Finance Bill

HL Deb 25 July 1989 vol 510 cc1358-401

6.7 p.m.

The Paymaster General (The Earl of Caithness)

My Lords, I beg to move that this Bill be now read a second time.

The Finance Bill continues the strategy of tax reform and tax reduction which the Government have pursued throughout their time in office. My right honourable friend the Chancellor of the Exchequer's sixth Budget carries forward our policy of reducing taxes whenever possible, eliminating undesirable tax-induced distortions and promoting tax reliefs which will make the economy work better. The British Economy has been transformed by the Government's policies; our success story has been recognised and imitated all over the world.

We have demonstrated that the way to generate sustainable economic growth is not through Government meddling in the economy, but rather through Government getting out of the way and letting market forces do the job. We have freed the private sector from unnecessary controls and regulations and created a stable environment for firms and people to plan ahead with confidence. We have removed large areas of the economy from public control.

The result has been a supply side revolution. Manufacturing productivity has grown very much faster than in the 1970s. Manufacturing output is running at record levels and continues to rise. Corporate profitability and investment are also growing rapidly.

The strength of the enterprise culture is shown by the record number of new businesses. Last year there was a net increase in new businesses of 1,300 a week—a new record. New businesses and new investment lead to more jobs. Over the last five years we have created far more new jobs than any other European country, and living standards have been transformed.

Of course we have had a few setbacks. But it is a testimony to the improved strength of the British economy—and the resolute commitment of this Government—that recent world economic shocks, such as the oil price collapse and the stock market crash, have not caused a major crisis or loss of confidence.

The reasons for that resilience are clear. People and businesses both here and abroad are confident that the Government remain committed to the path which they have so successfully followed over the past 10 years. That commitment is shown by the tough action that we have taken to get on top of inflation. We recognise that some individuals, particularly those who have taken out large mortages, are facing difficulties as a result of higher interest rates. But, as we have seen in the past, the costs of letting inflation get out of control are far higher.

It is now becoming apparent that our policy is working, and inflation will soon be firmly back on a downward path. Let no one doubt the Government's commitment to deal with inflation.

The increase in the trade deficit last year was primarily a result of the investment boom—consumer goods accounted for only about one quarter of the increase in imports of manufactured goods. It should be noted that the deficit is a private sector phenomenon; the Government's finances are in massive surplus. This means that the current deficit is very different from the deficits of the past. The boom in private investment will stand us in good stead for the future, increasing both capacity and exports over time.

The action which we have taken in tightening monetary policy will also help to reduce the deficit. The recent rapid growth of consumption has been associated with a fall in the private saving ratio. High interest rates will encourage saving at the expense of consumption. There are already signs that this is happening: retail sales growth has slowed right down and the housing market hs cooled off considerably. In the meantime, with the Government continuing to pursue sound monetary and fiscal policies, the deficit can be readily financed.

To appreciate fully the drastic turn-around in the performance of the British economy over the past 10 years it is necessary to view it in a world context. The UK grew more slowly than all the other major European countries all through the 1960s and 1970s. In the 1980s we have grown faster than any of them. In the 1960s and 1970s we were at or near the bottom of the European investment league. In the 1980s we are top. And productivity in the whole economy has grown faster than in any other major industrialised country except Japan since 1980—and in manufacturing we have beaten even the Japanese. Again during the 1960s and 1970s we were languishing near the bottom of those leagues.

The statitics make one thing abundantly clear. The Government have reversed the remorseless decline in the fortunes of the British economy. The British people are now wealthier than they have been before, and British business is investing more in the future than it has ever done before. It is the success of the policies that we have pursued over the past 10 years which has brought that about.

The role of tax reform is to encourage enterprise and improve economic performance in the medium term. The Government have therefore reformed the taxation of saving, in order to strengthen and deepen popular capitalism in Britain, in particular by encouraging wider share ownership. This Bill contains significant measures affecting life assurance, pensions, employee share schemes and unit trusts.

In the post war years, direct share ownership accounted for a declining proportion of private sector wealth. Since 1979 this trend has been reversed, while the number of people owning shares has increased dramatically. Even before the Abbey National flotation, 20 per cent. of the adult population were shareholders. I hope that those new shareholders will go on to acquire more shares. Only when a balanced portfolio of equities becomes the rule rather than the exception will our vision of a property and share-owning democracy be secure.

In my right honourable friend's Budget he announced a number of improvements and simplifications to personal equity plans. These changes, which enable small investors to spread risk more widely and allow direct investment to compete on more even terms with institutional saving have already been implemented. A substantial number of companies are now offering PEPs. Five hundred thousand plans have been taken out since they became available in 1987.

A particularly welcome aspect of wider share ownership is the increasing number of employees who hold a direct stake in the success of their own firm and so receive a share of its profits. The Finance Bill provides further encouragement to all-employee share schemes and introduces a new regime for employee share ownership plans (or ESOPs as they are generally known).

For some companies ESOP trusts offer more flexibility than normal all-employee share schemes. They can borrow to acquire shares rather than rely entirely on funds provided by the company; this enables a substantial number of shares to be held in trust for longer term distribution to employees.

By providing tax incentives for employee share schemes, ESOPs and profit related pay, the Government have improved the working of the labour market and assisted more employees to benefit directly when their companies do well. These measures complement the other steps that we have taken to end restrictive practices, reduce red tape and allow enterprise to flourish. This is the way to improve the supply side of the economy, and so increase both profits and jobs.

The further reform of the national insurance system announced in my right honourable friend's Budget will also improve the working of the economy. From October, contributions will be reduced across the board and two "steps"—which mean that contributions increase suddenly at earnings of £75 and £115—will be abolished. This reform removes an important work disincentive and ensures that, for those paying NICs, it is no longer possible to become worse off by working harder.

My right honourable friend's corporation tax reforms, introduced in 1984, have given the United Kingdom one of the lowest corporation tax rates in the industrialised world. As a result, overseas companies have been encouraged to invest in Britain and, most important of all, the quality of investment by British firms has been greatly improved. Now investment decisions are being made on the basis of economic factors, not tax privileges.

This reform is a crucial part of an environment in which company profitability has recovered to its highest level for some 20 years and businesses are investing at record levels. And, as the latest survey of investment intentions shows, high investment is set to continue. The investment boom that we are currently seeing is not just a recent development. Over the whole of the last seven years investment has grown more than twice as much as consumption. It is a clear sign that British industry has confidence in the future.

Since 1984 small companies have seen their corporation tax rate cut from 42 per cent. to 25 per cent. This year's Finance Bill raises the profits limits for the reduced rate by 50 per cent., thereby benefiting half of all companies not already paying at the reduced rate.

Small businesses play a crucial part in maintaining Britain's economic prosperity and laying the foundations for future growth. By reducing the burden of tax and regulation, the Government are ensuring a climate in which enterprise and initiative can flourish. The changes in this Bill strengthen Britain's claim to have one of the most favourable tax regimes for small companies in Europe and have been widely welcomed by businessmen and managers.

The last year has seen the greatest transformation in private pension provision since the war. Over 3¼ million personal pensions have been taken out. Personal pensions are particularly suited to young mobile employees and are the only form of pension savings available to the self-employed. For too long the late starter has been unable to make sufficient contributions to match the pension offered by final salary schemes. The Bill addresses this problem by raising the contribution limits substantially for those aged over 35.

As well as reducing the administrative burden on employers by simplifying the rules for additional voluntary contributions, the Bill also deregulates pension provision. The end of the link between the Inland Revenue limits on the size of pension eligible for tax relief and the maximum pension payable by employers will lead to a more flexible system. Employees and employers will be free to negotiate whatever pension package they think is appropriate. Inland Revenue rules will only constrain the size of the tax relief.

While the Government are committed to encouraging private pension provision, it is only possible to reduce tax rates if all special reliefs are looked at critically. With a top tax rate of 40 per cent. there can be no justification in allowing unlimited relief when such relief is at the expense of ordinary taxpayers who can expect only modest pensions. Unlimited relief also creates an unwarranted bias in favour of institutional saving.

For that reason the Bill introduces a limit of £60,000 on the earnings eligible for tax relief. This gap was deliberately pitched at a level to minimise disruption to existing schemes. Few people currently have earnings above this level, and most of these will receive generous transitional protection.

This cap will be indexed in line with the RPI. As a result, its real value will not fall over time. Although the numbers affected by the cap will increase, the build-up will be slow. Even in 40 years' time the vast majority of those retiring will be unaffected by the cap. Those who are affected will always have the opportunity of negotiating a non-privileged top-up pension.

As well as deregulating pension provision for those saving for retirement, the Bill also benefits people who have already retired. My right honourable friend recognised the special needs of those aged 80 and over in his 1987 budget by introducing a more generous age allowance. The Bill extends this allowance to those aged between 75 and 79. As a result three-quarters of all those aged 75 and over will not be liable to income tax at all. The Bill also reduces the rate at which the age allowance is withdrawn for those with incomes above the income limit. This will reduce the effective marginal rate in the withdrawal band to below 40 per cent. for the first time.

These measures will be complemented by the abolition of the pensioners' earnings rule, included in the Social Security Act. This will mean that pensioners are free to take up part or full-time pension employment without suffering any reduction in their state pension. Abolition will remove a source of rigidity in the labour market and has been widely welcomed.

As a result of these changes pensioners will pay less of their income in tax. I am pleased to say that pensioners not only now keep mere of their own money; they also now have more money in the first place. Between 1979 and 1986 the average net income of pensioners increased by 23 per cent. in real terms. Thus they have shared fully in the increased prosperity of recent years.

The Bill also introduces tax relief for private medical insurance for those over 60. It would be wrong to give these clauses too much importance. This tax relief is a modest measure expected to cost £40 million in 1990–91. By contrast, government spending on the NHS this year will total some £24,800 million. Yet although modest, this measure is aimed at a genuine problem. Membership of employer health insurance schemes normally ends on retirement. As a result, people find their premiums rise, their employers' contributions cease and their incomes fall at the same time. By going some way to offset this, these proposals will increase the overall provision of health care and so ease demand on the NHS to the benefit of those who continue to use its services.

As well as providing substantial help for pensioners, this Bill also includes a number of measures directed at charities. One of our main concerns has been the effect on charities of the European Court of Justice VAT judgment. We have managed to ensure that, for their basic non-business activities, charities will continue to benefit from zero-rated construction services and fuel and power. Most new communal residences, such as homes for children, the elderly and the disabled, will continue to be zero rated. In addition, vehicles leased to the disabled will become exempt from car tax, thereby reducing the cost of each car by £400.

I am also pleased that we have been able to maintain zero rating for the construction of village halls. This was warmly welcomed by all sides when announced in another place. I am sure that many of your Lordships will be well aware of the contribution that village halls make to local communities and will join me in welcoming this outcome.

Although all these measures are important, by far the best way to help charities is to encourage people to contribute to them. In recent years we have improved relief for charitable covenants, introduced relief for companies making one-off donations and, most recently, introduced relief for payroll giving. The response has been encouraging. Between 1978–79 and 1987–88, covenanted giving to charities has grown by 140 per cent. in real terms. Payroll giving has also grown steadily since its introduction in 1987. There are now over 3,700 schemes in operation and 120,000 donors participating. This Bill gives a further encouragement to this form of charitable giving by doubling the limit for relief. Tax reductions and growing net incomes have increased charitable giving. This shows that we are by no means the selfish and materialistic society that some claim.

Another measure which has been widely applauded is the reduction in duty on unleaded petrol. Together with the increased duty on 2-star and 3-star, this has ensured a rapid increase in the market share of unleaded in recent months. Unleaded petrol now accounts for over 20 per cent. of the market, up from less than 1 per cent. a year earlier. This further reduction in duty reaffirms the Government's commitment to phasing out lead in petrol.

I said earlier that the Government were committed to deregulation. The size of this Bill—over 180 clauses and some 17 schedules—may lead some of your Lordships to doubt the strength of this commitment. However, one of the paradoxes of legislation is that in order to repeal restrictions it is necessary to introduce new legislation. The close company clauses provide a good example of this.

Another reason for the Bill's length is that it includes some 30 pages implementing more of the recommendations of the committee chaired by the noble and learned Lord, Lord Keith of Kinkel. I should like to place on record the Government's appreciation of the work of the noble Lord and his colleagues in striking a balance between the rights of the citizen and the requirement that the revenue departments are able to collect tax that is due. These clauses are the product of an almost unprecedented degree of consultation for tax matters. They will help to ensure that the operation of the tax system is effective and efficient, while at the same time remaining fair and just.

