Lords Sitting of 20 July 1990

Preamble
The House met at eleven of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Southwark.

War Pensions Claims: Radiation Exposure
Lord Boyd-Carpenter Lord Boyd-Carpenter asked Her Majesty's Government:
Whether in the light of the decision of the coroner in the case of the late Mr. Walter Fazackerley they will review the decisions in other cases of claims to war pensions by persons exposed to radiation resulting from nuclear tests on Christmas Island and elsewhere in the Pacific.
The Parliamentary Under-Secretary of State, Department of Social Security (Lord Henley): My Lords, the war pensions scheme provides for pensions where there is reliable evidence which raises a reasonable doubt that a condition is caused or aggravated by service or that death was due to or substantially hastened by service. It is accepted that the evidence raises such a doubt in the case of participants in the United Kingdom nuclear weapons test programme who have contracted leukaemia (excluding chronic lymphatic leukaemia) or multiple myeloma, the condition from which Mr. Fazackerley died. Any claim to a war pension by such servicemen or their widows is therefore likely to succeed. Consequently, a review of decisions on claims for war pension as a result of the coroner's decision in the case of the late Mr. Walter Fazackerley is unnecessary. I am pleased to advise my noble friend that a war widows pension has been awarded to Mrs. Fazackerley.
Lord Boyd-Carpenter: My Lords, I thank my noble friend for that reply. Did I understand him to say that, nonetheless, the war pension authorities are not to review radiation cases which had been turned down despite the clear decision of the coroner's court? Surely in the circumstances of this case of exposure to radiation, at a time when very little was known about it, the finding that death had resulted from it must raise a reasonable doubt in all similar cases. Would it not be in accordance with the traditions of the war pensions scheme, with its bias towards the applicant, that these cases should be reviewed?
Lord Henley: My Lords, the coroner found that Mr. Fazackerley died of multiple myeloma. We have agreed in the past that we will award war widows pensions for deaths caused by multiple myeloma. There is no evidence that other forms of cancer apart from leukaemia have been caused by taking part in these tests.
My noble friend went on to say that we should review all cases. He may know that we previously rejected Mr. Fazackerley's claim on the grounds that
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he had not taken part in the tests but had been involved only in the clean-up operations. After representations from the right honourable Member for Stoke on Trent, Mr. Jack Ashley, I apologised for that decision, which was an error, because Mr. Fazackerley had been present in the area. I said that we would review all the claims to see whether the cause of death, if it came within those two categories, would give entitlement to a war widows pension.
Lord Dean of Beswick: My Lords, is it not a fact that in a general sense we treat the people involved rather more shabbily than other countries, such as Australia and America, that took part in nuclear tests? If that is the case, is it not time that we put matters right for the diminishing number of people involved?
Lord Henley: My Lords, I cannot answer for other countries. All I can say is that evidence shows that there is a slightly increased likelihood in the case of multiple myeloma and leukaemia. There is no evidence in the case of the other cancers.
Lord Harmar-Nicholls: My Lords, is my noble friend aware that while it is common sense that there should be some identifiable boundaries to bring people within the category for the purposes of war pensions, other factors such as our way of life today can sometimes account for the problems lying behind my noble friend's question? Is there no way of running alongside the formal agreement to give a pension by providing an ex gratia alternative? That would allow us to get over the rigid borderline which brings about these uncertainties.
Lord Henley: My Lords, I have already said that we have a generous standard of proof. I do not think that we can go beyond that. All we ask is that there is a reasonable doubt that a condition is caused or aggravated by service. In those circumstances, we will grant a pension.
Lord Molloy: My Lords, will the noble Lord he good enough to consider having talks on this trying subject with the Royal British Legion, which has many members who are so affected? It is beginning to examine the proposition whether or not such exposure could be treated as a form of war wound.
Lord Henley: My Lords, I have met the Royal British Legion on a number of occasions and it has raised this matter with me. I cannot go further than I have gone. If there is a reasonable doubt that a condition is caused or aggravated by service, we will grant a pension.
