the maximum residue levels—or MRLs as they are known—set out in the present regulations.
Secondly, the regulations will apply the same standards to imports as are applied to home grown produce, by allowing imports containing residues above MRLs to be seized, disposed of, or sent back to the country of origin. This should reassure farmers that their foreign competitors do not have unfair advantages in the use of these pesticides. By the same token, these MRLs, many of which are EC limits, will serve to facilitate trade within the Community.
Thirdly, the regulations are intended to provide consumers with the reassurance that levels of pesticide residues in food are safe and are at the lowest levels compatible with efficient food production. The safety of food for consumers is always of paramount importance. These regulations set maximum residue levels which are in all cases acceptable to the expert toxicologists who help us to run our pesticides registration system, both within DHSS and MAFF, and on our independent advisory committees.
These are the first statutory MRLs for pesticide residues in food in this country. They cover 61 pesticides and a wide range of the more important components of the average national diet, including cereals, products of animal origin (such as meat, milk and cheese) and a wide range of fruit and vegetables. It is the Government's intention to revise these regulations every two years or so, to take account, for example, of new developments in pesticides marketing, changes in use patterns, or developments in European Community legislation.
Turning to the text of the regulations, the MRLs in Schedule 1 are designed to implement mandatory European Community Directives 86/362 and 86/363 which set maximum residue levels for 23 pesticides in cereals, and products of animal origin. These MRLs will come into force in August.
Schedule 2 contains MRLs which we are not obliged to introduce, but which we have chosen to introduce so as to extend the statutory control beyond cereals and animal products to the more commonly consumed fruits and vegetables. Extending the range of foods covered has also meant extending the range of pesticides. There are 53 pesticides in Schedule 2, which comes into force on 31st December.
Responsibility for enforcing the regulations, since they are made under the Food and Environment Protection Act, rests with Ministers. Current monitoring of cereals and foodstuffs by the Working Party on Pesticide Residues is focused on areas where residues are considered likely to be found. This monitoring indicates that residues above the MRLs are rare. We do not therefore expect there to be many breaches of the regulations but where routine monitoring suggests that problems may be arising, we would envisage mounting an enforcement campaign. This would involve Ministers designating individuals as enforcement officers. They would then collect samples and would send them for analysis. Analysis for pesticide residues is a very complicated matter and would probably need to be done in the central laboratories. Local authorities have indicated that they are willing to collaborate with us in this work and to allow their staff to be designated as enforcement officers and, where they have the appropriate expertise, to contribute to analysis. Following a recent meeting they are now considering whether they wish to play a larger role.
Not all pesticides leave detectable residues, and many that are present just after treatment do not persist. But I believe that we owe it to farmers and growers, to the food trade and to consumers, to create a framework within which farmers know that they can operate freely, traders can buy and sell, and the consumer can go the shops in the knowledge that what is displayed there meets stringent national and international standards on residues. Because of their European component, these regulations also make their contribution to the achievement of a wider European market. I commend them to the House.
Moved, That the draft regulations laid before the House on 12th July be approved [33rd Report from the Joint Committee].—(Baroness Trumpington.)
Lord John-Mackie: My Lords, I am sure we all agree that it is absolutely necessary for this document to be produced because the public are a little afraid of the amount of spraying that goes on. It is reassuring to them to know that there are now regulations of maximum residue levels which are harmless. I never realised that 61 pesticides were used, of which 23 are used on cereals and 53 on the other crops listed in Schedule 2.
I wish to make only one point. In one particular year I counted that we sprayed a field of wheat five times: twice for weeds, twice for disease, and once for aphids. That is five pesticides being used. What happens if the level of each of these pesticides is just below the maximum registered level but the total is very high? I just wonder whether there is anything to stop that happening, otherwise we give a blessing to the statutory instrument.
Lord Mackie of Benshie: My Lords, I concur with my noble kinsman. When I think about pesticides I remember the remark of the Duke of Wellington about his troops: that he did not know what they did to the enemy, but "My God, they terrify me". That is true of the pesticides we use and I believe that the regulations are necessary, The review every two years is certainly also necessary. We commend the regulations.
Baroness Trumpington: My Lords, the MRLs are designed to be limits which will not be exceeded when good agricultural practice is followed. I hope that the noble Lord, Lord John-Mackie, was following good agricultural practice when he sprayed his field five times. However, we have selected the limits which best accord with United Kingdom circumstances. It is up to the noble Lord to take his usual responsible point of view when applying pesticides, knowing the results. I thank noble Lords for being so brief. I commend the order.
On Question, Motion agreed to.

Set-Aside Regulations 1988
8.41 p.m.
Baroness Trumpington Baroness Trumpington rose to move, That the draft regulations laid before the House on 4th July be approved [31st Report from the Joint Committee].
The noble Baroness said: My Lords, I am assuming that the background to the introduction of the Community set-aside scheme is well known to the House—though I can give more details in my closing remarks if required. The timetable set by the Council for implementation by member states has been very tight. Rightly so, because farmers needed to know the details of the scheme as quickly as possible if it was to influence cropping decisions for the 1989 season. So we have had to act speedily to devise these regulations. But the United Kingdom is not alone. Although we were the first to submit a scheme formally to the Commission for approval, we have been closely followed by most of the other member states. Only Italy, Ireland and Denmark have yet to send their proposals to the Commission. So most member states look likely to have schemes in force by this autumn.
Turning now to the details of the measure, I should first say that much of what is contained in these regulations is set by the two EC regulations, Council Regulation 1094/88, the main obligations; and Commission Regulation 1272/88, the detailed rules. But we have tried, so far as possible within the constraints imposed by the EC legislation, to keep the scheme relatively simple and flexible for farmers.
Farmers who enter the scheme must undertake to set aside an area of land equivalent to at least 20 per cent. of the area used for production of the so-called "relevant arable crops"—that is supported crops—in the base year 1987–88. Together with the obligation to set aside a certain amount of land goes an obligation not to increase the area of land remaining in production of relevant arable crops. There are three main options for the use of land set aside:
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fallow, woodland or non-agricultural use. I shall say a little about each one.
First, fallow: as is clear from a quick reading of the regulations, the word "fallow" does not quite equate with its traditional meaning. Farmers traditionally have thought of fallow as bare ground included in the arable rotation. However, under set-aside, the detailed rules for the management of fallow land include a requirement to establish and maintain a plant cover on the land left fallow. And fallow can be either rotational—in which case it attracts a payment of £180 per hectare (or £160 in the LFAs)—or permanent for the full five years of the scheme—in
which case the payment is £200 per hectare (£180 in LFAs). Schedule 2 to the regulations sets out the statutory management rules designed to help ensure that land is kept in good condition and that there is no damage to the environment. The rules include, for example, prohibitions or restrictions on the use of fertilisers and pesticides, and on land improvement works; and there is also an obligation to maintain features—for example, hedges and trees—on or next to set-aside land. The conditions provide scope for farmers to obtain positive benefits for the environment. We shall also shortly be issuing advisory guidelines to help them.
The House will also be aware that we have decided not to take up the option allowed for in the EC legislation of extensive grazing of fallow land. I am glad to say that our decision on this has been widely welcomed by farmers, who were justifiably concerned that such an option could distort competition for existing livestock producers, particularly in the uplands. France, originally the main advocate of grazed fallow, has reached the same conclusion and will not be permitting it in her national scheme.
For the woodland option, these regulations provide the farmer with a choice of two alternatives. In both cases, eligibility is linked to obtaining a planting grant under the Forestry Commission's woodland grant scheme. Farmers wishing to plant trees can then either opt for the route of direct set-aside to woodland—in which case they will receive the same rates of payment as for permanent fallow but only for the five years of the set-aside scheme—or they can opt to enter the farm woodland scheme and receive the rate of payment appropriate to that scheme for the full term of up to 40 years, depending on the species mix. We felt that it was important that farmers should have the choice between the two routes because, as your Lordships are aware, the farm woodland scheme has specific rules, for example minimum and maximum areas planted to trees; and we wanted set-aside to woodland to be nonetheless available to farmers outside these limits. I should add that while farmers are waiting to begin planting trees they will be required to manage the land as fallow under the management rules.