The Bill contains a series of measures to improve the taxation of savings, to widen share ownership and to help small businesses. It will simplify and modernise the administration of the tax system. It underpins the continued strength of our public finances and takes forward the Government's programme of tax reform, thus improving the supply performance of the economy. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(The Earl of Caithness.)

6.26 p.m.

Lord Bruce of Donington

My Lords, on behalf of those who sit on these Benches, and I am sure on behalf of all Members of your Lordships' House, wherever they sit, I should like first to congratulate the noble Earl, Lord Caithness, on his timely promotion. It will be very pleasant in the months that lie ahead to be able to exchange views with him. My personal encounters with the noble Earl have been brief but they have also been very pleasant. We certainly welcome his appointment.

In view of the weather, in reply to the noble Earl's euphoria concerning the state of the economy and the economic miracle that has happened, I do not wish to raise the temperature unduly by replying to him directly. I should prefer, with your Lordships' permission, to use the latest observations from the OECD, an organisation to which his predecessor, the noble Lord, Lord Young, was undoubtedly devoted. Indeed he gave your Lordships selected quotations from time to time in order to prove his point.

In answer to the noble Earl's glowing references to the Government's administration of the economy, I should like to quote the somewhat cooler words that I would use from the OECD: According to the latest forecast by the OECD (the Organisation for Economic Co-operation and Development, comprising the 24 most advanced capitalist countries) Britain is likely to have, in 1989 and 1990, the highest inflation rate of the big seven countries, the biggest current account deficit as a percentage of GDP, and the slowest growth rate". That was reported in the Economist on 15th July. It was unkind enough to add the words—and its address is not in the Walworth Road— To add insult to injury, the OECD secretariat has also quietly demoted Britain into sixth place in all the tables in its half-yearly Economic Outlook, acknowledging at last that Italy's economy is now bigger". I am not one to knock my own country. But it seems to me that there is a rather different view about us in parts of Europe whose prime interest is not the re-election of Mrs. Thatcher to the Prime Ministership whenever the general election comes. Moreover, I could not help noting from impeccable EC sources, and on the other side of the coin to give it a social flavour, that the number in poverty in the United Kingdom by accepted European standards (which the British Government themselves have accepted) has increased by over 3 million during the years 1979 to 1989. That is another view of the buoyancy and success of the British economy.

I propose to confine myself to two questions raised by the noble Earl: first, the overseas trade position and, secondly, the question of inflation. The deficit in our overseas trade last year was approximately £14 billion as compared with 1980 when it was approximately in balance. Those figures are not fiction. The noble Lord, Lord Young, has not yet got at the figures for the purposes of creative accounting. They are the facts.

The forecasts vary. The National Institute of Economic Research forecasts a figure of £17 billion at the end of this year and £15 billion the following year; others put it as high as £17 billion at the end of this year and £14 billion at the end of next year, with £12.6 billion in the year following that. I repeat that there are variations.

The question that one must address oneself to is whether the situation is serious. Does it matter in modern times? I can remember that in the course of the last 15 years a deficit of £300 million would have been regarded as catastrophic. A government were nearly brought down when figures were announced of £300 million in arrears for one year.

I do not want to seem unreasonable but the Government appear to take the attitude that this situation is only to be expected because of the vast capital investment that has been made in the United Kingdom. They always omit 1980 to 1981 and 1982 because there was a catastrophic massacre of a great deal of our capital equipment at that time. They seek to justify it on the grounds that it is capital equipment. I have news for the noble Earl which must defictionalise much of what he said. The department produces the overseas trade statistics which are classified according to the Standard International Trade Classifications. I have those statistics in all divisions: food and animals, beverages and tobaccos, basic materials, fuels, oils, fats and waxes, chemicals, manufactured goods, machinery, equipment, miscellaneous manufactures and commodities.

Those figures differ sharply from the more general terms that the noble Earl's predecessors used with regard to capital goods, intermediate goods and consumer goods. An analysis reveals that only some 14 per cent. of imports into the United Kingdom consist of capital goods. I am quite willing to supply extracts from the overseas trade statistics. As he knows, there are differences between the overseas trade statistics because imports are recorded as cif, and exports as fob. However, that does not affect the proportions, and the difference in the overall figure is approximately £5 billion. According to the visible trade statistics, which are derived from the trade and navigation returns, the deficit on our trade is some £20 billion as against the £15 billion on the balance of payments basis, which is accounted for by this factor.

I am fortified by the fact that that figure has been verified by Lloyds Bank, which is not a subscribing member of the Trades Union Congress or of the Labour Party. It confirms the figure. It says in the latest issue of its review: Whilst the deficit on capital goods has been rising, it was only £1.2 billion, barely 5 per cent. of the deficit in 1988, and imports in this category account for only 14 per cent. of total imports". There is a difference between what the noble Earl has told the House and the facts that I have revealed. Perhaps the Government are becoming cognisant of the true facts as distinct from the public relations aspect of the matter which may have been foisted on them by the noble Lord, Lord Young, in a propaganda euphoria. They may be shocked when they know the extent of this matter.

That point is further fortified by current economic trends which show that in 1979 fixed capital expenditure in manufacturing industry was running at £11.2 billion and slightly under that figure in 1988, when it was £11 billion. There has been no net substantial increase. One must take into account continued depreciation and obsolescence. There has been no net increase in investment in manufacturing industry to take it above the figure at which it was standing in 1979, adjusting it for 1985 prices at a common price level.

The Government may say that it does not matter because it is all covered by our massive overseas investment. It is quite true that overseas investment from Britain is approximately two-and-a-half times investment inwards, and there are of course assets owned by British nationals and corporations overseas. I would be surprised to learn, if I were one of those investors, that in some way the overseas investments were being held as a kind of security, or held under charge as security against a government deficit. Particularly after the abolition of exchange control in 1979, surely the Government would not wish to say to those who invest in the United States, for example, where a good deal of the money has gone—it has also gone to Korea, Germany and a number of other places—"You can send your money abroad for investment, but bear in mind that it is being held as security against any deficit which may be incurred". That has no relevance to it whatsoever.

What matters is that at the moment there is some £43 billion on deposit by non-residents of the UK in UK banks, which is there to get the interest that it can earn. It is held there by the interest that it earns. We call that hot money. It swishes all over the place, according to wherever it can earn the correct return. Are the Government happy to hang on to the £43 billion? That figure increased by £14.6 billion last year, according to Lloyds Bank research—hot money deposited in London.

It is entirely coincidental of course that that figure more or less corresponds with the total trade deficit. But there is a massive liability there which under the terms on which it was deposited can be withdrawn at will. Is that a satisfactory position? Moreover, there is a spin-off from that situation. Not only is this money on deposit, but interest is being paid on it. As it begins to accumulate, as it has done, the interest is paid on an ever-increasing sum.

If one looks at the surplus on invisible earnings, which have hitherto been one of our mainstays, one finds that it has been decreasing. In 1986 the figure was £8.9 billion; in 1987 it was £7.3 billion; at the end of 1988 it was £5.9 billion. That is despite an increase in interest, profits and dividends which one would expect from an increased investment.

But the transfer payments were about £3.6 billion last year, which included about £2 billion which for some obscure reason we pay out of the Consolidated Fund to the EC, the countries with whom we are in the most substantial trade deficit. I wish it to go on record that one is very glad that Mr. Major, the Financial Secretary to the Treasury, is going to the Foreign Office. The ex-Financial Secretary to the Treasury will be an excellent person to look after such matters.

The Earl of Caithness

He was the Chief Secretary.

Lord Bruce of Donington

I am sorry; the Chief Secretary.

If this deficit continues on anything like the lines forecast, in order to hold on to the deposits in London by maintaining interest rates, the interest burden is going to increase progressively and the surplus on invisibles will progressively deteriorate. If this situation continues, in four or five years' time the invisible balance may be extinguished altogether.

Money held on deposit is a very serious matter. What can the Government do in those circumstances? They are in a cleft stick. If they raise interest rates, more money is attracted and at the same time a considerable disadvantage is placed on manufacturing industry in trying to make further investment. As your Lordships know, this year investment is showing signs of sagging. On the other hand, if the Government lower the rate of interest, as they might be pressurised to do by those with very heavy mortgages on their homes, they face the loss of hot money from London. If that happens, the exchange rate goes down and imports become dearer as a consequence, putting, so we are told, an extra strain on inflation. But it makes it easier for exports.

The whole trouble is that the result of the neglect of investment in manufacturing capacity over these years has been an inability to give Britain the manufacturing capacity that it requires even to satisfy its own home market in competition with imports, let alone to increase its exports. So the Government are caught. If they keep the interest rate as it is at 14 per cent., though the figure will disappear out of the index in the course of the next two or three months for the purpose of the annual rate, it will still remain at 14 per cent. for the purposes of manufacturing industry and investment.

On the other hand, if the Government are forced by a sudden lack of confidence to raise interest rates, again imports will be made cheaper but exports will be more difficult to deal with. I trust that the noble Lord will agree with me that this discloses a rather serious situation. I am not going to say that it is catastrophic. Owing to the retention of high interest rates and hot money, for the moment the situation is held. But can anyone say that is a sound foundation for the British economy? I do not believe that any reasonable person can. One agrees that one balances one year against another. There can be surpluses one year and deficits the next. But never before have we had this continuing degeneration of our trade position mainly with the EC.

I now turn to inflation, which is connected with the problem that I have been discussing. At the moment it stands as 8.3 per cent. When the Government took over it was 10.3 per cent. That fact is not generally realised, mainly due to the extravaganza of the noble Earl's predecessor who boasted of having brought the inflation rate down from 20 per cent. to the then figure of about 4 per cent. In point of fact, some of the first acts of this Government on taking office were to raise interest rates very considerably indeed to about 17 per cent. They relaxed exchange controls, they nearly doubled VAT, thus putting up the cost of living, and they put extra charges on fuel, besides other measures. That raised the rate of inflation to 20 per cent. The Government ultimately succeeded in reducing it.

I wish to go back a little because I want to establish the fact as distinct from the myth. In the latter part of the life of the Government headed by Mr. Heath, noble Lords opposite will recall the famous Barber boom which set off inflation in this country to a very considerable degree. As time passed it was accompanied by a quadrupling in the price of oil, which caused the initial inflation in the United Kingdom from 1974 onwards.

In 1974–75 the inflation rate was running at 24 per cent.; in 1975–76 it was 16 per cent.; in 1976–77 it was 15.8 per cent.; in 1977–78 inflation was at 13.2 per cent. and in 1979 it was 10.3 per cent. That is how we come to the comparison with the present figure of 8.3 per cent. which the noble Earl is going to bring down. So after 10 years inflation has declined at a rate of about 2 per cent. and unemployment still remains, on the undoctored figures, about a million above what it was when the Government took over in 1979.

I do not consider that to be impressive bearing in mind that the very high inflation rate figures from 1974 to 1979 were at a time when this country did not have any benefit at all from North Sea Oil. During their period of office the Government have brought inflation down from 10.3 per cent. to 8.3 per cent. and they have had the advantage of £70 billion from the sale of North Sea Oil. All that they could do was to achieve a 2 per cent. decrease in inflation. All that they could do was to achieve an unemployment figure which on the old basis is still 1 million above the figure when they took over.

My arguments must be limited to those small points because properly one is subject to time limitations. I suggest to your Lordships that, far from showing the rosier picture referred to by the noble Earl in the earlier part of his remarks, they show a picture which spells great danger for the United Kingdom. We must consider many ways in which to extricate ourselves from the situation and a whole series of other domestic vicissitudes. I use a mild term for the misery that the Government have caused among the poorer people of our country. There are ways in which the problem must undoubtedly be tackled. But to pretend on the grounds produced that the adverse trade balance is of little consequence shows an alarming lack of economic discernment by those in charge of governmental affairs.

The Prime Minister is a self-styled tigress who sits in a Cabinet composed of hypnotised hamsters who do exactly what she wishes without question; and so one of the greatest acts that any incoming British Government must perform aside from dealing with those problems, in conjunction with our friends in Europe, the Commonwealth and elsewhere is to restore to the British people some measure of justice and freedom, which have progressively been taken from them by one of the most incompetent governments that this country has ever known.

6.52 p.m.

Lord Jenkins of Hillhead

My Lords, I join with the noble Lord, Lord Bruce of Donington, in congratulating the noble Earl, Lord Caithness, on his promotion and in joining our debates on these matters. I also found him a courteous replier for the Department of the Environment. I have no doubt that he will carry over those qualities into his new department. From the point of view of the presentation of the Government's case this afternoon he did not put a foot wrong. I look forward to some more idosyncratic speeches from him.