Lord Williams of Elvel: My Lords, does the noble Lord accept that there is strong feeling on all sides of the House that something should be done? I support the noble Lord, Lord Boyd-Carpenter. It is a question of a little generosity and perhaps, as the noble Lord, Lord Harmar-Nicholls, said, a little imagination. Will the Government think again about that?
Lord Henley: My Lords, I honestly cannot go any further. As I said, the standard of proof for the war pensions scheme is already very generous. We can award pensions only where there is some reasonable doubt that disability is caused by war service.
Lord Boyd-Carpenter: My Lords, is my noble friend aware that it seems to some of us who have been concerned in war pensions administration that it is contrary to the whole spirit of that system to rely on the highly technical question of which form of cancer has arisen? Is it really sufficiently certain that while radiation can produce some forms of cancer it cannot in any circumstances produce other forms? Is that really being maintained?
Lord Henley: My Lords, we are relying on the evidence produced by the report published by the National Radiological Protection Board. It stated that there was a slightly increased hazard of mortality in those two cases, but not in other cases.
Lord Mellish: My Lords, in the past there was the War Pensions Appeals Tribunal. Anyone who was rejected for a pension by the Ministry had a right to appeal to what was mainly a lay body. The two issues involved were attributability and aggravation. I speak as one who went before that board many times. I found that if one could show that some aggravation was caused through war service or, in this case, radiation, the tribunal would without any shadow of doubt find in one's favour. Does that still apply today, and have these people the right to appeal?
Lord Henley: My Lords, obviously these people still have a right to appeal. The appeals tribunal still exists.
The Earl of Selkirk: My Lords, what action should be taken as regards someone who was present at this explosion and who subsequently died of cancer? Further, what type of cancer would bring such a person into the pension range either for the benefit of his widow or indeed any of his relatives?
Lord Henley: My Lords, if someone who took part in those tests subsequently dies of or contracts leukaemia, excluding chronic lymphatic leukaemia or multiple myeloma, there is a likelihood of entitlement to a war pension. In the case of a person's death, his widow would be entitled to a war widows pension. Such claims should be made through my department.

NHS Trusts: Applications
11.15 a.m.
Lord Molloy Lord Molloy asked Her Majesty's Government:
How many hospitals and other NHS units have now expressed interest in becoming self-governing, and how many formal proposals have now been submitted.
Lord Henley: My Lords, 205 units have expressed an interest in becoming self-governing and 51 formal applications have now been received.
Lord Molloy: My Lords, I thank the Minister for that Answer. However, can he tell us what criteria the Government use for deciding whether or not a hospital should opt out of the National Health Service? I am sorry; I do not really mean opt out of the National Health Service scheme; I meant to refer to hospitals becoming self-governing. What precisely are the criteria upon which decisions will ultimately be made?
Lord Henley: My Lords, I hope that I misheard the noble Lord. I hope that he did not say that our hospitals are opting out of the National Health Service. The situation has been made quite clear to him on many occasions.
Applications for National Health Service trust status will have to demonstrate, first, potential benefits to patients and improved quality of service; secondly, they will have to demonstrate adequate managerial skills and capacity to run the hospitals as self-governing units; and, thirdly, they will have to show the involvement of senior professional staff in the management of a hospital. Further, the Secretary of State will need to be satisfied that the proposal is consistent with maximising choice for patients and GPs, that it is financially viable and that self-governing status is not being sought as an alternative to closure.
Lord Peston: My Lords, perhaps I may pursue the issue of criteria. Bearing in mind the fact that the evidence overwhelmingly suggests that doctors, nurses and paramedics tend to be opposed to self-governing status and that it is only the management staff who seem to think that they will do well out of it, will the Secretary of State, in making such a decision, actually make public in documentary form the precise reasons to which my noble friend referred as to why he took the decision in the way he did? In other words, will the reasons as to why the hospital concerned did or did not meet the required standards become public knowledge? Alternatively, will he simply say yes or no?