For the non-agricultural use option, we have tried to keep the regulations as flexible as possible to allow farmers to use their entrepreneurial skills. For this reason we have not included a list of permitted nonagricultural uses. We have, however, specifically excluded from eligibility the use of set-aside land for mineral extraction—including opencast coal—and for permanent buildings related to use for industrial,

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retail or residential purposes. The rate of payment for all non-agricultural uses is £150 per hectare (or £130 in the LFAs). The lower rate reflects the fact that an income could be expected from the non-agricultural enterprise. Of course, the set-aside scheme does not affect any requirement to obtain planning permission.
Turning briefly to eligibility, to enter the scheme an applicant must have been farming the holding for at least 12 months before the set-aside period begins. We hope that this will help to ensure that the scheme is only taken up by genuine farmers. Tenant farmers on a fixed term lease are eligible to apply provided that the lease has at least five years left to run. However, if tenants wish to take up the woodland or non-agricultural use options, they will be required to obtain the consent of their landlord. For the fallow option, they must notify their landlord. We believe that these requirements are in the best interests of tenants and landlords alike. In particular, they provide the tenant with the opportunity to explore with his landlord ways in which he may enter the scheme wihout incurring the risk of breaching his tenancy agreement.
In the interests of being concise I have given only the main outline of the regulations. I hope that this is sufficient as an introducton, and I shall try to deal with any other points that are raised in my concluding remarks. I should, however, like to say one further thing: that is to emphasise how important it is for arable farmers to register their 1987–88 cropping pattern with us this year even if they wish to defer a decision on whether or not actually to enter the set-aside scheme. The value of registration to farmers is that, if they apply for set-aside in a later year, they will not need to provide further evidence of the 1987–88 cropping pattern on land which has already been registered with us. If land has not been registered, independent evidence will need to be provided probably in the form of a certificate from a qualified surveyor. That may be difficult in some cases and will, in any case, involve further expense to applicants. I hope that arable farmers will see the advantages of registration and send in the shorter registration form to reach us by the end of September. I commend these regulations to the House.
Moved, That the draft regulations laid before the House on 4th July be approved [31st Report from the Joint Committee].—(Baroness Trumpington.)
8.50 p.m.
Lord John-Mackie: My Lords, I believe that the noble Baroness has a difficult job tonight. She began well and has been concise. She emphasised that time was tight and I cannot agree more. Within the next two months farmers will be busy harvesting and their minds will not be too far ahead. I hope that they will be able to find time to look at the question of registering before the end of September. Time is tight and sometimes it takes farmers a fair time to make up their mind, particularly as regards such an important matter.
The main object of the scheme is to reduce cereal production and many other crops, particularly oil
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seeds. We must look at the issue from that point of view. The noble Baroness suggested that there is scope within the scheme for diversification and so on. However, that is a side effect and we must look at the issue from a production point of view. I have my doubts about whether cereal production will be reduced.
Sub-committee D of the Select Committee on Agriculture made a comprehensive report. No fewer than five members of the committee will speak tonight. I shall leave it to them to pick out the salient points which the Government have ignored in their report and which I believe are important.
On Monday the Minister of Agriculture was interviewed on "The Farming Programme" and I listened with great interest. I was intrigued by the fact that he stressed most strongly that he wanted to concentrate on less-favoured areas where they should not be growing grain in any event. I doubt whether they should not be growing grain. I know that grain has been grown on some of the less-favoured areas for a long time. However, if he wishes to concentrate on such areas, believing that to be best, why offer the farmers £20 per hectare less than that offered to the other areas? To give the farmers £20 per hectare less than the more-favoured areas seems to be a curious way of stressing the point: that is unless the less-favoured areas are linked to the farm woodland scheme which the noble Baroness mentioned and which would help.
I spoke to a relation in Scotland about the matter. He farms two fairly large farms which were created by amalgamating smaller farms and which are in less-favoured areas. To join the scheme he is to take sufficient land out and plant trees on the farm on which he lives purely to shelter the house and buildings. He says that otherwise he has no interest in the scheme. He emphasised to me the fact that he had been talking to his neighbours, most of whom are still farming the smaller farms in less-favoured areas. They vary in size from 150 to 250 acres. The farmers have no interest because on a farm of that size one has the equipment to run it the way it is. There is probably only part-time labour and the farmer, or at most one worker. One cannot cut down on any of that and the scheme is not attractive to that type of farm. I shall be interested to hear what my noble kinsman has to say because it is probable that he has better knowledge of the areas than I.
The point is that these areas are not creating the surplus. What about the favoured areas? They are the large East Anglian farmers from where the surplus is coming. From the economic point of view, unless the 20 per cent. takes out enough to pay off a man, sell a combine and a tractor, probably leaving 1,000 tonnes of grain storage standing empty, it does not appear to be very attractive. I cannot see a 2,000 acre farmer taking out 400 acres from a fully-mechanised farm and doing just that; that is to say, reducing the staff by a man and selling a tractor and combine. I believe that the percentage should be graded downwards from the 20 per cent. in less-favoured areas to 10 per cent. on the best farms in the country. That may bring a bigger acreage into set-aside than at the moment. However, I give the noble Baroness that point which I believe is most valid.

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I think that there are several minor points which may have made the scheme more attractive. It is a pity that the French dropped the fallow grazing scheme. I do not agree with the noble Baroness that on the whole farmers did not like it. I believe that it would not have made much difference to the traditional grazing areas. It would be fairly easy to police and I do not believe that many arable farmers would go to the trouble to fence fallow grazing to any great extent. If it were made clear that no nitrogen must be put on the land and that the stocking must be light, I believe it would have been of more value to the country than fallowing, either green or straight fallow.
The noble Lord, Lord Vinson, chairman of the Rural Development Commission, speaks strongly about the matter from an environmental point of view, apart from the economic point of view. The noble Baroness has previously emphasised the fact that this is an experiment. The scheme should be experimented with and it could be altered if it is believed to be hurting the traditional grazing areas.
I should like to ask the noble Baroness how much flexibility there will be. Can one change from one type of fallow to another in the middle of the three-year period? Can one change from grazing horses to a fallow cover, and so on? Are the Government satisfied, as the noble Baroness mentioned, that tenants will have the same rights as owner-occupiers? They must have their landlord's permission and cooperation and that may be difficult to obtain before the end of September. That is a matter which must be looked at urgently.
Why is there the large difference of £50 per hectare for non-agricultural use? I declare an interest in that in my area, which is 22 miles from here, we can let land for horse grazing. It is up to us to find clients and the Government have done nothing to help us to obtain that horse grazing. Why should we find £50 for being a little more progressive than our neighbours who are putting down a green fallow? I believe that that is rather hard. After all, we are taking land out of production, which is what the Government want, and we are going to suffer because we are dealing with it in a different way.
There is the question of plant cover. Apart from pasture the only plant that I can think of is mustard, and you cannot sow that in October. A list of plants is given which are not excluded and I have marked them in the list here. I do not know anything about lupins and the noble Baroness may be able to help. Can one plant lupins in October? The other one is fodder rape. October is rather too late to plant seed rape but I do not know about fodder rape. These questions have to be answered.
If the Government get their acreage, on which they are going to spend £16 million, I worked that out as being between 200 and 250,000 acres. Is there enough mustard seed and so on to plant that acreage in the time we have been given?
I should like to make one last point. We are not allowed to do any more drainage and we have to be careful about how much repairing and keeping up of drainage we do. Would that cover mole drainage? We
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have to do a lot of that on my farm, as do a whole lot of other farmers. I hope that that is not to be tampered with in any way.
On the question of what will happen, I hope that we shall receive a report fairly regularly. I am sure that we could have a report one month after the end of the first year. It is only a case of adding up figures to see how the scheme is going. On the whole, we are anxious to help over the surpluses hut, as I said earlier, to use a Scottish phrase, "I hae me doots" about the particular scheme.
9.2 p.m.