Your Lordships' House is peculiarly inhibitied from dealing with Finance Bills, even though only about half are money Bills. Nonetheless, as an author almost 40 years ago of a book obscurely titled Mr. Balfour's Poodle, and as a Chancellor of the Exchequer 20 years ago I endorse that abstinence on the part of your Lordships.

That being so, debates on the Finance Bill can best be used as occasions for looking at the overall state of the economy. Because in May we had a 10th anniversary imprinted on our minds, and because the Government are fond of talking in terms of a new epoch having begun in 1979, it is appropriate to look at the past decade as a whole. Mrs. Thatcher has not instituted a new calendar. I suppose that one advantage of her views about the French Revolution is that she may have felt rather inhibitied in doing so.

There is very much a sense that the new world began in May, 1979. Before then there were the benighted ages not only of Wilson and Callaghan but also of Heath, Macmillan and, if truth be told, of Churchill, for no government was more consensual than that of 1951–1955.

It is also the conventional wisdom, achieved partly by the time-honoured device of deserveration, to present the 10 years as a record of unparalleled success. Mr. Lawson may be having a little temporary trouble but it is not more than a tremour in the tale of triumph; a little indigestion brought on by a surfeit of success.

The noble Lord, Lord Young of Graffham, was a particularly notable exponent of that version of history. Last Thursday when he assured me that if I tabled a Question he would be glad to answer it, I suddenly realised how much I shall miss him. Those Panglossian reassurances at least carried with them to our outpost on the frontiers of the Empire, when sometimes we feel that we have only district officers to deal with, a certain sense of association with vice-regal power. Now he is gone. The spell being broken, perhaps we might look at the facts of the past 10 years.

The accepted gospel is that, thanks to severe discipline and the rejection of short-term Keynsian management in the early years of the Government, the country has brought inflation under control; has enjoyed an unprecedently long period of sustained and sustainable growth; has vastly improved its competitive position; has put its industry in good shape; has become the envy of the leading world economies; and, as Mr. Lawson said in his 1988 Budget speech, is now experiencing an economic miracle comparable in significance to that previously experienced by West Germany and still enjoyed by Japan.

Since then there has been an inflationary blurp and a balance of payments deterioration which perhaps must be regarded as a little bigger than a blurp. Nonetheless, there is nothing wrong which cannot be put right by a Britain which has turned its back on the bad old days. Those claims are worth looking at in a little more detail.

The instrument of discipline in the early days of the Government was the control of the money supply—M3, the main aggregate—although there were a certain number of bewildering switches rather like an uncertain motorway programme at certain stages in those early days of concentration on monetary policy. Now when it has more or less been abandoned it is extraordinary to look back and see what has happened to the control of the money supply over 25 years of four successive governments.

The two periods during which money supply has been rather out of control have been the two periods of Conservative government: the average growth of 17.5 per cent. a year under the noble Lord, Lord Barber, and 15 per cent. a year under Sir Geoffrey Howe and Mr. Lawson. The two periods of Labour government in the 1960s and 1970s were, by comparison, quietly controlled as regards money supply.

On this issue the performance of the great sophisticated instrument of government of the Conservative Party has been quite extraordinary. They have behaved like a primitive American religious settlement where an enormous amount of wailing, beating of breasts, weeping and denunciation of the demon of alcohol goes on in public. But in private there are appalling scenes of drunkenness and debauchery affecting not only the congregation but also the preachers. However, under the two Labour governments—at any rate under some beneficent Chancellorships—we treated the money supply much more like those brought up in a wine growing country: we dealt with it as it came without letting it go to our heads one way or the other.

I turn from instruments to results. I deal first with inflation. I am aware, as the noble Lord, Lord Bruce, said, that the performance by the Government was once supposed to be the jewel in their economic crown. That is no longer the case. We all know the central point. They inherited 10 per cent., and now have it down to 8 per cent. with not very good prospects. However, it is the comparative record which is so appalling. It is twice the average for the European Community and the worst in any Western economic summit country other than Italy where it is about the same.

Secondly, we come to the crucial issues of productivity and competitiveness. Overall productivity in the British economy—that is output for workforce employed—has not risen very quickly, and less than in either of the two preceding decades. It has risen significantly faster than in previous decades in the manufacturing sector. However, the manufacturing sector has been shrinking in relation to the rest of the economy. Therefore, we have the paradox of some dynamism in the less dynamic part of the economy accompanied by a rather weak productivity performance in the parts of industry which are becoming more important. At any rate the improvement in productivity, even in manufacturing, seems to have done nothing for the competitiveness of British industry whether at home or abroad. Imports of manufactured goods have gone up to 10 times more than production has increased since 1979. The trend line for manufactured imports has risen over the 10 years about three times as fast as exports, which is a somewhat worse relationship than in the preceding period.

The effects of that were masked by oil until 1986. Once the mask began to slip, they revealed themselves in a horrifying balance of payments deficit. A sort of "Portrait of Dorian Grey" has been enacted. We now have a worse balance of payments deficit in relation to GDP than the much vilified one of the United States, with worse prospects for either improving it or being able to finance it indefinitely.

The fixed investment performance has also not been as strong as the noble Earl suggested this afternoon. The figures have been vitiated so much by classifying sales from the public to private sector as positive fixed investment for the private sector and also by the massive change in the frontier in the two sectors that it is possible to sustain an inconclusive statistical argument almost indefinitely on that point. However, the decade performance for net fixed investment in manufacturing looks substantially down on the not very great performance of the 1970s.

It would be surprising if that were otherwise because the second half of the 1980s has been genuinely notable for having an exceptionally strong and sustained period of growth in personal consumption. Thus, from the end of 1984 to the beginning of 1989, that increased at an annual average rate of 5.9 per cent. which is a vast increase over a four year period.

One's reaction to that is bound to be mixed. In a sense, the ultimate purpose of all economic activity is consumption. To that extent, it is good. At the same time the endemic fault of the British economy for decades has been for all booms to be consumption linked and thus more unstable than those of Germany or Japan whose miracles the Chancellor believes we are emulating. At this time, we have a consumption linked boom with knobs on. Whatever else can be said about the record, it is not one based on any of the traditional values of thrift, providence, Victorian England or the corner shop. As regards the private sector, that is based on "give'em the money".

There has been a decade of output growth at an average of 2 per cent. per year, and consumption growth at an average of 3 per cent. which accounts for a great deal of the present position. That might be fine if there were good prospects ahead. Riding a bicycle with no hands is very good if you are going along a straight road towards the sunny uplands. However, if you are riding straight towards the cliff edge, that is rather less impressive.

There seems to be a major and central dilemma facing any Chancellor or any Prime Minister at present; it is one which makes a lot of recent boasting about the economy sound rather tawdry. Unless we can grow by at least 2.5 per cent. per year, unemployment—and I admit that that has come down a lot during the past two years but is still higher than in the United States, Japan or Germany—will start to rise again. If we grow by anything like that 2.5 per cent. every exponential consideration suggests that the balance of payments deficit will grow from its present massive £18 billion into realms beyond human experience. We could easily be at a deficit of £40 billion or £50 billion, the equivalent of 10 per cent. GNP. So far from being the envied paragon (if we ever were), we should quickly become the only first world country with a third world debt problem.

I do not claim to have a philosopher's stone solution. Increasingly, I distrust panaceas. I believe that the problems of the British economy remain deep seated. I do not believe that this Government have made great impact on those problems; but nor did the preceding Government. They have made one or two problems better and perhaps have made two or three worse. However, mostly they have failed to effect them one way or the other. A little modesty from the Government about their economic performance would not come amiss.

I find offensive and increasingly ludicrous the view that economic virtue was enthroned in May 1979 when the evil serpents of Macmillanite profligacy, Heathian compromise, Wilsonian weakness and Callaghanite cowardice slunk away into dark corners before the flashing blade of a sword of discipline and truth held in an arm clothed in white samite. Manichaeanism is a bad thing in most fields of human endeavour but is particularly so in the essentially mundane process of the management of the economy where we need modest rationalism, particularly when large parts of the record and prospects are as bad as they are at present.

7.8 p.m.

Lord Boyd-Carpenter

My Lords, I also begin by congratulating my noble friend Lord Caithness on the Front Bench on an extremely well deserved promotion. Those of us who have seen him in action on the legislation of this Session know what an adroit and effective parliamentarian he is. It is very good indeed to see that ability and hard work recognised.

I understand that he is now Paymaster General. As one who some years ago held that office, I wonder whether I may remind him of the fact that not then, unfortunately, but some 200 years ago the paymaster generalship was a highly remunerative office. In those days the holder of that office used to draw the pay of the public services, invest it and draw the income from the investment. If, as was often the case, a frigate disappeared at sea, the pay owing to the crew went to the Paymaster General. The only distinction between holders of the office in those days was that the extremely punctilious ones were always regarded as self righteous because they simply invested money in gilt edged while the more speculative ones put it into all sorts of investments in the happy knowledge that if successful they would gain the proceeds, and if unsuccessful they would not have to carry the loss. Alas, that was 200 years ago. However, the Paymaster General still has one agreeable perquisite which my noble friend might not yet have seen. He is ex-officio governor of the Royal Hospital at Chelsea, which is one of the finest and most moving institutions in this country.

While on the subject, I hope I am not out of order in asking my noble friend to convey to his right honourable friend the Chief Secretary my congratulations and particularly the pleasure I feel that the position has been restored and that the right honourable Member for Kingston upon Thames is now Chief Secretary to the Treasury once again.

The debate on the Finance Bill is an annual exercise in this House and, of course, tends to be extremely diverse. The noble Lord, Lord Bruce of Donington, was in characteristic form. Everything was wrong with the Government, and it was the fault of the Government that things had gone wrong. The noble Lord, Lord Jenkins of Hillhead, was a little more sophisticated in his approach; to such an extent indeed that when he came to contrast the records of two Labour Governments and the Conservative Government he somehow did not have time to mention that in 1977, under a Labour Government, the IMF had to be called in. Severe restrictions were imposed on economic activities and personal consumption in this country under threat of pressure from the IMF. The noble Lord did not appear to have time to mention that aspect of the matter.

I was a little surprised that the noble Lord should regard a rise in personal consumption as criticism of the Government. It must be admitted that personal consumption has risen conspicuously over the past 10 years. After all, personal consumption is ultimately the objective of economic activity. That is what it is all in aid of. The fact remains that although criticisms may be made the great majority of people in this country are better off in terms of material goods than they have ever been and have enjoyed steadily improving standards. However much the noble Lord, Lord Jenkins of Hillhead, may dismiss it, when we consider, as we shall in a couple of years' time, the choice of the next Parliament it is likely that many people will remember that fact. I certainly do not regard it as a criticism of the Government that personal consumption has risen. I would regard it as a criticism if it had been reduced, as it was under the orders of the IMF as recently as 1977.

Lord Jay

My Lords, 1966.

Lord Boyd-Carpenter

My Lords, 1966. I am obliged to the noble Lord. Consumption, of course, was reduced in 1977 under the measures taken as a result of the pressure from the IMF.

I am grateful to the noble Lord, Lord Jay, who is to follow me in this debate. He will recall, as probably no one else in the House will, that I followed him as Financial Secretary to the Treasury as long ago as 1951. I inherited from him an extremely well run office and an extremely good private secretary.

One must pick out from this massive Finance Bill the points to which one wishes to refer if one is to keep one's observations within a length that your Lordships' House would tolerate. I regard the Bill, as a whole, as not making dramatic change but retaining a steady continuation of the process of recent years, a steady improvement in the efficiency of our system and improvements in our system of taxation; though before I finish I will have one or two suggestions for further improvements which I hope my noble friends and my right honourable friends may desire later to consider.

I agree with what was said earlier. One should be concerned at the current rate of inflation. I should like to hear more from my noble friend Lord Brabazon of Tara, when he winds up, on how the Government see the development of inflation. Fairly optimistic observations have been made recently which I profoundly hope are right, but I say at once that no one can be satisfied with an inflation rate of 8.3 per cent. It is much too high. It is damaging to so much of the good work that the Government have done. Resolute effort to restrain inflation should be the first priority in the economic policy of the Government.

Control of inflation certainly involves strict control of public expenditure. There is no doubt that excessive public expenditure and unjustifiable increases in the wage levels of those in the public service are contributors to inflation. I hope and believe that the Government regard coping with inflation as being the first priority in their policies. That has been said. I am however inclined to wonder whether the Bill, looked at as a whole, fully reflects it.