Lord Henley: My Lords, as the noble Lord knows, we shall consult all the bodies involved in the hospital, the regional health authorities and all other interested parties. My right honourable friend will then make his decision based upon the application document which will be published, as will the comments received in consultation and all the other information relevant to that application. As yet, my right honourable friend has not said whether he will make public the reasons for his decision.
Lord Mellish: My Lords, I understand that the phrase "opting out" really means that hospitals want to get away from what some of them call the dead hand of bureaucracy which is applied by the district health authority. I must therefore ask the following questions. Can the Minister say who are the people in the district health authorities? Further, when they make a good decision, who is the person above them who says, "No, we shall not have that either"?
Lord Henley: My Lords, membership of the district health authorities is another matter. I must stress again that National Health Service trusts will not opt out of the National Health Service.
Lord Mellish: I know that.
Lord Molloy: My Lords, in so far as the Minister has outlined the criteria which will be used, can one assume that the information will ultimately be published in detail? Further, will it be possible for

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interested people to protest about something that the Government may be intending to put upon them which they do not want?
Lord Henley: My Lords, as I said, there will be consultation with all interested bodies. Obviously such consultation will be taken into account by my right honourable friend the Secretary of State when he makes his decision.
Lord Peston: My Lords, I am sorry to pursue this matter, but my noble friend asked an important question. Perhaps I may clarify the position in regard to your Lordships' House. If a particular hospital were granted self-governing status, would Members of this House be able to ask precisely why this had happened? Alternatively, if such questions were asked, would the Minister, if it were his job to do so, simply rise and say, "My right honourable friend the Secretary of State has taken this decision and there is nothing more to be said"? That would be a very serious situation given the way in which we have debated such matters in this Chamber. We need to know upon what basis, especially in terms of public documentation, we shall be able to examine such decisions.
Lord Henley: My Lords, I said that the application document will be made public and that comments received through consultation will also be made public. After such consultation, it is the duty of my right honourable friend to make his decision.
Lord Tordoff: My Lords, with all due respect to the Minister, that does not answer the question. Are we at any stage to be told on what basis a decision has been made? Further, is there any way in which Members of your Lordships' House will be able to challenge a decision?
Lord Henley: My Lords, quite obviously my right honourable friend is accountable to Parliament. Therefore, to that extent, any decision he makes can be challenged.

Company Failures
11.20 a.m.
Baroness Ewart-Biggs Baroness Ewart-Biggs asked Her Majesty's Government:
Whether the level of company failures is in line with their industrial policy.
The Minister of State, Department of Trade and Industry (Lord Trefgarne): My Lords, the Government's policy is to promote a business climate in which the private sector is free to prosper by its own efforts. That policy is working. In a dynamic economy there will always be firms going out of business. What matters is the net position. The latest figures for VAT registrations, the best available measure of net change in the number of businesses, show continued strong net increases in registrations.
Baroness Ewart-Biggs: My Lords, I am pleased to hear the optimistic note in the Minister's Answer. Perhaps I might point to some other figures which show rather a different picture. Is the Minister aware that figures released recently show that 11,600 firms
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went into liquidation or were declared bankrupt in the first half of 1990, and that that is a 30 per cent. increase on the same period last year and the highest figure for 10 years? Is the Minister further aware that one of the reasons for that rise is the Government policy on the uniform business rate? Are the Government contemplating a U-turn on the setting of the UBR as they have with the poll tax?
Lord Trefgarne: My Lords, no, we are not contemplating any U-turns; the noble Baroness may be assured of that. The reasons why businesses go out of business are many and varied. Some of them relate to the standard of management. Companies sometimes cease to trade for respectable reasons; for example, in connection with amalgamations and such matters.
Lord Carr of Hadley: My Lords, will my noble friend confirm that in many areas of this country where there are bodies such as local enterprise agencies, a movement to which the Government have given a great deal of support, the rate of failure of new small businesses has been about halved in recent years?