Lord Mackie of Benshie: My Lords, as usual I follow my noble kinsman knowing that large parts of what I was going to say will already have been said by him. However, I believe that this is a very important measure, not in itself but in what it is trying to do. There is the most enormous interest in it. We have all received literature from the Royal Society for the Protection of Birds, the Council for the Preservation of Rural England and the Consumers' Association, all of whom are experts on what should be done to improve the countryside from their particular angle.
I believe that the first thing to remember is that agriculture in this country is still a great business of enormous importance to the country, the biggest single saver of imports that we have, and that remains the basis on which any improvement or lack of improvement in the countryside will be carried out. It must be approached from that point of view.
I do not know how much the Government are hoping for and perhaps the Minister can tell us what is the estimate of the take-up of this scheme. Like my noble kinsman, I see great snags. It comes to £80 an acre, £200 a hectare—I am more used to working in acres, as I am sure is the noble Baroness. At £80 an acre it is wholly unattractive to any farm which is producing in a reasonable manner. I cannot think that it can be taken up by anybody who does his accounting, who is making a living out of farming and who has the normal overheads of a not too large overdraft or is paying a rent, and that sort of thing. I cannot see that it is attractive in any way at £80 an acre.
The experience of the experiment in Lower Saxony, where they were paying £160 an acre, was interesting and we should look at that. I have a paper on it and a speech by the Minister in the Federal Republic which states:
"Farmers' participation in the experiment was lower than hoped for in the first year. In total an area of 33,000 hectares at an average cost of 35 million deutschmark took part. The average green fallow acreage was 4.35 hectares. The participation was concentrated in areas with relatively poor quality land, that is particularly in the heath region which had 35.9 per cent. of total applicants".
That lends some credence to the hope of the Minister of Agriculture that the scheme will take land out of production which should not be growing cereals at all. However, even there I doubt that it will have much effect. My noble kinsman has already cited the example of the family farm. If one takes out 20 per cent. at £80 an acre, I very much doubt if it is possible in the small farms, or farms which are not all that small but certainly big by continentnal standards. Farms between 100 and 200 acres on the east coast of

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Scotland and upland areas cannot find it very attractive.
As regards the good ground farms and grain growing areas in East Anglia and East Scotland where I am myself, there is no way that I would look at it. I could not possibly look at 20 per cent. of the farm at £80 an acre and continue to be able to buy myself another gin. It would drop my income enormously. The only sort of people who can take it up are those who are doing extraordinarily well, are extraordinarily competent, with very good land and want to plant trees. They can do without the income because in the long run the new grants for trees may pay them to put in trees but in the short run they will lose the income off the farm, and £80 an acre will not cover that.
I believe that experience of this scheme would show that there is not enough money in it—and I have often quoted a figure in this House. If you save the export subsidy and the storage on 2 tonnes of barley, it comes to a great deal more than £80 an acre. In fact half of it comes to more than £80 an acre. If the German scheme did not work at double the money, I cannot see a great deal of hope that this scheme will have any real effect on the surpluses which are bedevilling the efficient farmers of this country and of Europe.
There are a number of points about the present scheme, particularly regarding slippage, about which we have heard a great deal from America. The fact is that one does not get a fall in production in proportion to the number of acres taken out of use. My noble friend Lord Hunt, who is mainly interested in the countryside as a pleasant place to be proud of, is concerned about this aspect and asked me to speak about it. It is simply this. Putting fallow down, particularly rotational fallow, is apt to raise production on the rest of the land.
My noble friend was also worried that we are not using grass as a cover crop from the conservation point of view. If an increase in the production of sheep and beef on a surplus area could be avoided, it is natural to conserve the countryside as a pleasant place rather than having acres of bare fallow.
Another point, again raised by my noble friend, relates to fallow in urban areas. We all know that one cannot put stock on fallow land in urban areas. If one farms too near a town there are problems with dogs and human vandals. It is impossible, therefore, to carry stock. If one has a lot of bare fallow, or land left to what is called natural regeneration, one has the most appalling eyesores. Natural regeneration means growing weeds, thistles, and so on, and the seeds are blown into everyone's gardens. Natural regeneration appears to be a total and complete nonsense.
As regards other uses, it is hoped that 2 million acres in this country will be taken out of production. All the farm shops, horses, nature trails, jumping grounds—however one cares to put the land into non-farming use—cannot possibly take up those 2 million acres. Therefore, we shall be looking at woodland and/or grazing. I put in a plea that the Government should now start examining extensification, which means lowering the amount of
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fertiliser and the intensity of the farming of grass. To do that one gets back to a system which worked for a long time in my native county of Aberdeenshire.
Land is put down to grass for a number of years. At the end of three or four years one takes a very cheap crop of oats which needs no fertilising and then puts back the land under a cover crop of grass. If you are intensifying to the extent that we are doing today, it is possible that de-intensification, or a more extensive system of farming, would pay just as well and might also be healthier for the countryside than the various schemes we have at present. Therefore, I hope that the Minister will be able to tell the House that the Government are willing to examine such a scheme.
Even with the present scheme an enormous amount of inspection will be necessary. There will have to be an increase in the number of civil servants looking after affairs if we are to have any form of set-aside. The scheme must be policed properly, otherwise it will come into total disrepute. If that is to happen, I plead for further consideration of extensification. It is a ridiculous word but it means less intensive systems, which will be better for the countryside. A decent subsidy—I call it a subsidy—from the Government would pay farmers as well and keep the population in the countryside, which will look a great deal better. Apart from that, I believe it is an interesting experiment. Like my noble kinsman, I look forward, though I cannot see; I look in fear.
9.13 p.m.
The Earl of Radnor: My Lords, I thank my noble friend for explaining these regulations so clearly. In point of fact they are, in essence, fairly simple. I discard the alternative uses of land as being of only fringe benefit so far as concerns the main objective, presumably, of this set-aside. The main objective—a laudable one—is to save money being spent on surpluses and to diminish those surpluses by taking land out of cultivation.
Then one gets down to the details—I shall be brief because they have all been mentioned already—of whether any land will be taken out of cultivation. When the noble Lord, Lord John-Mackie, mentioned that this might be an experiment, I saw my noble friend nod her head. I think that this is an experiment taken almost to the point of timidity, because there are two main streams here. First, the target is too small, which brings in the point of slippage which the noble Lord, Lord Mackie of Benshie, made. So in point of fact very little, if anything at all, will be accomplished in the way of reduction. I did not hear the noble Lord mention in the same breath as slippage advances in biotechnology, plant breeding and those sorts of matters which, if extrapolated from the past, mean that we shall all be growing more crops per acre or a heavier weight of crop per acre, which would therefore cancel out any small advantage that might have been gained.
Having said that, I do not think that set-aside is worthless in any way. It has to be looked at in the context of farm price reviews and stabilisers. Although I agree with the noble Lord, Lord Mackie of Benshie, that very few people would want to take 20 per cent. of their land out at the present time—he

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gave some very good examples—if perchance stabilisers bit deeply and the percentage crop in price accumulated, or if for some other reason, such as a farm price review, prices were really reduced so that some of the smaller and not quite so efficient farmers were put in an awkward position, then they might see this set-aside scheme as an insurance policy, albeit a very poor one.
In that context—I hardly dare mention it since the scheme only runs for five years and people can opt out after three—I still secretly believe that any payment for doing something should be indexed, but I shall not press the point further than that.
At the moment the whole matter might prove to be much ado about nothing. This Government and all the other governments across Europe might conduct their experiments to see what happens; but it will be quite a long experiment if they want to change direction in a hurry.
The matter has been commented on in the press, and very widely in the farming press; but outside farming the whole matter of set-aside is of considerable interest to everybody. Perhaps, unlike me, people feel that large blocks of the English countryside are going to look rather different from the way they have looked in the recent past. Here, if I may make an excrutiating joke, I am a voice crying in the wilderness, because I believe that the proper way to have gone about this matter would have been to allow land to fall back to nature. On the whole, if a blade of grass grows, the Englishman wishes to cut it; if a bush grows, he wishes to clip it; or if a rose grows, he wishes to prune it. That seems to me to be rather a suburban attitude towards country life. If we have to take land out of cultivation, I should be much happier if it were left for God to do what he would with it.