The other related aspect is the ease of borrowing. It seems to me that our banks are a little too easy in granting loans to borrowers. I hasten to say that I am not reciting any personal experience—any experience of mine would probably be in the contrary direction. On the whole, however, the banks seem to provide loans somewhat easily. It may be that a tighter policy on allowing loans thro ugh our banking system would contribute to helping to deal with inflation.

The example given by the proposals of the former Secretary of State for Education to supplement student grants by student loans seems psychologically and singularly ill-designed in this context. Surely it is not a good idea to encourage graduates on leaving university, having taken their degrees, to do so in debt and therefore accustom them to the idea of borrowing in order to sustain their standards of life. I hope in that context that the new Secretary of State for Education will consider seriously whether encouraging borrowing on this scale among the younger generation is particularly wise and whether it does not carry with it a considerable risk of spreading the desire to borrow—and to borrow for consumption—which is certainly one of the features in cur inflationary situation today.

I repeat what I said last year. I regard our system of direct taxation as still oppressively high. A rate of 40 per cent. at around £20,000 a year is a considerable levy to impose upon earnings. If one compares it with levels of taxation before the war one sees how far we have moved, even under a Conservative government, to severe levels of personal taxation.

One of the advantages of reducing personal taxation is that it gives greater incentive to work, to enterprise, to take risks, and chances and to push forward projects. Increasing people's take-home pay through reductions in taxation enabling them to have a higher quantum of take-home pay for the same nominal wage is a very good method of securing restraint in wage demands. That applies particularly at the lower levels of income. After all, the ordinary man looks at the package of his take-home pay more seriously and sensibly than he does the nominal wage which has been negotiated for him.

Therefore, I beg of my noble friends, and right honourable friends to go further forward with the process of tax reduction. It was something of a disappointment that this year's Budget, and therefore the Finance Bill which we are discussing, does not make substantial reductions in taxation as at one time had been hoped. I hope that this does not indicate any diminution of the zeal of the Chancellor of the Exchequer to bring down the levels of taxation.

I have one or two rather contrary suggestions to make. I should have thought that there is every justification, if more revenue is needed, for increasing the tax on tobacco. If people insist on smoking and thereby add ultimately to the cost of the National Health Service—this has been statistically demonstrated—there is no reason at all why they should not be made to contribute rather more in taxation which can then go towards the health service, the costs of which they themselves have caused to rise. I hope that the Government will seriously consider substantial increases in tobacco duty. I make that suggestion with some seriousness.

I take a rather heretical view on VAT. It is a highly inflationary tax. In my experience it compares very badly with the old purchase tax which it replaced. When we had purchase tax—I had some responsibility for operating it during two stints at the Treasury—we were able to discriminate as to the direction in which the tax fell. Purchase tax on luxuries such as jewellery, silks and so on was very high. It was sometimes as high as 66 per cent. But it was not applied at all to basic necessities. There was a deliberate use of the differential rate in order to discriminate against luxuries and not to inflate the price of necessities. It was a much better tax.

I know that since we joined Europe we have been landed with VAT. I regard it as a harmful and inflationary tax. I came across one example of it the other day which seems to me to call for a remedy. If one buys a car one has to pay a tax on the car. The VAT imposed applies not only to what one paid for the car but applies also to the tax one involuntarily paid on the car. That is an extremely oppressive application of VAT. It is after all supposed to be value added tax. How it can be said that one is adding to value simply by paying the car tax on one's car, I do not know. It is very oppressive and could be remedied without serious financial consequences.

I want also to raise a point on the inheritance tax. In the nature of things the tax falls on people at a bad moment. It falls on a family when the breadwinner and his widow have died. It is especially harmful that it falls on their principal home. It goes right against the Government's policy of encouraging home ownership. With the high level of house prices, particularly in the south of England, the tax can be very heavy even on quite modest homes. It must discourage people who like to think that they have bought a home which they will be able to pass on to their children.

There is a partial precedent for treating the principal home on a special basis. That applies to capital gains tax. As I understand it, if one sells one's principal home, no capital gains tax is applied. That is a sensible provision. Such an exception might well be applied to everybody's principal home. It would from time to time save the Government from embarrassment. When the owner of a great house dies the Government have to be brought in, because of the high rate of tax, to find financial help to prevent the house being closed or sold up. If a big house, on which therefore the tax would be high, were not subjected to inheritance tax, from a practical point of view a good many people would not have to come to the Government for help.

There seems to be a considerable argument for such an approach which would be enormously gratifying to a large number of people. People will have worked for years, paying their mortgages, which as your Lordships will know are now at very high rates, and will finally acquire their homes and own them. I know that inheritance tax does not apply to his wife, but as soon as the man and his wife die a heavy tax is imposed on the home and the children may often have to sell it. There is room here for a sensible and intelligent tax concession.

I very much welcome the encouragement which the Bill gives to charitable contributions. We have moved with this stimulus quite a way in encouraging private charity—not as far, because we have not the resources, as the United States, but a considerable way. Judicious tax concessions in respect of charitable contributions can do a great deal of good. Private charity has qualities which, with the best will in the world, publicly administered social services do not have. It can be more flexible and more adaptable to individual circumstances in particularly difficult cases than any system of social security, however humanely and intelligently administered it may be. The encouragement therefore of private charitable activities is one of the good features not only of this Finance Bill but of previous ones.

Innumerable points will occur to other noble Lords. This is a massive Bill. My noble friend explained its size. If we were subject to the procedures of another place and we took it in Committee, it would take us a very long time to consider. There is a mass of detail representing the devoted work of a department which I think I can say includes the ablest people in the public services. I refer to the Treasury. I am sure that much of the less conspicuous and less noticeable parts of the Bill will contribute considerably both to the progress of our economy and to individual happiness in many cases.

I do not propose to plunge into a great argument as to whether the outcome of the Government's policies over these years has been as good as I like to think it has been or as bad as the noble Lord, Lord Bruce of Donington, likes to think it has been. The truth is that we have seen unemployment steadily fall and the standard of life of the great majority of our people steadily rise. That is the kind of thing which ordinary people will use as a criterion on which to judge the success or otherwise of the Government's policies.

I shall be interested to hear what my noble friend Lord Brabazon of Tara says in reply. The noble Lord, Lord Bruce, referred to the, on the face of it, massive deficit on the overseas balance of payments. However, I am encouraged by the fact that despite the deficit foreign investors seem to find this a very good country in which to invest. It is noticeable that the Japanese, with the world open to their choice, have on several occasions recently made massive investments, especially in the motor car industry of this country. That is surely an indication that impartial people, with no particular bias in our favour, find the state of the British economy attractive for investment. They find it apparently sound. That is a judgment to which I think we are entitled to give a good deal of respect.

The Bill will shortly become enacted, I am sure that all noble Lords, whatever the doubts some may have expressed, will wish that it contributes to the increasing strength of our economy and to the increasing wealth and happiness of the people of our country.

7.30 p.m.

Lord Jay

My Lords, in warmly congratulating the Minister on his promotion, I can say with complete conviction that we cannot at any rate blame him for either last year's or this year's Budget and Finance Bill. I think the best that can be said about these two measures for this year is that they will not be so damaging as last year's which stepped up spending by those with the larger incomes and so converted the balance of payments deficit for 1988 from the Chancellor of the Exchequer's forecast of £4 billion to an actual deficit of about £14 billion.

One can well understand the disappointment of the Government's supporters at finding that after 10 years we now have an inflation rate which is very nearly equal to that which the Government inherited when they came to power. We also have an unemployment figure that has doubled and the overseas payment deficit is higher than ever previously known. Indeed, as this Government constantly declare that they are fighting inflation as their first priority, it is particularly surprising that the inflation figure has nonetheless been rising for two years and is now very close to where it was when they first came to power.

It seems to me that we have slid into this damaging predicament because, first, almost all instruments for controlling the economy have been thrown away; and, secondly, this Government continue to choose—and this is especially true of the previous Minister, the noble Lord, Lord Young—to ignore, if not actually to conceal, what is really happening in the economy and what, up to last year, was partly hidden by our temporary oil earnings.

As regards economic miracles, one interesting fact is that the real annual growth of out put per year in the UK has grown in the past ten years more slowly than it did in the years between 1969 and 1979 and, indeed, more slowly than the average for the whole period from 1948 until 1979. But, imports in those last years, especially manufactured imports, have been increasing uncontrollably since the 1970s. That is the real phenomenon of the 1980s. As a result, last year's current balance of payments deficit of £ 14 billion is running this year at between £15 billion and £20 billion. It is almost entirely a visible trade deficit with the EC, about half of which is with Germany and most of which is in manufactured goods, especially motor vehicles.

Of course, up to 1970 our visible trade with the EC was roughly balanced. The deficit appeared from 1973 to 1976, when we removed all tariffs from EC imports, and it has been growing ever since. The trade deficit produced by last year's Budget is not a temporary deficit, although that aggravated the situation; it is a long-term deficit which has now been increasing for over 10 years. All that is made worse by the fact that our net invisible earnings are also now declining. There are two reasons for that: first, the very high interest payments on our huge borrowing from overseas; and, secondly, our ever-growing payments into the EC budget.

The most serious aspect of this whole rake's progress is the balance of payments deficit. I say that because, whatever the propaganda says, if you are in a current balance of payments deficit you must, as a nation and as a government, do something about it. You either have to borrow from overseas or you have to run down your reserves.

With a current account deficit of £15 billion or £20 billion, we are, in effect, living beyond our means internationally to the extent of between 4 per cent. and 5 per cent. of our GNP. Against that we have official reserves which I think amount to rather less than £30 billion—the Minister can tell us if that is correct when he replies—but we lost 2 billion of that figure in June alone. At that rate the reserves would hardly last 18 months. Therefore we are bound to borrow and we are in fact now borrowing from overseas on a very large scale. That is why the Chancellor of the Exchequer has to maintain a 14 per cent. interest rate, which is 7 per cent. higher than the corresponding German rate.

Even if we use some of our reserves this year in order to meet the deficit, we shall almost certainly be borrowing something like £10 billion or £12 billion from overseas. This means—and I make this point especially to the noble Lord, Lord Boyd-Carpenter—that every three months this year we shall be borrowing as much as we borrowed from the IMF in the whole year of 1976.I do not think that the noble Lord noticed that. Moreover, only a fraction of that borrowing will mean real capital formation in the UK, as in the case of the Japanese motor firms' intervention, which I very much welcome. I suspect that that will only amount to about 5 per cent. of what the Government call "inward investment". Unhappily, the great bulk of it is being borrowed from thousands of unknown traders and speculators as short-term deposits which they can withdraw within 24 hours or less.

As regards the amounts involved, my noble friend quoted figures estimated by Lloyds Bank. I shall quote a recent article which appeared in The Financial Times which put the situation in this way, Government activities … are under the constant scrutiny of anonymous foreign investors who stand ready to withdraw an estimate of £35 billion of short term hot money at a moment's notice". It now needs 14 per cent. interest rates to keep this money here. No doubt that makes things look better in the short term; but it makes the longer term prospect worse. First—and this is probably the most serious point of all—by holding the exchange rate at too high a level, we are worsening the very trade defect which is the basic cause of the whole trouble. Secondly, by borrowing £10 billion, or something of that order, every year at a rate of 14 per cent. or 15 per cent. we are increasing the outward payment of interest and dividends from this country on the wrong side of the account by something like £200 million every year. That is one reason, as I said, why the invisible account is deteriorating.

Although one feels inclined to say, "I wouldn't have started from here", as regards what is done next, the fact of the matter is that "here" is where we now stand. For reasons of dogma the Government have now thrown away exchange control; control of imports; direct control of the volume of bank deposits; and, finally, any incomes policy. Of course the latter dogma is now costing us dear as pay inflation gets going again. As long as certain people in the City pay themselves a salary of £250,000 or £500,000 a year, some other people will put in claims for another £5, £10 or even £20 a week. Moreover, some of them will go on strike in support of those claims and will receive a great deal of support from the public.

The Government then say that they are trying to restrain inflation by holding up the sterling exchange rate; but that, as I have said, is to make the longer-term outlook much worse. The truth is that the present sterling exchange rate is much too high. The right exchange rate is a rate which enables one fully to employ one's resources without a balance of payments deficit. It was indeed the fall in the exchange rate in 1986 that reversed the employment movement in this country and started the up-swing. That shows the importance of the exchange rate.