Lord Trefgarne: My Lords, my noble friend is right. The position is far from consistent across the country. As he rightly pointed out, in some areas the rate of failure is much less than it is in others. What matters, as I said earlier, is the net position, and the fact is that substantially more businesses are opening these days than are closing down.
Lord Williams of Elvel: My Lords, it was interesting to hear the Government statement of their industrial policy, because until now I did not gather that they had one. Will the Minister confirm, however, that that industrial policy which he has just set out is wholly at variance with the Government's counter-inflation policy? A counter-inflation policy, after all, demands, according to them, high interest rates. Is it not those high interest rates which are driving small companies into bankruptcy?
Lord Trefgarne: My Lords, nothing is worse for small businesses than high inflation. It is our policy to reduce inflation through the measures that we have taken, and that will be of great benefit to all industries, small and large alike.
Viscount St. Davids: My Lords, is the Minister aware that Japan is the business failure capital of the world at the moment, closely followed by the United States and West Germany and then us, and that at the other end of the scale come North Korea and Albania? Is it clear in which direction we should be going?
Lord Trefgarne: My Lords, the noble Viscount draws your Lordships' attention to some interesting statistics upon which I should like to reflect, if I may.

BA: EC Competition Directorate Visit
11.23 a.m.
Lord Dean of Beswick Lord Dean of Beswick asked Her Majesty's Government:
Under what powers, and in what circumstances, officials of the competition directorate of the European Commission are permitted to search the London office of the chairman of British Airways and to inspect his personal bank account.
Lord Trefgarne: My Lords, Commission officials visited British Airways on 23rd and 24th February, by prior arrangement with the company. The visit was part of the investigation of an agreement between BA, KLM and Sabena which had been notified by the airlines to the Commission under the Community's competition rules. We have no reason to believe that the Commission exceeded its powers. If the airline wishes to make a complaint about the conduct of the visit, we will follow this up.
Lord Dean of Beswick: My Lords, is the Minister aware that the company received less than 24 hours' notice that such a search was to be made and that even though the chairman offered total co-operation and to make available any documents that the Commission wished to specify, it did not specify any documents, but made the search an open one which included the perusal of some of the chairman's private belongings? Is the Minister aware that such a search is not what we expect in this country and is totally unacceptable?
Lord Trefgarne: My Lords, as I said, I do not believe that the Commission officials exceeded their powers in the matter; but I think that the visit was conducted in a somewhat heavy-handed way. We hope that they will be more restrained in the future.
Lord Jay: My Lords, if the Commission officials exceeded their powers, would the British authorities have corresponding powers to inspect the personal bank account of members of the Commission?
Lord Trefgarne: My Lords, as I said, I do not believe that the Commission exceeded its powers in this matter, but I doubt that we have the powers that the noble Lord mentions.
Lord Monson: My Lords, if the Commission did not exceed its powers, is that not an argument for restricting its powers?
Lord Trefgarne: My Lords, the Commission's powers in this matter are set out in a regulation made under the Treaty of Rome, which came into force in 1987 and was approved by the Council of Ministers at the time.
Lord Williams of Elvel: My Lords, as a matter of information, when Euromerger control comes into operation, as I believe it will later this year, will the powers that the Commission already has under the regulations that the Minister has specified be extended to the new regulations for all Euromergers?
Lord Trefgarne: My Lords, those powers were granted to the Commission under the competition articles of the Treaty of Rome. Any new powers will have to be granted under whatever is the appropriate
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article of the treaty, and will, as I understand it, require the further approval of the Council of Ministers.
Lord Williams of Elvel: My Lords, I am sorry to press the Minister but I am not entirely clear. Is not the Euromerger control a regulation under the same articles (Articles 85 and 86) as the previous regulation, and therefore presumably the same powers will apply?
Lord Trefgarne: My Lords, I need to take further advice on that question. It sounds to me as though the noble Lord has it right.
Lord Monson: My Lords, I am sorry to be obtuse, but will the Minister explain what on earth the private bank account of the noble Lord, Lord King, has to do with a possible merger of BA with KLM and Sabena?