I am sure that the environmentalists have missed a trick here. They seem to think that a fallow with many passes of the cultivator every year and possibly the spray boom, or the green fallow without any animals grazing on it, with the mower and the flail trimming it off, are going to be good for nature. I cannot see that that is good for birds, mammals, reptiles or lepidoptera. Most of us who were brought up in the country knew perfectly well where to go to find brown game and wild flowers. It was in just those messy places to which the noble Lord, Lord Mackie of Benshie, referred. The pheasant always sat in a clump of nettles and the rabbit, I am afraid, with him. Wild flowers grew (at any rate in my part of the world), and we knew exactly where to go to look for wild animals. They were not on the fallow ground. The fallow was huge in those days. Fallow ground had the skylarks, the green curlew and, sadly past, the stone curlew as well. I am sorry that this matter was not allowed. One could do it but I believe that one would be penalised. It would be quite possible and allowable to let land fall back—
Lord Mackie of Benshie: My Lords, the noble Earl knew when he was young where to go to find wild flowers and pastures which had been down for generations. However, we have interfered so much
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with the land. We have sprayed all the natural flowers; and the weeds that grow now are the ones that have survived the sprays. If you leave for a generation land that has been cultivated, you will not get a very pleasant mixture such as the noble Earl remembers. That is my point.
The Earl of Radnor: My Lords, I take the point entirely; but in the same way the Government are having a little experiment, I should be quite prepared to have one too if I were given the opportunity.
If I wished to set anything aside on my farm (which I would not dream of doing) I could do it by allowing the land to fall back so that little bushes grew for the song birds, and so on. Then I would build a cheap and small bird-watching hide and charge a small sum for people to come and look at whatever had come to my green patch. I shall not pursue that matter further. The regulations are important as an insurance policy if something goes very wrong for the smaller and not so well-off farmers. It will be a rush for them to be organised for September, and difficult for them to realise that they must be organised by 30th September even to join the scheme in future years. Having said that, I give the regulations a qualified welcome.
9.24 p.m.
Lord Walston: My Lords, perhaps I may settle any lingering doubts that the noble Baroness may have about my attitude towards the regulations by saying that I do not in any way oppose the proposals. Having said that, I cannot pretend that I give them a warm welcome, basically for the reasons that other noble Lords have already put forward. I do not believe that this will work. What is not sufficiently realised other than by farmers themselves is the very great financial burden they have in the form of fixed costs, whether for rent, for mortgage interest, for bank overdrafts or, to a certain extent, for wages. Those things go on year after year, whether one is farming 100 acres, 80 acres, 1,000 acres or 800 acres. Something in excess of £80 an acre on a normal efficient arable farm is a low figure for the actual fixed costs. If a farmer were offered £80 an acre for taking his land out of production he would be worse off than if he were farming that land and getting a low price for whatever he might have produced on it. It would certainly cover his variable costs.
So, while it may be that certain farmers on marginal land, or who wish for one reason or another to have life a bit easier, may be tempted by this, at the present proposed rates I cannot see that there will be any significant response to the scheme. I, may be proved wrong, and we shall see very quickly. However, it would surprise me very much if there were any significant reduction in the total production of the crops in question.
I say that because there is still another factor which I do not think has been mentioned on this occasion, although it has been raised in the past when discussing the matter. It is this. The farmer who is going to go into set-aside will not offer his best land; it will be his marginal land, his worst land. Therefore the average yield of his farm will be enhanced by

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taking out the worst land. Thus, having rather more effort and time to spare for his remaining land, the chances are that the yields on that land will increase—I think it may be called "slippage" in technical jargon—and the total amount produced will not be anything like 20 per cent. less. For those reasons, I do not believe that this scheme will have any significant effect in solving the problem of overproduction and reducing the costs of the Common Market.
On the question of costs, I should be most grateful if the noble Baroness could give us some estimate of figures as to how much this scheme is expected to cost in the first year—and the second year if she has the figures—how much less of the crops in question will be produced and therefore how much will be saved in intervention, and so on.
My noble friend Lord Mackie of Benshie mentioned the Lower Saxony experiment. I should like to remind your Lordships of figures which were in fact printed in the Select Committee's most valuable report on set-aside of agricultural land, which was printed on 29th March of this year. According to the report, in the first year, that is 1986–87, in Lower Saxony the total cost of the scheme was £11·8 million. The reduction in output was 135,000 tonnes, which at a round figure of £100 a tonne means £13·5 million was saved provided the crop was completely destroyed immediately—if it was burnt. However, had it been sold at some lower price—say, 50 per cent. of the £100 which is the guaranteed price of the Community—the scheme would in fact have cost approximately £6·75 million.
I happily accept, as pointed out in the report, that the first year in Lower Saxony was disappointing but that it looks as if there will be a better response to it for the second year. But it does not necessarily follow if there is a better response that the cost of the scheme will be less. Therefore, if the noble Baroness can give us figures to show how much the scheme will cost and what the savings are expected to be, I think it will put us in a somewhat better position to assess its value.
I turn now to several minor points. It has already been made clear that opencast mining is not allowed on land which is set aside. But it would be interesting
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to know if, for instance, it would be legitimate to use the land which is set aside for the provision of infill, for the making of roads or for building sites, as in certain areas there is a very considerable demand for infill. Could it be used for the excavation of pits into which town refuse could be put? One of the most valuable uses to which disused quarries or pits can be put is for the dumping of refuse. Will that be allowed on the land which has been set aside or will it be one of the prohibited uses? That is only a minor point, but it is of some interest.
I cannot help feeling—and here again my noble friend Lord Mackie of Benshie mentioned this point—that more emphasis should have been placed upon conservation and the environment in its widest sense. I know that some—dare I say?—lip service has been paid to that idea. However, many people would be far happier if instead of paying farmers what appear to the outside world to be substantial sums—even though, as I have explained, I do not believe that they will be sufficient to entice them to take part—to grow nothing on their land, they were paid sums to do certain approved jobs which would enhance the environment and give more pleasure to the urban population. Whether it is making land available for picnic sites, growing wild orchids, or doing a whole variety of things, the set-aside should be linked to specified projects agreed to by those authorities which have already been quoted, which will assure the population that the land which has been set aside will add to their pleasure rather than merely left to grow thistles, nettles and possibly a few wild flowers.
My final point is somewhat more philosophical. Surely it is a grave reflection on our so-called civilisation today, and on the form of the world economy as it exists today, that while one-third of the world's population suffers from malnutrition or starvation, we should be racking our brains and evolving all sorts of ingenious devices so that we can produce rather less. Is that the type of civilisation in which we want to live and of which we are proud? Can we not devote the ingenuity, of which there is plenty in Brussels and elsewhere, which is being used to discover the best means of growing less food to discovering how we can ensure that the food we do not want goes to the people who need it so sorely?
9.33 p.m.
Lord Middleton: My Lords, whatever else it was, the Commission's set-aside scheme agreed by the European Council last February was never intended to be a major instrument for reform of the CAP, and hence its relatively small Community budget provision. At best, the Commission estimated that Community cereal production might be reduced by 2·3 million tonnes, which would just about balance the annual increase in corn yields attributable to improved production techniques.
It is clear that Her Majesty's Government took the view that the main instrument for reform was the new stabiliser regime, and of course that is right. They would therefore draw up a set-aside scheme which would need to conform with the Commission's guidelines, but which would cost the United Kingdom taxpayer as little as possible; would be as simple as possible to administer; but which would at the same time stand a chance of being taken up by farmers. As we have heard from the noble Baroness, most of the Commission's conditions are contained in the Great Britain scheme. When it comes to payment, the Commission prescribed a minimum of £65 per hectare and a maximum of £390 rising to £455 in certain conditions. Payments under these regulations, as we have heard tonight. range from £130 to £200 a hectare. I have to agree with many noble Lords who have spoken that this scale of payments will not be very attractive to British farmers.