As I see it, the only real choice left now to us before 1992—which incidentally, is likely to make the trade deficit worse—is whether the pound comes down with a crash or is managed down gradually, but substantially.

Despite his unfortunate balance of payments forecast, no one would wish to belittle the present Chancellor's reputation as a bluffer and a gambler. However, that is not enough in the present situation, after all the mistakes of the past 10 years and with a record of a growing payments deficit.

We need now a policy to ensure that the exchange rate falls reasonably smoothly to a level where the trade and payment deficit can be got under control again. Of course, that will tend to raise the internal price level, but I am afraid that that is the price which a country pays to stop living beyond its means.

It is crucial therefore to maintain the maximum practical United Kingdom influence over the sterling exchange rate. It is all that we have left with which to control the economy. In my view, to fix that rate now, whether in the EMS or on any other pretext, would be one of the most gratuitous acts of unilateral disarmament since the Trojans invited the wooden horse within their walls.

7.41 p.m.

Lord Ezra

My Lords, before I make my brief contribution to this important debate, I should like to state that a long time ago I made a firm commitment for eight o'clock tonight, when I hope to receive some guests, and so I shall absent myself for a few minutes, if I may, to receive them and then return with all speed to the House.

We have had some important contributions from persons, highly skilled and occupying important positions directing at various times the country's economy. They have covered a great deal of ground in a short time. I should like to address myself to a simple question: are we returning to a stop-go situation? I should like to examine that question with regard to what has happened over the past 10 years; to consider what the prospects are; to try to discern the underlying trends that have brought about our present situation; and then to consider whether the remedies now being tried are adequate or whether there should be some other remedies.

From the evidence of the past 10 years, it looks very much as if we are back in a stop-go situation. When the Government came to power, that coincided of course with a world recession and so they could not be blamed for being in a difficult situation at the start. During that period, they deliberately adopted certain deflationary policies which had the effect, among other things, of substantially diminishing our manufacturing capacity, about which I shall say more in a moment.

Recovery began to set in around about the end of 1981. It went right through until about 1986–87, when there were discernible signs of overheating which increased in intensity until we found ourselves faced in 1988–89 with a situation, familiar in the past, of a substantial balance of payments deficit and increasing inflation, of course stimulated by the high interest rates which then had to be applied. The question is whether we are going to continue in that type of situation. I have no doubt that, as a result of measures being taken, there will be a degree of recovery in due course, after a period of painful adjustment, and then perhaps after a certain period we shall get back into the same overheated situation. That is not a pleasant prospect for this country.

To find out whether that position is really likely to recur in the years ahead, I thought that it might be desirable to try to discern underlying trends. What have been the basic trends which have led to the present situation? I may not be right in my analysis, but I have identified two trends which I believe to be largely responsible for where we are now and for the possibility of a recurrence of stop-go.

One is the behaviour of what is known as broad money. My noble friend Lord Jenkins of Hillhead referred to it and so did other noble Lords. The surprising fact is that we have a Government who prided themselves on their monetary policy when they came to power. The control of the money supply was meant to be the cornerstone upon which the whole of the country's economy was to be based. But round about 1984 they decided to give up that cornerstone, if one does that with a cornerstone, and left the broad money supply to look after itself.

I have the latest figure in the Economist, which compares us with other countries. The growth in broad money in Britain in the year ended May was 21.8 per cent. That was in one year. The only other country of the 13 OECD countries in the table to have exceeded that figure was Australia, with a growth rate in broad money of over 24 per cent. In every other country it was substantially lower. Australia exhibits many of the symptoms that we have in this country. It has a gathering balance of payments deficit and increasing inflation. It is having to apply a high interest rate.

We have reached a situation where we have what appears to be a virtually uncontrolled growth in money supply. The noble Lord, Lord Boyd-Carpenter, referred to that point, and it has mainly been revealed by the way in which bank lending has increased over that period. Bank lending in 1984 was just below £15 billion and in 1988 it was over £55 billion. It is growing at a rate of knots. There is a vast amount of currency and credit sloshing around in an uncontrolled way. That is on the one hand. On the other hand, because of the diminution in our manufacturing capacity, that money has had to be increasingly employed in bringing in goods from abroad.

The noble Lord, Lord Bruce of Donington, referred to the fact that the vast amount of goods coming from abroad are consumer goods, with relatively small amounts—less than we have been led to expect—being directed towards capital requirements. Whatever the case may be, we seem to be faced with a growing supply of money plus credit on the one hand and a reduced productive capacity to meet that great spending capability. That seems to be the situation.

If that is a fair analysis of the underlying trends and the situation is as I suggest, there arises the question of how to deal with it. Let us consider for a moment how the Government have set about dealing with it. They have done so by using a single instrument, as we know, and that is interest rates. They seem to regard interest rates as a sort of mediaeval nostrum, a sort of cure-all, for every conceivable economic disease.

The trouble is, however, that it exacerbates some negative aspects of the economy. The first effect of rising interest rates is clearly to increase inflation. As it works its way through to inflation, the effect of high rates is to worsen the balance of payments because it tends to make goods less competitive. Over a period, no doubt by diminishing the rate of industrial growth—it may be that we end up with a hard landing—those things correct themselves, but at a considerable social cost. The question that must be asked—it was posed by the noble Lord, Lord Jay—is whether there should not be a variety of measures to deal with the situation.

First, perhaps I may take the currency. In addition to the problem of the vastly growing amount of broad money and diminished basic industrial capability, we have a highly exposed currency. It is subject to the massive speculative pressures of the world which have now been unleashed. I should have thought that the time had certainly come when we should be trying to reduce the exposure of our currency by finally negotiating our way into the exchange rate mechanism. So long as we have a volatile currency to deal with, an excessive credit and spending power and a diminished industrial capacity, we are bound to remain in very serious difficulties. So I should "unbundle—if I may use that current fashionable word—the currency by putting it into the ERM. Then we shall keep it away from the rest of the problems which we have to deal with.

Coming to the broad money question, I believe that the Government ought to think again about liquidity ratios, over-funding and all the other things that used to be done in the past to try to control the level of broad money. In addition to that, there should be much more stimulus towards private saving. The level of private saving over recent years has fallen from about 12 per cent. to a mere 4 per cent. or less. So I believe that the question of broad money needs to be tackled in itself.

Finally, as regards our industrial capacity, of course there has been a substantial improvement in manufacturing productivity, as my noble friend Lord Jenkins of Hillhead rightly said, but on a much diminished manufacturing base. That was the whole point which we made in the overseas trade report: we were very concerned that the manufacturing base would be unable to meet the needs of the country, particularly when the oil revenues diminished. That is precisely what came about.

So I should like to conclude by saying that, in order to find a long-term solution to our problem and avoid getting into the stop-go situation, we must look again at ways in which we can enlarge our manufacturing base. There are a variety of measures which can be taken for that purpose and we have had many debates on the subject. It seems to me that it is of prime importance. So we need to look again at the underlying causes of our present difficulties, to see whether the policies that are being adopted at the moment are sufficient to deal with them. I fear that they are not. A variety of measures are needed and I have tried to indicate some of them.

7.53 p.m.

Lord Houghton of Sowerby

My Lords, earlier in the debate the Chamber looked somewhat like an old boys' network. I counted five, if not six, former Treasury Ministers in their places in the House. Surely that is the most elitist gathering that I have yet seen on the Finance Bill in your Lordships' House. There has been a tendency—or at least there was when I first came here 15 years ago—to regard the Finance Bill as an inconsequential event. On one occasion I was shocked when it passed through all its stages without debate. Another noble Lord, Lord Harmar-Nicholls, and I decided that we could not let that kind of thing happen again.

We have steadily tried to build up the claim of your Lordships' House to have a point of view about some matters upon which our powers may be restricted. It so happens that the noble Lord, Lord Bruce-Gardyne, had to leave without fulfilling his intention of participating in the debate. I am sure that we are all sorry about that. I was to follow him and I was going to say how pleasurable it was to see him back in his place, taking part in our debates. We wish him well.

This happens to be very close to the 40th anniversary of my maiden speech on a Finance Bill. That was when I first entered the House of Commons in 1949. We were debating the Finance Bill in this Chamber. I made my maiden speech from what was then the Government Benches, Mr. Speaker's Chair being under the clock. I am pointing at the place where I made my first speech on the Finance Bill. The Chancellor of the Exchequer, Sir Stafford Cripps, completely ignored it when he came to reply, which I thought was probably what I deserved from such a source. I cannot say that I enjoyed my first venture into a speech in the House of Commons.

I have had 40 years of Finance Bills and 25 Chancellors in my time. A little before I came into the House I began to know Chancellors. My score covers a little more than my parliamentary life. But from Philip Snowden to Nigel Lawson is a pretty good score of experience and education in ministerial styles and affairs.

What impression do I have about the trends in taxation over that period? I come to this now because I think that this Finance Bill could be the next to last in this Parliament. Certainly we can expect to have another Finance Bill in 1990 but after that one cannot be so certain. So it seems that we have probably come to the end of the present era of changes in tax structure and taxation reforms by the present Chancellor. It is no good being Chancellor of the Exchequer unless one is there for at least five and hopefully seven or eight years in order to achieve a coherent plan of taxation policy. I think some Chancellors have failed to do all they could have done if they had stayed longer. However, three or four Chancellors during the last 40 years have left their mark because they were able to stay to see their vision about taxation changes more fully realised.

My impression is of the tightening grip of the tax gatherer upon the taxpayer over the years, added to very substantially of late by the Keith Committee on taxation enforcement which came out over a period of three years—1983 to 1985.

The first question which I wish to put to the noble Earl, of whom we are all very fond, is whether Clauses 168 and 170 represent the end of the Keith disciplines to be introduced into our legislation. The Customs and Excise taxes were dealt with several years ago. The direct taxation recommendations have been sorted out and implemented over the past two or three Finance Bills. There is a further instalment in the Finance Bill today.

The Keith Committee recommended a much more severe code of control over and treatment of the taxpayer. We stopped moralising about taxation and even about tax avoidance or evasion. The report of the Select Committee of the House of Commons of 1905 was a sanctimonious report. It discussed moral delinquency and advanced the economic theory—this is nonsense—that those who paid less than they should were transferring some of their burden to their neighbours. I think we would have difficulty today in seeing that direct relationship between tax avoidance and the mass of revenue and the millions of taxpayers who contribute to our national exchequer. Nevertheless, tax avoidance can be regarded as a failure to comply with the law and a failure to discharge one's civic duty properly.

However, I think we have now turned all of this into a system. We have been looking for efficiency and tighter control. So the language in the Keith Report does not concern the morals of the matter but rather the identification of the taxpayer. That is the first item. The control of the known taxpayer is the second item. Those headlines carry a message. That is the tenor of the Keith recommendations.

The Inland Revenue decided straight away that several of the recommendations were impossible to apply. I have referred to one of them before. It was put forward by the 1905 House of Commons Select Committee. It suggested that all settlements reached by the Inland Revenue with delinquent taxpayers, short of prosecution, should be publicised. It was suggested that names should be publicised. I believe I suggested on one occasion that I thought a much better way of dealing with that kind of delinquency was to call back the stocks and put people in them. Anyway, the Inland Revenue was very sceptical about some of the remedies which even the Keith Committee thought were possible.

But now we find that the disciplines on the taxpayer as regards rendering returns, obeying requests for information and being willing to offer rights of entry to officers of the Inland Revenue bring the draconian powers of the Inland Revenue board down into the hands of its authorised officials. That was unheard of at one stage. Powers given to the Inland Revenue board were thought to be tolerable only if they were exercised by the direct authority of the board. However, now an authorised officer will have the authority to carry out such powers.

I think the other thing we shall find is that, instead of a rigid code of penalties, more flexible penalties will be introduced which will be at the discretion of authorised officers. I think that this new regime of control of the known taxpayer should be watched a little carefully. The reports of the Inland Revenue board should be examined to ascertain how far the penalties have been used and in what way, because we are bringing the authorised official well to the door of the citizen in more directions than taxation. I think that must be watched as regards civic freedom.

The other thing I think has been noticeable over the years is the search which the Inland Revenue has made for additional sources of income which it can convert into additional deductions of tax at source. Now as never before there is a range of tax deductions from income, interest, dividends, wages and salaries. Never before has the Inland Revenue had such a grip over the collection of tax at source. That relieves the taxpayer to a very large extent of any noticeable participation in his own assessment as tax is removed at source.