Lord Trefgarne: My Lords, I am not certain what papers were examined by the Commission during the two visits which it made on consecutive days; but I understand that one of BA's legal representatives was on hand throughout the visit. I presume that he satisfied himself that only the appropriate papers were examined.
Lord Clinton-Davis: My Lords, without commenting on that case, is it not clear that those powers were invested in the Commission to deal with situations where serious abuses of monopoly power could take place, or had taken place; and that it is necessary in such circumstances for the Commission to avail itself of such powers at relatively short notice, because somehow vital documents frequently have a habit of disappearing if a longer period of notice is given by the Commission of its requirement to carry out those searches?
Lord Trefgarne: My Lords, the Council of Ministers has agreed, as I said earlier, that the Commission should have certain powers in that area. I do not believe that it exceeded its powers on that occasion, but I agree that appropriate powers are correct and proper, which of course is what the Council agreed a couple of years ago.
Lord Airedale: My Lords, the allegation in the Question is that a private bank account was investigated. Has there been an investigation as to whether that allegation is true of false?
Lord Trefgarne: My Lords, the precise list of papers which the Commission studied is not available to me because I understand that such a list is not kept. British Airways has made no complaint that incorrect papers were studied. So far as I know, the Commission studied only those papers that it was entitled to see.
Lord Dean of Beswick: My Lords, are the examiners' powers restricted to the private sector or do they also have power to investigate government documents on demand? If they have that power, would it not have saved us all a great deal of trouble if they had investigated the DTI papers when the British Aerospace deal involving Rover Group was going through?
Lord Trefgarne: My Lords, the Department of Trade and Industry is not a party to this particular matter. Therefore the question asked by the noble Lord does not arise.
The Earl of Halsbury: My Lords, will the noble Lord tell the House whether it is the case that a European bureaucrat can enter private premises in this country without an order of the court?
Lord Trefgarne: My Lords, it is not quite as simple as that. As I understand it, the position is that the Commission can ask to visit premises, and if the party refuses to allow admission to the premises it is the duty of the government concerned, in this case the British Government, to make the necessary arrangements which would mean going to the court to get a writ.
Lord Bruce of Donington: My Lords, I apologise for pressing the noble Lord a little further on this. As regards the documents that were inspected—his department has notice of the question I am asking—is he aware that it is invariably the practice when an investigation takes place, at least if it is carried out professionally, that a list is always kept of the precise documents that are inspected?
Lord Trefgarne: My Lords, I believe the noble Lord is referring to some other kind of investigation. I understand that a list of the documents that were inspected was not kept on this occasion, although I understand that some of the personal documents of the noble Lord, Lord King of Wartnaby, were in the office which the Commission visited.
Lord John-Mackie: My Lords, notwithstanding the point that my noble friend Lord Clinton-Davis made, surely the first thing the Commission should have done was to ask for the documents it wanted to inspect and not to carry out a search.
Lord Trefgarne: My Lords, I agree with the noble Lord. I understand that British Airways would have been perfectly willing to provide whatever documents the Commission had requested. However, the Commission chose, nonetheless, to make the visits that are the subject of this Question. That is why I said I thought the Commission had acted in a rather heavy-handed way on this occasion. However, I do not think the Commission exceeded its powers.
Lord Boston of Faversham: My Lords—
Lord Denham: My Lords, I know that the noble Lord, Lord Boston of Faversham, wishes to ask a question. However, I hope he will forgive me if I point out that we have spent nine minutes on this Question and 25 minutes on the Questions as a whole. I think the House might feel that after the noble Lord, Lord Boston, has asked his question and my noble friend has replied, it might be time to move on.
Lord Boston of Faversham: My Lords, I am obliged to the Government Chief Whip. Is it not extraordinary that a list is not kept in these circumstances? How is the owner of the documents to be sure that he will receive any of them back? He is entitled to get them back.
Lord Trefgarne: My Lords, I do not believe that any documents were removed. They were inspected, and in certain cases I believe they were copied. However, they were not removed.