The noble Lord, Lord Gallacher's Sub-committee D on which I have the great pleasure of serving, when taking evidence on the draft set-aside scheme, was told by the farming organisations that at least £300 a hectare would be needed just to cover the fixed costs on arable land. The Home Grown Cereals Authority thought that £260 might tempt farmers to participate.
Noble Lords have mentioned the green fallow programme in Lower Saxony. That programme was unable to stimulate much take-up until Saxon farmers had been offered compensation in the range of what amounts to £333 to £466 per hectare. A further disincentive is the proportion of a farmer's arable land to be withdrawn. I agree entirely with the noble Lord, Lord John-Mackie, and his noble kinsman that substantial cereal producers would be very unwilling to reduce their output by 20 per cent. Again, some farmers might have been tempted to participate, had they been allowed to put their set-aside land down to grass for grazing. This has been mentioned by noble Lords. It is allowed by the Commission under their regulations but not under these regulations. I think I understand the reasons for the Government's unwillingness to allow a "grazed fallow", but I too, with other noble Lords, am disappointed that this option was not adopted for Great Britain as we recommended in our Select Committee report.
I cannot believe that when livestock numbers are known through the returns which farmers make for various reasons, it will be impossible to administer more extensive grazing on set-aside land. There are also good environmental reasons for doing so, as noble Lords have pointed out.
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Turning now to matters of detail and with regard to fallowing, I understand why the farmer is required to establish plant cover on the set-aside land. This is to prevent leaching of nitrates, soil erosion and so on. However, rotational fallow is to be allowed. This is a perfectly normal husbandry practice, especially on clay soils. On a portion of the farm, the stubble is left unploughed after harvest and then ploughed in the following May or June, before there has been much weed growth. The furrow slice will be broken up by cultivation during the late summer. That and the weather will achieve a tilth for September or October sowing, after a year's rest or fallow. In that case, a cover crop would be wholly inappropriate. On heavy land, ploughing in a green crop would turn in the tilth and what was turned up would not have time to form a seed bed.
Turning to Regulation 4(1), I do not see why the set-aside land has to be on adjacent fields if more than one field is to qualify. This might be difficult where rotational fallow is to be adopted. It seems to me to impose an unnecessary restraint. I am sure that there is a perfectly good reason for this which the noble Baroness will tell me. If I remember rightly, the council regulation required members states:
"to take necessary measures to keep land in good agricultural condition".
Yet the plant cover under these regulations, as the noble Lord, Lord Mackie of Benshie, has said, may take the form of the regeneration of "naturally-occurring vegetation." That is precisely the language used by scientists employed. by the Nature Conservancy Council, of which I am a member, when they correct me after I have used the word "weeds". They say, "There are no such things as weeds. Those plants are naturally occurring vegetation."
The regulations require the plant cover to be cut at least once a year. But many a weed can spread its seed far and wide if mowing is mistimed. Indeed, under these regulations, a farmer may be excused from mowing his plant cover on the grounds of maintenance of wildlife habitat. That pleases me very much as a member of the Nature Conservancy Council. It certainly pleases my noble friend Lord Radnor. But it horrifies me as a farmer who is well aware of the damage done by rabbits. They certainly come under the heading of wildlife.
Under the requirements as regards the use of set-aside land for non-agricultural purposes, building works for certain purposes are forbidden. As far as I can see, all the set-aside land could be covered in concrete, provided that the use for those particular purposes was avoided. That would hardly be keeping the land in good agronomic condition; nor would some of the uses mentioned by the noble Lord, Lord Walston.
In my view it is necessary that our European farmland should be kept right and fit for food production in an emergency. Just now there is an urgent need to get land out of production. But anyone who failed to experience a frisson on learning of this year's drought in the United States must be shortsighted as well as unimaginative. The world's climate could change. All our land might then again be in demand for food production.

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I feel that these regulations are not quite tight enough in requiring that set-aside land should be kept in good heart and condition. I know that the Explanatory Note states that that is the case, but that is not the same thing. Beneath the heading "Explanatory Note" on page 13 is stated:
"This note is not part of the Regulations".
Finally, I do not see why a farmer should not renew his field drainage while the land is fallow. The noble Lord, Lord John-Mackie, mentioned mole draining. That would seem to me to be the obvious time to do it.
The Ministry of Agriculture, Fisheries and Food, in giving evidence to the Select Committee, said that a set-aside scheme could:
"accelerate the effect of action on prices by offering producers an alternative to production of cereals and help reduce the impact of lower prices on the incomes of those producers least able to adapt to them."
That is a modest goal and this is a modest scheme. I am afraid that I join other noble Lords in not being very optimistic about the likely take-up.
9.43 p.m.
Lord Stodart of Leaston: My Lords, I have always felt that I had a good deal in common with the noble Lord, Lord John-Mackie, as regards farming. We have known each other for a long time. It gave me a certain amount of satisfaction to learn that he and I evidently wake up at the same time in the morning and listen to the farming programme at a quarter-past six.
On Monday I listened to the programme. When the Minister and my right honourable friend were asked by Mr. Tim Finney who they were aiming the set-aside programme at, the reply was quite specifically:
"at the upland marginal cereal growers"
I am certainly one of those growers. I am a marginal grower indeed, because for years Leaston has been right at the very edge and on the wrong side when the hill subsidies were being offered. It was the last farm outside the hill farming area. So there is no question of the marginality of it.
I shall not detain the House for very long. However, I feel that the reaction of a marginal upland farmer may be useful to your Lordships. Leaston has been farmed on conservative lines of two years of grass followed by three years of grain, with almost equal acreages of the three varieties. The yields vary wildly. In 1981 the yield was 51 cwt. per acre overall, and it went down to 30 cwt. in the disastrous harvest of 1983. The average over the last five years has been almost exactly 2 tonnes an acre.
Much has been said about variable costs. I tend to get confused about which costs are variable and which are fixed. I believe that the expression "fixed costs" is one of the most ridiculous ones that has ever been invented. However, variable costs such as those for seeds, fertilisers and sprays, which are all reducible on a per acre basis, have averaged £79 per
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acre over the past five years. In 1987 the costs were £84 per acre. It is interesting that the figure from the east of Scotland colleges for the less favoured area farms from 1984 to 1986 shows a variable cost of £79. It is also interesting that in another place Sir Charles Morrison quoted a figure of £80 as the variable cost for Wiltshire.
I am bound to say that tributes to my right honourable friend have been somewhat lacking this evening. But one thing that can be said is that he has done his sums with a good deal of care in arriving at a figure of £80 per acre. However, the cost of set-aside cannot coincide precisely with the figure of variable costs.The point has been made that if acreage is reduced, some of the fixed costs will inevitably rise per acre. I would not be able to save on labour and I cannot see that a large bill in depreciation will come down. When I say that there will be no saving in labour, I dare say that with 60 acres less I might save a bit on overtime, which would not be very popular with the farm staff. Therefore I must say to my right honourable friend that in handing us this cup he has not been able to fill it. It is not his fault; it is the old enemy, the Treasury, which is determined to see whether it can cheese-pare us a bit.
If I am farming outside the less favoured area, I am offered £80 per acre and if I am inside it, I am offered £72 per acre, provided I reduce my 300 acres to 240 acres. I must do that for at least three years and preferably for five. In any case, the figures will come down by £20 per acre if I work the fallow into my rotation. If I reduce down to 200 acres, which is a reduction of 30 per cent., I shall receive a bounty of £140 per year for 20 tonnes of grain being freed from the hated co-responsibility levy. That £140 would be far outweighed by the cost of sowing and tending a green crop on the fallow.
Am I attracted by the scheme? I fear not—and I think that my noble friend will have to face up to the fact that that is the answer coming from all sides. It is understandable perhaps from the National Farmers' Union but, significantly, it is also coming from the economic staff of at least one of the Scottish agricultural colleges—who are very, very good.
My right honourable friend has said—and I commend him for emphasising the point—that set-aside is a payment for managing land, keeping it in good condition and making it environmentally attractive; it is not a hand-out to farmers for doing nothing. I agree with him 100 per cent. that there would be a public outcry if payments were set much too high.