In my own case I never hear from the Inland Revenue until after the end of the year of assessment. Then I want to know how much I am owed for overdeduction. It is easy with the coding system we have now to pitch the tax deduction where the differential rate can be used, high enough to cover possible liability and even to cover in some cases contingent liability. One finds not too soon after the end of the year whether one owes something or whether one is owed something by the Inland Revenue. On occasion surprisingly, although one owes the Inland Revenue a small amount, one's notice is inscribed to say that this amount will not be collected. That is an indulgence which in my experience is worth framing and showing to one's grandchildren. It is new in the experience of the Inland Revenue for it to declare that an amount is too small to be bothered with. That shows a consideration for the taxpayer on which it is well worth offering a word of approval. Those two matters, the tighter grip and the wider use of the system of deduction of tax at source together give the Inland Revenue something much more valuable in the hands of tax administration than it has ever had before.

The other thing I wish to mention is a trend which I think has its dangers. It is the system of selective concessions from the taxable code. They are increasing, they are more widespread than before and they are all hostages to fortune. Once one gives a concession it is extremely difficult ever to withdraw it. At the present time one sees in two major directions how small beginnings have led to a monstrous vested interest—one is the mortgage market and the other the insurance market. Unless we are very careful, we shall find a new lobby looming up on the horizon, which is the charity lobby. Yet the Government are rather blind about voluntary service. "Charity" is now a term which loosens purse strings and brings out cheque books in a generous impulse which is quite unique in our affairs.

"Charity" used to be a hated word, but it is not now. Look at the patronage in the hands of our broadcasting authorities in the field of charitable work. There is the BBC Children in Need appeal, the commercial Telethon and the Red Nose appeal. Those three television programmes among them notch up £30 to £40 million a year. That is all in the hands of the biggest patronage to charity that this country has ever known. That process needs to be watched. I hope that when we come to consider charity law we shall address the many matters that need our attention. We should ensure that there is proper control and accountability of all forms of appeal to the public. Flag days have been allowed to get well out of hand. They were such a daily or weekly affair that they became a nuisance to the citizen. He was stopped in the street all the time by someone rattling a box. Flag days had to be brought under local authority control and are still.

We tend to develop an industry of our institutions. Taxation is an industry. Why is it that in all the publications that reach the hands of Inland Revenue officials there are lists of advertisements for experienced tax officers and inspectors of taxes? They are wanted by consultants, accountants and professionals in the field of finance and particularly of taxation. What is it that is now being sought in these raids on the staff of the Inland Revenue? It is quite serious. People who have been trained by the Inland Revenue are leaving, induced to go by those who can pay them higher salaries because they work for fees. They work on the side of the taxpayer, and I do not criticise them for that.

It looks as though the limited expertise in tax affairs—recruited and trained by the Inland Revenue—has now to be spread over the interests of the taxpayer, who wants his own consultant to look after his interests. I can only suggest that the time may be coming when, in addition to a legal service, we shall need a taxation advisory service. Is that not a reflection upon the complications of the tax system? Can the taxpayer not expect to get a square deal from the Inland Revenue unless he pays someone? That is surely part of the argument for simplified taxation, difficult though that is.

Those are the impressions that I have gained of taxation policy over the long term. I agree with the noble Lord, Lord Boyd-Carpenter, that the level of taxation is still too high. When one looks at an item of income—salary, wages, interest, investment income—and sees 40 per cent. taken off, that looks a pretty big figure. I believe that many people in employment regard what is taken off as what "they" take away. I do not believe that they examine as closely as they should what their true liability to tax may be.

Well, there we are. I sit down after 40 years and heaven only knows whether I shall take part in any more of these debates. It has certainly been an education to work in the realm of probably the most efficient taxation system in the world. I think that it is that so far as concerns direct taxation. One sees all the problems.

I say in conclusion that the introduction of codes of more severe penalties for failure or neglect ought to excite the administrators of our taxation system to seek the good will and understanding of the taxpayer rather more than they do. I hear the staff of the Inland Revenue say frequently, "We should like to give the public a service", but they should tell the public what service they would like to give them. It is a service, after all. Taxation is one of the obligations of citizenship. The British people are not averse to paying what they feel is right and just.

However, there are too many injustices built into the system now to meet with universal approval. They will take a lot of getting rid of. We may eventually be driven to the practice of President Reagan of getting rid of a great many of the selective concessions, reducing the level of taxation generally and starting from a lower base altogether. I hope that I live to see that.

8.14 p.m.

Lord Jenkin of Roding

My Lords, I rise immediately to express the hope that under no circumstances is this the last occasion on which we shall hear the noble Lord, Lord Houghton of Sowerby, address the House on the subject of taxation and Finance Bills. Those of us who have listened to him on previous occasions and in other places know that he brings to the subject an immense wealth of experience, not least from his former activities at the Inland Revenue Staff Federation which propelled him into public life. We hope that we shall hear him again.

I also begin with a profound apology to my noble friends on the Front Bench that I was not here when the debate opened. I can only plead in mitigation, not as an excuse, that I was attending a charitable function downstairs, and I failed to see that the debate had been announced on the television screens.

I shall resist the temptation—because the hour is getting late and there are one or two specific things that I wish to say—of following the remarks of the noble Lord, Lord Bruce of Donington, and others who have spoken and challenged the Government's economic policy. I shall say merely that for the majority of those who have the conduct of our industrial affairs—I do not say that the view is universal—and those who manage very large sums of policyholders' life or pension fund money, the biggest shadow at;.he moment is not any of those matters which noble Lords opposite have mentioned. It is the potential prospect that there might be a change of government after the next election. That is what they really fear. Having listened to some of the recipes advocated by noble Lords opposite of returning to the detailed and specific controls over the economy (which, happily, we have abandoned) I can well understand those anxieties.

I hope that I am not breaking with the tradition of these debates if I talk about the Finance Bill, because this is the Second Reading. I should like to direct my attention to those parts of the Bill which deal with occupational pensions and one or two related matters. I should immediately declare my interest as chairman of a major mutual life insurance company.

For nearly 100 years—it may be more than 100 years—tax relief has been given for pension arrangements by the Income Tax Acts. Employers have been able to claim their contributions to a pension scheme as a deductible expense of the business. Employees have had relief from tax in respect of their contributions. Their employers' contributions have not been taxed as the income of the employee, and the income of the fund is itself exempt from tax.

The noble Lord, Lord Houghton of Sowerby, referred to the vested interest of insurance. However, that system is founded upon a very sound principle indeed. It is a principle which has been enshrined in the words: exempt the build-up, tax the benefit. It means that one spreads the income of a working life over a person's entire life and in effect one spreads the tax as well. In a progressive tax system under which the higher one's income the higher the rated tax one pays, it is straightforward equity that if one's income fluctuates between a higher amount when one works and a lower amount when one retires the tax system should reflect that. The tax reliefs for pension schemes over the years have done just that.

Of course the schemes require Inland Revenue approval and the rules have changed over the years. However, the principles have remained the same. The tax reliefs have been proportional to the income. Maximum contributions have been related to the maximum level of pension bought in relation to final income or income over the past three years. It has all been proportional with no limit placed on the size of income that qualifies.

For the first time this Bill has introduced an upper limit. If noble Lords have had the time to study the schedules and follow the arguments, they will know that there is now an upper limit for taxable income that qualifies for tax relief of £60,000. An approved pension scheme and payment contributions under it will not attract tax relief for those parts of income over £60,000 a year.

If one assumes that the maximum pension is two-thirds of that salary level, that is a maximum pension that can be paid for of £40,000 a year. To many people that is still an astronomical sum, but for those who are concerned with the management of industry—manufacturing industry, service industry and the finance industry—a salary of £60,000 a year is by no means unusual today. If our top managers, leading scientists and engineers and professional men such as lawyers, actuaries and accountants earn more than £60,000 a year, any contribution relating their pension to their total income will not qualify for tax relief above the new limit.

It has perhaps not been fully recognised that that is a major breach of what has been a longstanding practice of all governments and that it represents a new departure. But the Government have perfectly reasonably said that they will not make that retrospective. It will apply only to new pension schemes or to new entrants to existing pension schemes or, in the case of the self-employed, to people who take out new policies after the date of the Budget.

However, as has been pointed out frequently by those concerned with management, that immediately puts a substantial premium on to the cost of persuading people at that level of management or expertise to change their jobs. If they can stay in an existing pension scheme and still obtain relief without the upper limit of £60,000 applying, they will obviously have to be paid very much more either in terms of a higher salary or in terms of additional non-tax relieved pension contribution in order to persuade them to change jobs. The costs of doing that are likely to be substantial.

But the matter goes further than that. The Government have said that £60,000 is not a fixed figure, and that it is to be indexed. But it is to be indexed in relation to prices and not to earnings, so that progressively the effect is likely to be that more and more people will be brought within the ambit of that new pension ceiling. It has been calculated that if, over the next 30 years, earnings rise on average 2 per cent. faster than prices—that is not an unrealistic assumption—the equivalent at today's prices would be an income of a little under £30,000 a year. That would be getting on for between 35 and 40 per cent. of the total membership of pension schemes. They will be subject to that ceiling.

For the individual, that will mean that his tax-exempt provision for his occupational pension will progressively leave him with a smaller and smaller pension relative to his income. The idea that one will be able to retire on two-thirds of one's final salary is something that will go. Alternatively, he will have to top up the approved pension provision without the tax relief either for his employer or himself or with the benefit of the build-up of the interest being tax relieved. That is probably likely to cost about twice as much. For any given amount of pension, it will cost him twice as much to build it up without the tax relief.

For the economy as a whole, it is bound to lead to a growing block on job mobility. That means that for the slice above the monetary limit—whatever it might be—instead of exempting the build-up and taxing the pension, there will be a system under which one taxes the build-up and the pension. It seems to me to be a form of double taxation which I am surprised to find us debating at this time. Where stands the century-old principle "exempt the build-up, tax the benefit"?

So far I have spoken mainly about pension schemes run by employers for employees: but the same applies to the personal pensions which the Government have been keen to encourage. I entirely applaud that. The relief is now given on the appropriate percentage of the income up to £60,000 depending on age. I very much welcome that and should perhaps declare an interest. During the passage of the Bill in another place, the Government increased the percentage for those over 60 to a higher figure than had originally been provided. Again, the limit applies only to new personal pension plans. If one already has an existing personal pension plan—a pre-Budget pension plan—one can continue on the old rules and the old percentages with no upper limit.

However, I must tell my noble friends that, for the insurance industry which administers many millions of those pension schemes, that has given rise to the most haphazard results. If one has a pre-Budget pension plan with a fixed annual premium, one cannot thereafter increase that premium without it coming under the new rules. If one has a pre-Budget plan that allowed a variable premium—some companies have offered that for some time—one can cheerfully vary the premium and increase it as much as one likes in line with one's income and one is not subject to the new rules. If, on the other hand, one has taken out a series of single premium policies—there was never any reason to choose the one rather than the other—each new single premium policy is a new policy and one is caught by the new rules. There seems to be no logic in that save that, if there is to be a cut off, it works in that way.

That might have been avoided. Pensions legislation is essentially long-term legislation. It is perhaps the most important form of investment that the individual makes after buying his house. People take out pension schemes intending to go on paying for 30 or even 40 years in the hope that they will be able to draw benefits for a further 20 or 30 years after that. It is indeed long-term business. It is not right that settled expectations should be defeated in that way without giving long notice and engaging in extensive consultation. That did not happen in this case. It was announced in the Budget. I shall say a word about the form that that consultation might take in a moment.

Before I do so, perhaps I could mention a third but related problem of which I have given my noble friend on the Front Bench notice. Government legislation has encouraged the switch to personal pensions. I certainly welcome that. It has been an extremely successful and effective policy. At the time of the relevant social security Bill, it was estimated that perhaps 1 million people might take advantage of the switch to personal pensions by opting out of employers' pension schemes. It now looks as if the figure is about 3 million people —three times as many as were originally envisaged. That is a staggering success for the Government's policy.

However, the consequence has been that, for the companies that are having to administer it, there has been the most incredible explosion of work that has had to be crammed into a very short period. That sheer success has produced a problem. I hope that, in raising it tonight, I might be given some words of comfort by my noble friend Lord Brabazon of Tara when he comes to reply.

In order to obtain the retrospective relief, the individual had to submit his application by 5th April. He then became eligible for retrospective relief over the previous two years. There is no argument about that. However, to be effective, the insurance companies then had to process the papers and get them to the social security department by 17th May. It is perfectly fair to say that they all had adequate notice that that date would be 17th May, but neither they nor the department could possibly have guessed what a huge flood of applications would arrive during the past two or three weeks before 5th April, every one of which then required to be processed and sent to the department by 17th May.

