Finance (No. 2) Bill

HL Deb 27 July 1988 vol 500 cc267-326

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.

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.

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, 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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.

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 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, 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 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 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 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 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 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 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.

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.

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 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 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 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.

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 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 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 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 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 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 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 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 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.

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 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.

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 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, 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 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 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, Vol. 500 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 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 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.

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.

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.