As I have said, my right honourable friend has been hard at work on his statistics. Therefore, surely he must know how many tonnes of grain he is aiming at not being produced. He must also know what kind of tonnage is produced by farms which yield, say, below the 2 tonne per acre range. I suspect that he has a pretty good idea because the statisticians in MAFF are very clever. He probably knows too the tonnage from farms which yield between 2 and 2½ tonnes an acre. Will he get his required tonnage from the marginal upland growers who are his prime target, even if they were all to stop growing grain? Perhaps my noble friend can tell us that. I very much doubt it.

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Therefore, if my right honourable friend had to take in some of the low ground, his set-aside figures would have to be much higher. He made that point himself when he has said that rates in the less favoured areas are lower because yields are lower, ergo it is not illogical to say that they will be higher if he extends the scheme to areas where the yields are greater.
Finally, I have just two points. I think that £80 per acre is possibly just enough—and that is a guess on my part—to interest a 30 cwt. an acre grower. However, I cannot believe that enough grain is coming off that kind of land to give the result that is wanted. Secondly, as I understand it the runaway costs which are at the back of the scheme, the enormous expenditure on the common agricultural policy, are caused not by payments to farmers but by storing the grain in intervention. Set-aside is something totally new.
It is very difficult having been told "Grow more: you are a wonderful lot, your productivity is an example to the nation", all of a sudden to be told to go into reverse. Was it not Winston Churchill who said something to the effect that if one wants to put an express train into reverse and set it going in the other direction, one has to slow it down and stop it first? Therefore I think that to get a new venture of this kind off the ground one must pitch one's offer on the high side and then, if it proves a success, there will be the possibility of reducing it.
My noble friend will embark on what I think is fairly rough water when she replies to this debate. I am quite certain that she will calm the waves with her usual eloquence. But as it is, I am afraid that I must join other noble Lords in expressing what perhaps I might politely call a good deal of froideur about these proposals.
9.55 p.m.
Lord Northbourne: My Lords, most of the points that I had intended to make have already been made. I too give a qualified welcome to these proposals. I must agree with earlier speakers that the amount of compensation that is being offered is probably totally inadequate. I should like in particular to support those noble Lords who have advocated the grazed fallow option or deplored the fact that grazed fallow is not included in the provisions.
If I may, I should like very briefly to speak about the environmental issues involved. The Government have introduced this set-aside proposal under Regulation 1094/88 of the Community. Unlike many other Governments in the Community, they have done so by the due date for the introduction of such regulations, for which they certainly deserve to be congratulated. Under the same regulation they will have to introduce within the next two years provisions for compensation for the extensification of farm operations as an alternative to set-aside. I suggest to your Lordships that extensification is of the greatest importance—possibly, indeed definitely, of much greater importance in the context of the countryside and environmental issues than set-aside.
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In that context I should like to draw to your Lordships' attention the CPRE evidence which starts on page 107 of the excellent report from Sub-Committee D. Extensification undoubtedly has potential advantages over set-aside but it is fair to say that not all extensification is necessarily good for the countryside. Many noble Lords will remember the countryside in the 1920s and '30s when the gaps in hedges were blocked with bedsteads and when grazing fields were often rotten with ragwort and thistles which spread their seeds all over the fields.
The maximum benefits from an extensification scheme will only be obtained if there is a farm plan and payment under the scheme is conditional upon the observance of that farm plan. I suggest to noble Lords that the Government are making fairly heavy weather of the concept of the farm plan, but there is absolutely nothing new about having a farm plan in agriculture. Certainly when I was training as a land agent every tenancy agreement had clauses related to the way in which the land should be used. For example, there were restrictions on the sale of manure and straw off the farm and ploughing permanent pastures and very often provision for specific rotations. The object of all those provisions was to keep the land in good heart.
A single visit or, at most two visits, per year by the land agent responsible for running the property was quite sufficient to ensure that those covenants in the lease were broadly observed. I think that there could be greater difficulty in the specific case of the grazing density of cattle. There is a problem in relation to extensification and indeed in the grazed fallow option in relation to the control of the number of beef animals grazing on a particular property.
In the context of extensification, I ask the noble Baroness whether there is any prospect of the introduction of some experiments on the concept of extensification which could be carried out forthwith, most suitably perhaps on the experimental husbandry farms.
There are questions that need to be answered. Among them of course are questions relating to the practices which are most valuable from an environmental point of view and also acceptable from the point of view of production. An obvious example of a practice that is becoming accepted as most valuable in both contexts is the non-use of herbicides and insecticides on the headlands of cereal fields. However, there are some proposals which the CPRE has suggested in its evidence which I believe would not work and would lead to an infestation of noxious weeds. I am conscious of the fact that conservationists often seem to want to make two weeds grow where one grew before. However, there are weeds and weeds; and some of the more noxious weeds are not the most valuable from the point of view of wildlife.
Another question that we have to ask ourselves is this. What kind of countryside do we want? The Countryside Commission and the CPRE seem to prefer a patchwork of fields interspersed with hedgerows—a kind of countryside traditional in many parts of the country for the last 100 or 200 years but not always. Before the enclosures, the English

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countryside must have looked very different. Many of your Lordships will be familiar with, and love as I do, the countryside of northern France, where there is not a hedge to be seen and the poplar trees are planted in straight lines. Straight lines are anathema to the experts. The shelter belt planting scheme specifically excludes from the receipt of Government grant trees planted in straight lines. We are left with the question: what kind of countryside? Is there a danger of a bureaucrat's landscape or one drawn by a committee—a landscape in impeccably good taste but dreadfully dull?
Finally I should like to turn back to the set-aside scheme and discuss for a moment the question of access. Farmers were described by the Nature Conservancy Council in its evidence as custodians of the rural environment. We are all probably agreed that there is a need for long-term goodwill and cooperation between farmers and the public if access to the countryside is to work satisfactorily. In its evidence the CPRE refers to the provision of quiet access on foot to areas which are the subject of set-aside or extensification. Some other witnesses go much further and call for mandatory access to such areas. I think that many farmers would welcome quiet access on foot provided that it is for a purpose and subject to decent standards of behaviour. But how does one enforce decent standards of behaviour? The existing rights of way network gives us an example of the difficulty of doing so. The problem with the rights of way network is not its use but its abuse.
On the estate for which I am responsible, we have three examples of how access to the countryside can work. We have a scout camp which has been there for many years. In 25 years I do not think that we have ever had one single cause to complain about the occupation of that area by the scout camp. We allow the Pony Club to use some of the woods. Occasionally we have cause to complain but a telephone call to the secretary of the Pony Club usually puts the matter right. Finally, in the third example, we have for three or four months of the year gypsies who spend the winter in some of our woods. But, again, because the relationship is a permissive one, we get very little trouble from them.
How different this is from the problems that we have as a result of the rights of way running across some of our fields, which, due to sheep worrying, entirely prevent us from keeping or breeding sheep in those fields, and from the vandalism which is also associated with the right of way network. I think the difference lies in the fact that one right is conditional on reasonable behaviour and is given to a limited group of people; the other right is enjoyed as of right and is given to the public at large.
I would urge that if public access is to be a feature of set-aside, the Government should ensure that it is offered only subject to reasonable and enforceable conditions and to specific groups for a specific purpose. Only in this way can we hope to enlist and retain the co-operation of the farming community that is so important to the success of all the projects which we have, and which I wholly endorse, for the greater access to the countryside by the public.
10.5 p.m.
Lord Carter: My Lords, this discussion of the regulations provides the only opportunity the House has had to debate the set-aside policy and to draw attention to the report on set-aside prepared by Sub-Committee D. It also provides an opportunity to pay a tribute to my noble friend Lord Gallacher who I believe finishes his term as chairman of the subcommittee at the end of this Session. Suffice it to say that I have never served anywhere under a better chairman whose combination of wit, firmness and courtesy has made membership of the committee a positive pleasure.
I do not propose to go through the report or the regulations in detail: but I should like to draw out just a few points from both. Before I do so, I shall repeat a point that I made when I asked a Starred Question on the set-aside policy because the Minister referred to landlord and tenant. I congratulated her on achieving what the Labour Party has been trying to do since it was formed: to end the private landlord in British agriculture. She will have to explain why the landlord, if a let farm returns to hand, should let it for a rent of, say, £35 or £45 an acre on a lifetime secured tenancy when all the landlord has to do is to plant it up with a cover crop and to draw the compensation of £80 an acre.