It is a fact that many of the insurance companies have been unable to deal with that enormous load. But the consequences do not fall on the insurance company. It may be highly embarrassing, but the real problem is for the individual insured, who, having sent in his form perfectly correctly by the due date, finds that it has been rejected by the department because it has arrived in Newcastle or wherever after 17th May. The date of 17th May is in regulations, and the line so far taken by the department has been that there is to be absolutely no concession, even if the form has teen held up in the post, or in some cases even where it has reached the department in perfectly good time but for no good reason has been sent back (and that has happened in a number of places).

It has been estimated that perhaps there might be between 3,000 and 5,000 people who put in perfectly valid applications for a personal pension plan and whose applications have been turned down by the department for no better reason than that they arrived a day or two later than the deadline of 17th May.

This matter has of course been put to the department but it seems to feel that it is bound by the regulations. I cannot believe that a government who have anxiously pressed the case for giving individuals more control over their pension arrangements and more individual interest in pension arrangements, and whose policy has met with the remarkable success of having three times the number estimated, cannot find some way in which this problem might be resolved. The people who will be disappointed that they have not will be the 3,000 to 5,000 people who had intended and expected that they would benefit from the new arrangements and who through no fault of their own will not be able to do so.

Perhaps I may end on one more general point which comes back to what I said about the pension arrangements in the Finance Bill. It is long-term legislation. It should have been the subject of considerable consultation. This is in marked contrast, I must say, to the provisions of the Bill in Clauses 82 to 90 which deal with the taxation of life insurance companies. In that case there was an admirable document put out by the Inland Revenue, there was a long period of consultation and it is perfectly clear that Treasury Ministers listened very carefully to what was said. There were a number of options available, and in the end the Government chose one of the options and have legislated.

That seems to me to have been entirely in line with the excellent practice that has been built up over a number of years of not trying to spring major tax changes—not changes in rates or anything of that kind but major structural changes—on to an unsuspecting public without notice; but instead to spell out the details in consultation papers, take the advice of those who are likely to be affected and then, in the light of that advice, to legislate.

It was done in the case of the reform of the corporation tax in 1970, with the introduction of VAT in 1971 and with the introduction of tax credits, which eventually became child benefit, and with a number of other measures. Why could it not have been done with this very significant change, as I say, in a century of well established principle and practice in relation to occupational pensions?

The way that it has been done is causing untold difficulty. I have not had time, and it would not be right to weary the House with further details; but I have to say that there is a good deal of disquiet in the pensions and insurance industry because of the way in which this has been done. There will be opportunities to amend the legislation either by means of regulations or in future Finance Bills. I hope that Treasury Ministers will listen very carefully to those who have to administer this very important part of our industrial, commercial and social life which is the occupational pension field.

8.34 p.m.

Baroness Seear

My Lords, at this time of night I shall endeavour to be brief. I am delighted to be able to congratulate the noble Earl, Lord Caithness, on his new appointment. We have all enjoyed sparring with him in his previous incarnations. We shall continue no doubt to enjoy sparring with him in his new role.

My enthusiasm, however, was slightly dashed when I realised that he had inherited the scriptwriter from his predecessor. I realise that he has had very little time to find a new scriptwriter, or indeed to write his own scripts, but I should like to encourage him in every way I can to do just that. As I listened to the noble Earl I felt not only that I had heard it all before but also that I did not recognise the world that he described as the world in which I live: everything was for the best in the best of all possible worlds; the Government had been totally successful; people's living standards had risen; and we were the most admired of all nations.

That may be how the noble Earl sees it. It all depends on the colour of the spectacles that one wears. Yet, as he knows perfectly well, as does everybody on the Government Benches (those that are left of them) and as has been said by nearly every speaker from this side of the House, the reality is that we have a huge balance of payments deficit. Moreover, we have a hideously high level of inflation in comparison with our competitors. Indeed, it is high in comparison with the objectives set by this Government and the tests the Government set themselves as to what they regarded as a satisfactory level (and the expectations which they led us to have) of inflation.

If that were not enough, we have in this country—it is a matter of very great concern which few other speakers have mentioned—a higher level of personal debt than I can ever recall. That is worrying a great many people. In the face of those three characteristics of today's social and economic scene, can the noble Earl really be so complacent?

If I had not been here in the House of Lords I should have been sorely tempted to say to him: "Look, Lord Caithness, come off it! Tell us frankly what the position is. We all want to collaborate to try to get things right". Between us we have a great many ideas as to what might be done. But so long as the Government insist on pretending that everything is perfectly all right, then of course in many ways I would be wasting my time. We talk, but they are not prepared to hear. They do not want to look at the facts as they really are. No doubt among themselves they are far more realistic. But, surely, we too can share in the realism and discuss the position as it really is.

The Government accept—and repeatedly say—that the level of inflation is far too high, very dangerous and must come down. We are with them on that. However, they are determined to use only one instrument to try to combat inflation; namely, the instrument of high interest rates. They use high interest rates to serve two purposes. As the noble Lord, Lord Bruce of Donington, explained, one purpose is to attract and hold hot money because that is one way in which they can sustain the level of sterling. They are afraid of what may happen to sterling if interest rates are not high enough. That is the policy that was followed by the United States.

As my noble friend Lord Ezra said—it was a view repudiated by the noble Lord, Lord Jay—a better way of trying to control the fluctuations of sterling would be to get into the exchange rate mechanism and get in there fast. I hope that the noble Earl will be the Minister who at last is able to say, "The time is right". I hope that he will not have to tell us as frequently as we have been told in the past, "Yes, the Government will do it when the time is right". If the noble Earl cannot do that tonight perhaps he will work out and tell us the criteria for making the time right. There has been every conceivable variation in the conditions of this country so that it is impossible to believe that something near the right time has not arrived at some point in the cycle that has taken place over the past three or four years. If the Government are prepared to do that, one reason for maintaining high interest rates would be removed.

The other reason is to check excessive expenditure. There is no doubt that there is excessive expenditure. Some people—and I do not agree with them—are asking for more credit controls although not full-blooded credit controls. As my noble friend Lord Ezra has suggested, one could look at liquidity ratios. One has only to walk into Regent Street to see banners offering thousands of pounds of interest free credit. It is at sale time. Perhaps 1,000 people go into such a store in one day. I do not know the figures. If they availed themselves of that astonishing offer just think what it would do to the amount of money circulating completely out of control.

Obviously the Government have to look for ways to control the amount of expenditure at the present time and to attempt to reduce the hideous level of debt. One measure is high interest rates. As we all know, they have very unfortunate, very damaging consequences, as well as having some value in achieving the purpose for which the Government are using them. They also have a horrific effect on mortgage rates which feeds straight through into wage claims. This contributes to and exacerbates all the problems that we are facing at the present time. The Government are well aware of this. But they do not seem to understand that there may be ways of dealing with excessive purchasing power other than to rely all the time on high interest rates.

My noble friend Lord Ezra has pointed out that high interest rates always makes it very much more difficult for manufacturing industry to get on with the job of investment, which it needs to do. They put up its costs in a variety of ways. High interest rates make it much more difficult for manufacturing industry to undertake the two tasks that it needs to do: to supply the demand for goods in this country and therefore to cut back on imports in the right way—not by import controls but by producing the goods that people wish to buy in preference to the imported goods that they buy because they cannot buy the goods manufactured in this country—and to make itself far more competitive in foreign markets. I shall return to that in a moment.

The Government can do other things. To say that to increase interest rates is the only instrument is surely a very blind response. There are fiscal measures that could be adopted. One looks in vain in this legislation for the kind of fiscal measures which could be introduced which would have some effect on cutting back on excess purchasing powers. The noble Lord, Lord Boyd-Carpenter, has already said that the Government could do more with taxes on tobacco and drink. It is not perhaps a very large matter but it could be done. These taxes have not risen to keep pace with inflation. It is one way of limiting people's purchasing power other than by high interest rates. I know that it will have some effect on the RPI. That is a disadvantage but not an overwhelming one.

Very uneven ways in which advantages are given to different groups have grown up over time. The noble Lord, Lord Jenkin, has given us an impassioned plea —for 20 minutes —in favour of the pension industry. The pension industry has benefited from special tax concessions. The other outstanding area is mortgages. Surely the least that we can say is that there should be no MIRAS benefits above the standard rate of income tax. Surely the amount of benefit that people can receive through special tax benefits on mortgages should not be allowed to grow as inflation grows but should be maintained at existing levels. There be no question of raising the level. Surely we want different kinds of expenditure, different kinds of benefits, to be on one level, and not to have particular kinds of expenditure especially favoured by the tax system, as they are today.

One further way in which we can cut back on excess expenditure by citizens is by more encouragement for savings. On these Benches we very much approve of the developments in share ownership and, although with some reservations in certain areas, in home ownership. However, different kinds of savings are undoubtedly dealt with differently in terms of taxation. A really imaginative Chancellor would be looking at ways in which saving of a more general kind could be encouraged through tax concessions in the way that savings in pensions and houses are encouraged. At present those are the only two areas.

There are a number of precedents for the way in which this could be done. The Institute of Fiscal Studies, as no doubt the noble Earl knows, has been working on a variety of schemes to give people encouragement to save in other ways and to receive the same tax incentive to saving in these other ways which is available at present through our existing tax system, which is highly biased in two or three directions. That is one way to check the excessive expenditure that is going on at the present time leading to such very high levels of debt and increasing inflation.

Listening to the noble Earl, I felt that, if he is reflecting the Government's view of the economy today, they are not coming to grips with the real problems that we are up against. The year 1992 is around the corner. The global economy in which we have to operate is full of people who will provide us with the roughest possible competition. One has only to look at what is happening in the Pacific countries—in Japan, Korea and Taiwan. The situation is changing all the time. We shall find it extraordinarily difficult to hold our own, let alone to improve our position, in the Community or with regard to these other very challenging competitors that we have to meet all the time.

With the money that the Government have available now—they are talking about paying back the national debt with it—they should be asking "What can we do with this money, sharply and quickly, to increase our competitiveness?" There is no sign in this legislation that the seriousness of the competition that we face has been taken on board. In this country our infrastructure is a handicap to our economic success. There is a reluctance to develop the further steps that need to be taken to obtain the best possible value out of the Channel Tunnel and by so doing to enhance our opportunities in Europe.

Above all, far more money needs to go into making our labour force really competitive. It is hideously obvious that in comparison with other countries we have had and continue to have an untrained labour force which will not compete with Europe or the Pacific countries, and nothing in our present plan is altering this. We know that that is so. On paper everybody admits it.

What are we doing? The money ought to be used to train 16 to 18 year-olds to become competent to compete the world over. Because we have failed so much to train older people in the past, real training should be given to them and real incentives. What are we told? We are told to leave training to the employers because they are the people to do it; the market will drive them to do the right thing. The market has never driven them to do the right thing in the past and I see no earthly reason why they will do the right thing in regard to the quantum leap in education and training that is required if we are going to have anything like the labour force capable of competing.

I see nothing in the Bill that reflects the dangers that we are up against. We have a balance of payments deficit with the Community. Why? It is because our people are not properly trained and they are not good enough to compete. That is the danger and that is what we must alter. I see nothing in the Finance Bill that would lead us to believe that this is going to happen.

8.50 p.m.

The Minister of State, Foreign and Commonwealth Office (Lord Brabazon of Tara)

My Lords, we have had a long, interesting and thoughtful debate. A Bill as long as this inevitably gives rise to a number of points, and I will try to deal with as many of them as I can.

Most noble Lords have made reference to inflation and the high level of interest rates. Although the Government realise that high interest rates are never popular with borrowers, it is crucial to everyone that inflation is beaten. A resurgence of inflation would destroy jobs and savings and endanger our continued economic success. The Government have always made it clear that interest rates would be set at whatever level is necessary to maintain downward pressure on inflation.

The noble Lord, Lord Bruce of Donington, sounded proud of the 10.3 per cent. rate of interest bequeathed to us by the last Labour Government. I suppose that that is understandable, given the extent to which inflation was out of control under that government. It peaked at 26.9 per cent. in 1975. Shortly after that the IMF had to be called in, as my noble friend Lord Boyd-Carpenter reminded us. Under this Government prices have increased at less than half the rate under Labour. We regret the 8.3 per cent. but it may have peaked and I am confident that it is on a downward path.