On the business of the grazed fallow and the grassland option referred to by a number of noble Lords, I too was disappointed that this was not included in the proposals. All of us who supported it and the EC regulations have recognised that if this is to be introduced there will have to be very strict controls on the stocking rate. I should include an absolute prohibition on any increase in the number of breeding animals on the grazed fallow which is in the set-aside scheme. It is obvious that the size of the national flock or herd and the growing animals is a function of the size of the national breeding herd or flock. If the arable farmer in the set-aside scheme could use the grazed fallow only for a very low stocking rate of store cattle or sheep, that would slightly increase the demand for store animals and would help the hill and upland farmer. He could let the grazing to sheep in winter and reduce the overgrazing on the uplands and moors.
It is an interesting statistic that if the national and the stocking rate of sheep and cattle was reduced or was de-intensified by a quarter of an acre per livestock unit nationally this would require an extra 3 million acres of grassland. A number of noble Lords referred to the extensification proposal which will have to be introduced. It will be interesting to see how the Ministry will deal with that when the proposals are introduced. It would also be interesting to know from the Minister when she thinks that those proposals might be introduced on the extensification scheme which has to be produced.
In the debate on set-aside in another place, the Minister, Mr. MacGregor, said that his mind was not closed on the grazed fallow option. It would be helpful if the Minister will repeat that assurance in this House.
I noticed the well-concealed glee with which the Minister pointed out that the French, who first

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suggested the grazed fallow, had not included it in their set-aside scheme. I can only say that it is not only Albion that is perfidious. There is an important point of detail in the regulations which was referred to by my noble friend Lord John-Mackie and also by the noble Lord, Lord Middleton. although the technique that he described was what is called the bastard fallow, which I believe is the term.
I refer here to page 12, paragraph 1. It is clear that the cover crop that has to be planted under the terms of the set-aside scheme has to be sown in the autumn. It is made entirely clear that it is to be planted immediately after harvest. As was pointed out earlier, one of the commonest crops for cover or for green manure is mustard which is a spring sown crop. There is great difficulty in establishing a grass cover in a wet autumn. Almost all the listed crops in this list B are spring-grown crops. I should like to ask which are the autumn-sown cover crops that the Ministry is recommending that farmers should use to meet the conditions of Schedule 2, paragraph 1.
I have referred to list B. There is a curiosity that although it is listed in the schedule to the regulations, list B is not mentioned anywhere else in the regulations. It is a little curious why it should be there. An important point has been raised by the CPRE regarding the list of crops. It points out that there is a loophole in the regulations which will allow events to occur which are damaging to the environment and undermine the agricultural integrity of the scheme.
Under the regulations, farmers can extend their cropped area at the expense of wildlife habitat and landscape features while in receipt of set-aside money. That is because the requirement under Regulation 3(1), that a farmer must undertake not to increase the area of his relevant arable land, does not cover all arable crops. It is covered only by the EC regimes. Thus a farmer could increase his crop area by removing hedges, scrub or marshland, to compensate for land which is set-aside, and increase his area of forage crops under List B whilst receiving set-aside money as long as his relevant arable area has decreased by 20 per cent. or more. The result to the countryside will be a further loss of semi-natural habitat and landscaped features. How does the Ministry intend to ensure that farmers who participate in set-aside do not increase their area of forest production at the expense of semi-natural vegetation and landscaped features?
The Minister will know that there has been a lukewarm welcome to the scheme in this House and outside from farmers because of the level of compensation that has been offered. This is not the time of night to indulge in a seminar on marginal economics. However, I believe that the noble Lord, Lord Stodart of Leaston, was wrong when he referred to the variable costs as the cost of the set-aside. The farmer must consider the loss of the gross margin from the crop. It is the difference between the value of the output and the variable costs and will be in the region of £120 to £200 per acre depending on the yield of the crops.
The conservationists are disappointed because of the absence of the grassland option. I believe that the
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Ministry and the Commission have missed other opportunities. For example, a number of the proposals in the report from Sub-committee D suggest a lower limit of 10 per cent. on arable land. That would encourage the larger arable farmers to join. It also suggests the use of the co-responsibility levy to increase the resources for set-aside and the use of a tendering procedure to set the level of compensation.
There is a widely held belief that all of this is a Machiavellian plot and that the Ministry have produced a set-aside scheme which they do not believe will have much uptake. It is hoping that other member states will produce set-aside schemes which work and which will help to solve the problem of services leaving our farmers better off. However, it would be unfair to ask the Minister to comment on that belief.
Like the farm woodland scheme, we wish this scheme well. It is an experiment and an attempt to reduce surplus production. However, like many other noble Lords who have spoken, I have doubts about its effectiveness.
10.13 p.m.
The Duke of Somerset: My Lords, I apologise to the noble Baroness and to the House for not putting my name to the list of speakers at the correct time. I shall be brief.
A number of doubts have been expressed about the potential lack of take-up of the scheme due to the low figures of payment offered, especially in relation to the typical fixed costs or growth margins of genuine farmers. However, I have in mind one type of person who may be tempted and who appears to be specifically excluded. I refer to the landlord who has a farm come-back in hand. He may well be tempted as am I, to extensity his management along the lines so well expressed by the noble Lord, Lord Mackie of Benshie. The farm could be reorganised to include setting aside 25 per cent. of it to green fallow under the regulations, a further percentage to farm woodlands and the balance to some extensive operation such as hay production or horse grazing outside the scheme. All that would maintain the farmer's previous income and please his environmental instincts and those of others.
However, the set-aside element is precluded by the regulations, which demand one year's previous farming occupancy in order for the land to be eligible. I wonder about that point. Bearing in mind the object, which is the reduction of cereal surpluses, perhaps the Minister could explain the thinking behind it. Otherwise, I should like to extend a cautious welcome to the regulations.
10.15 p.m.
Baroness Trumpington: My Lords, I have listened to your Lordships' speeches with great interest. Perhaps I may try to reply to the various questions which have been asked of me immediately. I should like to agree warmly with the noble Lord, Lord Carter, concerning his remarks on my noble friend Lord Gallacher. I should like to offer my best wishes, in which I am sure the noble Lord, Lord Carter, will

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join, to my noble friend Lord Middleton who I believe takes the chair in his place.
A great many of your Lordships have wondered whether the scheme will be picked up. Nothing like this has been proposed before. We shall have to see what happens. I must tell my noble friend Lord Stodard of Leaston and others that the number of inquiries which we are receiving testify to the keen interest in the scheme, notwithstanding his misgivings.
I believe that rates of payment was one of the major issues which came up this evening. Setting an appropriate level of payment is most difficult in a novel scheme, and we gave it very careful thought. I can understand that to highly profitable farmers the rates may seem low, but we have to strike a balance. If the rates were set at a level attractive to farmers with the highest yields in the country, they would greatly overcompensate the less efficient. As my noble friend Lord Stodart of Leaston would agree, Members of this House and the general public would soon protest if we paid farmers too much. Whatever rate is offered, farmers are likely to set aside their least productive land first and to cut back the area of the crop which produced their lowest margins. We have taken that into account in determining the premium.
Similarly we must recognise that growers taking up set-aside would probably not only save on their variable costs but also on some fixed costs. I believe that if growers do their sums with those factors in mind, many will find set-aside well worth considering, and particularly so if their resources are currently stretched or their profits on some crops are marginal.
I should say to the noble Lord, Lord Walston, that the rate of payment can only be judged once the scheme is in operation. We shall be carefully monitoring take-up. It would be unwise to judge set-aside on take-up in the first year.
My noble friend Lord Radnor suggested that the target was too small. There is no target. We have made it quite clear that we are not aiming at any particular number of hectares to be taken out of production. It will depend on how farmers respond.
The noble Lord, Lord John-Mackie, asked why there should be a £50 cut for non-agricultural use. That is to take account of the fact that nonagricultural use should attract an income. EC rules require that to be reflected in the level of premium.
The noble Lord, Lord Walston, and my noble friend Lord Stodart of Leaston asked for a forecast of the costs and the savings. It is impossible to forecast uptake, as I have already said, particularly in view of the late date of launch. I assure your Lordships that for each hectare set aside, the savings on crops not grown should more than offset the cost of the premium.
The noble Lord, Lord Carter, asked about tendering. We considered that very carefully, but there are many technical problems. He will be interested to know that no member state has opted for it.
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The noble Lord, Lord John-Mackie—I hope noble Lords will forgive me for skipping about, but I have tried to keep subjects together, although perhaps unsuccessfully—suggested that there should be a lower than 20 per cent. requirement for bigger farms. The EC rules require a 20 per cent. reduction in arable area. We do not have discretion on that point.
The noble Lord, Lord John-Mackie, also spoke about tenants and how difficult it was to obtain the landlord's consent between now and the end of September. I agree that that may be the case. As I made clear, the timetable is tight. Inevitably, because of the late date the Council agreed on the set-aside proposal, this year's uptake may be affected. However, tenants can still register, and should, and can apply for next year if they do not have time this year.
The noble Lord, Lord Carter, also spoke about the tenanted sector. In devising the rules for the United Kingdom set-aside scheme, close attention was paid to its implications for the tenanted sector—despite the noble Lord's naughty smiles at me. The possibility of having an upper limit on the proportion of the holding to be set-aside was considered and discussed with the Commission. However, it was felt that such a limit would be inconsistent with the main aim of the scheme to reduce surplus production. Therefore, we decided to include the requirement for an applicant to have farmed the land for at least one year by the date his set-aside obligation is to start in order to provide a disincentive to speculators or landlords wishing to resume let land without farming it. However, we did not favour a three-year rule as it would discriminate against bona fide farmers occupying land which had changed hands by sale, leasing or inheritance.
The noble Lord, Lord John-Mackie, asked whether mole drainage was permitted on fallow land. I must tell him that it is not for a new system, but routine maintenance of existing systems is permitted. The noble Lord also asked about plant cover. We will be issuing guidelines on plant cover, among other things. Grass, mustard, certain game cover crops, and naturally regenerated vegetation are all possibilities. The participant in the scheme is required to establish cover as soon as practicable after 1st October. I agree that it might not be worth planting a mustard crop, for example, at that time but a farmer could leave cereal stubble as a cover over the winter and then put in mustard in the spring.
I now come to the environment, which is a very important subject. The primary purpose of set-aside is to discourage surplus production. We have a further important aim—to protect the environment and, if possible, gain positive environmental benefit. First we must avoid environmental problems. The basic rules for the management of set-aside land address not only keeping it in good condition from an agricultural point of view but also preventing an adverse impact on the environment. A green crop cover must be maintained. That is important to avoid the land becoming an eyesore. It will also help to avoid erosion and minimise nitrate leaching.
Inorganic fertilisers are banned and organic fertilisers can be applied only with specific

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authorisation to prevent soil erosion. I address these remarks to the noble Lord, Lord Northbourne, who was particularly interested in environmental aspects. Pesticides, apart from herbicides, are banned. Herbicides are permitted only on the specific authorisation of the Minister in order to deal with weed problems. Farmers are required to maintain existing hedges, trees and water courses on or next to set-aside land.
My noble friend Lord Radnor will understand that the scheme does not confine itself only to avoiding environmental damage. There are also opportunities for environmental improvements. For example, set-aside may be in the form of strips, providing opportunities for habitat creation or recreation. There is specific provision within the rules for the management of fallow land to encourage farmers who wish to develop wildlife habitats on the land to do so, and we jolly well hope that farmers will come forward with imaginative ideas. More generally, the department will be issuing advisory guidelines for farmers on how to select set-aside land with the greatest potential benefit for the environment and how to manage it to secure that benefit. The Nature Conservancy Council and the Countryside Commission, as well as ADAS, are helping in the preparation of these guidelines.
One noble Lord asked me about extra payments to do with specific management practices on set-aside land which would be of benefit to the landscape or to wild life conservation. My right honourable friend has already announced that within the Government we are considering the feasibility of such a scheme. However, extra payments for less intensive farming are not appropriate under set-aside and there will be a separate scheme for extensification.
Turning to extensification, which was mentioned by several noble Lords including the noble Lord, Lord Northbourne, work on the detailed rules is going on in Brussels. We are reflecting. However, there is a long way to go in sorting out the many practical problems which the scheme raises. Pilot schemes might well be one way forward if they can be accommodated within the EC rules, though they would be more suited to normal farms and not specialised experimental farms. I accept that there could be environmental benefits from extensification. I also maintain that there are environmental benefits from set-aside.
The noble Lord, Lord Mackie of Benshie, and my noble friend Lord Radnor raised various points which also came, I understand, from the noble Lord, Lord Hunt. He was concerned that a farmer participating in set-aside would intensify production on the rest of his holding. We have always accepted that some slippage will occur, by which I mean the percentage of land withdrawn will not be reflected in exact proportionate cuts in production. Inevitably we think that farmers will set aside their poorest land first. We cannot hold back the rate of technological change on the land remaining in production; but the scheme expressly prevents farmers from increasing the area remaining in arable production, so there will be no incentive to convert other land to arable.
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On the point about use of grass as a cover crop, grass is permitted but under the rules of the scheme it cannot be grazed even by farm livestock already on the holding. Our decision not to introduce grazed fallow has been welcomed widely in Parliament and elsewhere. We always made it clear that one of our main objections to grazed fallow was the difficulty of control, which applies to existing livestock producers as well as to new ones. In any case the EC rules do not permit us to restrict the option to existing livestock producers only.
Before I leave that point, perhaps I might just mention my favourite subject, horses. The keeping of horses is permitted on set-aside land. It would count as non-agricultural use and the compensation payment would be the appropriate rate for that use. None of that would alter the treatment of horses for rating purposes. However, I should point out that if horses were to be treated as agriculture for rating purposes we should need to think again as to whether we would permit them on set-aside land.
One other point was raised jointly by the noble Lord, Lord Mackie of Benshie, and his absent noble friend. As far as set-aside on the urban fringes and in the green belt is concerned, my right honourable friend the Secretary of State for the Environment is responsible for policies relating to the control of development in the countryside. Those policies apply with special force in the green belt. Set-aside will not change that. Of course most development is specifically excluded on set-aside land.
My noble friend Lord Middleton said that cover crop was not appropriate for rotational fallow. It is a requirement of the EC scheme that there should be a plant cover. Farmers can choose the right plant cover to suit the soil. If they do not know what is best they must take advice. My noble friend said that set-aside must be on adjacent fields. This requirement is only for a minimum of one hectare, as set-aside can be either in a single field or in an adjacent field; for instance, in a single block. This is an EC requirement, but above one hectare this requirement does not apply.
The noble Lord, Lord Northbourne, talked about encouragement for better access to the countryside. I do not see the case for compulsory access to set-aside land. Nor would we be within the powers in the EC regulations if we provided for this. However, in our advisory guidelines we shall certainly be encouraging farmers to consider possibilities of better access.
Finally, with regard to fallow grazing, the Government will take a great deal of convincing that this would not simply transfer extra quantitites of livestock and problems to their sector. I think that in this stormy sea I shall rest my laurels on what I have said. If any noble Lord wishes me to write to him, I shall gladly do so as I pass into smoother waters.
Lord John-Mackie: My Lords, I think we should compliment the noble Baroness on the way she has replied to all our questions. I admire her immensely for that and we thank her for finishing on such a nice note.
On Question, Motion agreed to.

Harwich Parkeston Quay Bill
The Queen's Consent signified, and Bill reported from the Unopposed Bill Committee with amendments.
British Waterways (No. 2) Bill [H.L.]
Returned from the Commons agreed to with an amendment; the amendment considered and agreed to.

Education Reform Bill
Returned from the Commons with the Lords amendment agreed to.
House adjourned at twenty-eight minutes before eleven o'clock.