My noble friend Lord Boyd-Carpenter asked for an assurance that we would seek to tackle the rate of inflation. My noble friend can rest assured that the defeat of inflation remains at the centre of the Government's policy. Over the last year the Government have taken strong action to bear down on inflation by tightening monetary policy. This policy is clearly taking effect.

Increases in interest rates are the only effective means of bringing down inflation. There is no easy or painless alternative. Other major countries like the USA, Japan, Germany and France also rely on interest rates to defeat inflation. This is why the Government got on top of inflation when they took office and again as recently as 1985 when interest rates were as high as they are today. Interest rates worked then and are having the desired effect now. Indeed, as households are now, for the first time, substantial net payers of interest, interest rates are particularly well targeted at consumer spending.

To those who say that this policy is not working, I would point to a number of indicators which suggest that the economy is slowing down. MO growth has slowed over the last few months. The growth in retail sales has slowed significantly since 1988. The Royal Institute of Chartered Surveyors' surveys show that house price rises are continuing to slow down.

The noble Lord, Lord Ezra, said that a rise in interest rates increased inflation. That is why it is appropriate to look at the RPI, excluding mortgage interest payments. Excluding those, the underlying inflation rate was 5.9 per cent. in June, which was slightly lower than the rate in May. This suggests that inflation may now be at its peak rate and will soon be on a downward path. The Government remain committed to defeating inflation. For this reason the Chancellor has said that monetary policy will remain as tight as is necessary for as long as is necessary.

The noble Lord, Lord Bruce of Donington, expressed concern about the effect of interest rate increases on business. The Government appreciate that such increases are unwelcome to businessmen and regret any difficulties being experienced. But for industry overall output and productivity are both growing strongly and profitability is at the highest level for about 20 years. This has made most firms less reliant on borrowing and therefore less sensitive to short-term interest rate changes than they were in the past.

Furthermore, most larger firms can now borrow long term and long-term interest rates have risen very little. Investment remains buoyant. Industrial investment rose by over 17 per cent. in 1988 as a whole compared to 1987; business investment is now a higher proportion of national income than ever before. The latest DTI investment intentions survey—that for June—projects a continued rapid increase in investment in 1989.

The noble Baroness, Lady Seear, suggested that we should turn our attention to fiscal policy. It is clearly right that fiscal policy should buttress monetary policy. That is why we are running a substantial fiscal surplus. However, it is inappropriate to use fiscal policy for fine tuning. Attempts to smooth out growth cycles by discretionary variations in fiscal policy are liable to be destabilising in practice and inflationary—a lesson learnt from the experience of the 1960s and 1970s. Taxes and government spending can be changed only infrequently and changes are often difficult to reverse. Effects are also very uncertain. Interest rates are a much more flexible and reliable instrument for achieving the money GDP objective. Tax increases would hurt the supply side of the economy and trade performance would suffer in the long term.

The noble Baroness also advocated Britain's entry into the exchange rate mechanism of the European monetary system—a cry which I have heard not infrequently from the opposite Benches. The Government have always made it plain that the United Kingdom will join the ERM when the time is right. In her Statement to the House on the outcome of the Madrid summit the Prime Minister explained that we had first to get our inflation rate down. We would also be looking for satisfactory implementation of other aspects of the first stage of the Delors Report, including free movement of capital and abolition of foreign exchange controls. Membership of the ERM is not a soft option. Countries within that organisation change their interest rates also.

During the debate many speakers have referred to the current account deficit. It would be quite wrong to describe the deficit as unsustainable. There are many examples around the world of sizeable deficits or surpluses persisting for a considerable period. There have been the recent sustained imbalances of the United States, Japan and Germany. These reflect the worldwide move towards deregulation of capital markets, development of a wide range of new financial instruments and massive growth of mobile capital. It is not surprising that imbalances have emerged. Indeed it would be remarkable if domestic saving equalled domestic investment in every country.

However export volumes are up 7 per cent. on a year earlier and it is clear that the trend remains upwards. Growth of import volumes has been slowing in recent months after rising since early 1987.

The noble Lord, Lord Bruce of Donington, said that investment goods were not responsible for the increase in the trade deficit. The main reason for the deficit has been a surge in investment which has not been matched by a comparable increase in savings, with the result that the UK has been importing capital from abroad. The demand from both consumers and companies has been growing faster than industry's capacity to meet it. Of the increase in imports of manufactured goods, excluding erratics, a quarter is due to consumer goods, including cars, and three-quarters due to goods for production and investment. This investment will increase industrial capacity and exports in the future. In addition, action taken to tighten monetary policy will help to encourage saving rather than consumption. In the meantime, sound policies must be readily financed.

The noble Lord, Lord Bruce of Donington, said that we were dependent on hot money to pay for the deficit. In the modern world the Government are dependent upon capital markets whether or not the current account is in deficit. My right honourable friend the Chancellor has noted that this is an excellent discipline for any country. It encourages the pursuit of sound anti-inflationary policies.

The noble Lord made great play of the flow of overseas investment into the UK, which only goes to show a considerable confidence of overseas investors in the British economy. We welcome the growth of overseas investment in the UK, in particular the recent announcements by Honda, Toyota, Bosch, Fujitsu and other companies mentioned by the noble Lord, Lord Boyd-Carpenter. That investment will help considerably in years to come in the balance of payments in the motor car trade, which is one of the critical areas.

The noble Lord, Lord Bruce of Donington, suggested that the numbers in poverty had increased by 3 million since 1979. That is based on the EC definition of poverty, which is someone on two-thirds of average income. That relative view of poverty is a definition which no government have ever accepted. It is absurd to suggest that as average incomes go up the numbers in poverty increase. Real incomes throughout are increasing. The bottom 10 per cent. of income distribution had a real increase of 6 per cent. between 1979 and 1985, and there have been further increases since then.

The noble Lord, Lord Jenkins of Hillhead, said that the productivity of the whole economy is not better than in the previous two decades. We must compare our performance against those of other countries and not simply those of the past. In the 1980s our economy and productivity grew faster than for any other major industrial nation except Japan. We were near the bottom of the league in the 1960s and 1970s. So we have been doing better relative to our competitors.

The noble Lord, Lord Jenkins, also claimed that growth was unbalanced and that consumption was growing too fast. We cannot agree. Growth is broadly based. Between 1981 and 1988, consumers' expenditure grew in real terms by 4 per cent. a year. That was slower than investment at 6.5 per cent. and similar to exports at 3.5 per cent. In 1988 investment was up 12 per cent. and consumption up by only 6.4 per cent.

The noble Lord further suggested that the boom was based on consumption. That is not so. Over the past seven years total investment has grown twice as fast as the rate of total consumption. Under the last government, investment grew by less than consumption. Improved performances reflect improvement in profitability and confidence in the future.

My noble friend Lord Boyd-Carpenter and, I believe, the noble Lord, Lord Houghton of Sowerby, suggested that tax rates were still too high and asked why there had been no tax cuts in the recent Budget. I remind noble Lords that the Government are committed to reducing taxation. They have pledged a figure of 20 per cent. basic rate when prudent. National insurance reforms from October will give an increase in take-home pay for working people of up to £3 a week at a full year cost of £2.8 billion. My noble friend also suggested, as did the noble Baroness, Lady Seear, who echoed his remarks, that the tobacco tax should be increased. I must say that they have not found a very sympathetic audience in this particular spokesman. We must strike a balance between the health sector and the need for revenue in determining the tax on tobacco. We thought it wrong this year to provide additional pressure on prices when the Government's reserves are so strong. I remind noble Lords that cigarette prices are 40 per cent. higher in real terms since 1979.

My noble friend Lord Boyd-Carpenter suggested that main residences should be exempt from inheritance tax. The Government have substantially increased the threshold for this tax now at £118,000. As my noble friend recognised, housing is already a highly privileged asset, with mortgage interest relief, capital gains exemption, and domestic rates abolished. Therefore we feel that there is no case to give any further privilege.

The noble Lords, Lord Ezra and Lord Jenkins, spoke of the broad money supply. I think the point was M3. We must recognise the effect of the deregulation of the City and the liberalisation of financial controls. These have made it very difficult to interpret the broad money figures and, as a result, it is appropriate to look at a range of monetary indicators. The noble Lord, Lord Ezra, suggested that we were returning to a stop-go cycle. I cannot agree. We have had now eight successive years of sustained growth. The seven years to 1988 have seen a combination of strong and steady growth not matched since the war.

In his most interesting speech, the noble Lord, Lord Houghton of Sowerby, asked a number of questions. I agree with other noble Lords in hoping very much that this will not be his last speech in connection with a Finance Bill. I do not intend to ignore his speech as it was ignored 40 years ago in this Chamber. He asked me whether Clauses 168 to 170 of the Bill represented the end of the implementations of the Keith Committee recommendations. The great bulk of the implementation is now complete. For income tax there will be a further consultative paper on administration and the conduct of appeals. This will be the subject of a future Finance Bill. The measures are likely to be smaller in scope and in substance.

The noble Lord suggested that Inland Revenue officials were given too much power. We believe that the Keith Committee struck the right balance between the rights of the taxpayer and the needs of revenue departments. Revenue powers are subject to review in the courts. This Bill contains a number of safeguards for the taxpayer. The noble Lord, Lord Houghton, also suggested that there were too many concessions to mortgage interest, insurance and charities and so on. The Government's belief in low tax rates requires special reliefs to be looked at critically. But we believe it right to encourage home ownership and charitable giving. Charities do much good in the country, as many of your Lordships well know.

My noble friend Lord Jenkin of Roding asked why there was a cap on occupational pension schemes. We believe that ordinary taxpayers should not be expected to provide unlimited subsidy to high earners. Reducing tax rates is a quid pro quo for getting down marginal tax rates. With a 40 per cent. top rate tax there is no longer a justification for unlimited relief. Other savings reliefs, such as BES schemes and PEPs, are subject to monetary limits. If there is no cap, there is an unwarranted distortion in favour of institutional saving. My noble friend asked why these were indexed to prices rather than to earnings. Statutory indexation in the tax system—for example, tax allowances and capital gains—has always been indexed to prices. The United States has an earnings cap of 98,000 dollars and it is indexed to prices. Price indexation clearly means that increasing numbers will be affected by the cap, as my noble friend suggested. But the build-up will be slow. On a generous assumption of 2.5 per cent. earnings growth, no more than 4 per cent. of the workforce will be affected in 40 years' time. My noble friend suggested that the cap leads to employees being unwilling to change jobs. However, employers are free to pay what is required to recruit. There is no case, therefore, for a subsidy from the taxpayer.

My noble friend made some points about the application for personal pensions which missed the 17th May deadline. I concede that, given the huge numbers involved, it is quite possible that some mistakes were made and some forms have been incorrectly returned to companies. Where it can be demonstrated that properly completed forms were received in the department by 17th May, the office at Newcastle will be happy to rectify the mistake.

My noble friend also asked why there have been no consultations on the pensions measures. This year's changes did not change the basic tax treatment of pensions which my noble friend described. The substantial tax reliefs remain—relief on contributions, a tax free build-up of pensions and a tax free lump sum subject to the £90,000 limit. Very few people are affected by the new pensions cap.

As regards life assurance, the consultative document issued in 1988 offered more radical options for change. Therefore it was appropriate to have a long consultation period.

I hope that I have managed to cover most of the points raised this evening. The Bill contains some important changes to the taxation of savings. The cap on tax relief for pensions completes the reform begun in 1987 by my right honourable friend the Chancellor of the Exchequer. The taxation of life assurance has been put on a more rational and coherent basis while the Bill provides a major boost to employee share schemes.

The last decade has seen a transformation of the economy. In recent years Britain has out-performed her major European competitors in terms of growth, investment and jobs. It is the success of the Government's policies which has brought that about. It is those policies which are central to the Bill and I therefore commend it to your Lordships' House.

On Question, Bill read a second time.

The Earl of Caithness

My Lords, before I formally move the next stage of the Bill I hope that your Lordships will permit me to say how grateful I was to hear the kind remarks which were made. I realise that I have a great deal to learn in order to live up to the high standards set by my predecessors in my new office. I shall certainly endeavour to meet those standards.

It is also an honour to be speaking in the same Chamber as the noble Lord, Lord Houghton of Sowerby. He made his first speech on the Finance Bill 40 years ago when I was kicking the sides out of my pram. I now make my first speech 40 years on. When he said that the tax rate was too high it did not surprise me that he was not listened to by his own side. I assure him that he was listened to by this side of the House today. I beg to move that this Bill be not committed.

Moved, That the Bill be not committed.—(The Earl of Caithness.)

On Question, Committee negatived.

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