Finance Bill
11.33 a.m.
The Paymaster General (The Earl of Caithness): My Lords, I beg to move that this Bill be now read a second time. The Government's central economic objective is to defeat inflation. The key instrument is tight monetary policy and high interest rates, which discourage borrowing and encourage saving. Tight monetary policy is supported by tight fiscal policy; the public sector's budget has been in surplus for the past three years. In his Budget my right honourable friend the Chancellor of the Exchequer maintained this tight fiscal stance.
The two years 1987 and 1988 were a remarkable time for the UK economy. Over this two-year period, non-oil GDP grew by 10·5 per cent. Fixed investment grew by 24 per cent. Unemployment fell by nearly 1 million. Real personal disposable income increased by 8·5 per cent. Profitability reached a level not seen for nearly 20 years.
Looking back with hindsight, it is now clear that the rate of expansion of the economy over that period was rather too rapid. Growth in domestic demand averaged 6 per cent. a year over the two years 1987 and 1988. Output performance was good but could not realistically be expected to keep pace with this rate of demand expansion. The result was rising inflationary pressures, higher inflation and a deficit on the current account of the balance of payments. This is the background to the present situation of tight policies and slow growth. To reduce inflationary pressures we need a period in which the growth of output is below that of productive potential. This is what we are now seeing.
GDP growth has slowed markedly in the past year or so. Non-oil GDP growth for 1989 as a whole was down to 3·25 per cent. from 5·5 per cent. in 1988. GDP in the first quarter of this year was only 1·5 per cent. above the level of a year earlier.
There are those who say that policy is not working but I have to say that they are wrong. In order to reduce the inflationary pressures arising from excessive demand growth, the first requirement has been to get that demand growth down. This we have done. Although the impact of tight policy on demand has been slower than originally anticipated, there is no doubt that it has had an impact and demand growth has slowed. The increase in retail sales over the past year has been only 1·5 per cent.
Against this background inflation is bound to fall. But up to now the economy has been much more resilient than we originally expected. The consequence of slower than expected progress in reducing excessive demand growth has meant disappointingly slow progress in reducing inflation.

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The peculiarities of our retail prices index measure are serving at the present moment to produce a headline inflation figure well in excess of the true underlying rate. But even if one excludes mortgage interest payments and the community charge from the RPI, thus producing a measure of consumer price inflation which much more closely corresponds with that used in most other EC countries, the inflation rate is still 6·9 per cent. around two percentage points above the EC average.
We clearly need to get our inflation rate down. We shall succeed in doing so as long as we maintain our present tight policy stance. This is exactly what the Budget presented by my right honourable friend the Chancellor of the Exchequer aimed to do. But this does not mean that there is no further scope for tax reform at this point in time. There is scope and this Finance Bill takes advantage of it.
A feature of the 1980s was a substantial fall in the personal sector savings ratio. This should by no means be seen as necessarily a bad thing. One reason why people have been saving less in aggregate has been because financial deregulation has given them opportunities to borrow which were denied them before. Another reason is that the lower inflation rates of the 1980s, as compared with the 1970s, meant that savers no longer simply had to run hard just to stand still—to save substantial new amounts each year merely to repair the erosion of their existing savings through high inflation. And, as personal sector savings have fallen relative to income, so public sector savings have risen, with the result that the national savings ratio did not fall significantly.
But when investment growth really took off, savings did not respond. Indeed, the personal sector savings ratio continued to fall. An imbalance emerged between domestic investment and domestic savings, which was met from overseas—in other words, a large current account deficit emerged on our balance of payments.
As a short-term development this is nothing to worry about. But in the longer run it is desirable to restore a better balance between domestic savings and domestic investment; and as we do not want to invest less it is better that we do this through saving more.
As a nation we have at times in recent years given the impression of having lost the habit of thrift. At some point we need to rediscover it. In these circumstances it is only right that we should look again at how the tax system rewards or penalises saving and see what might be done to change it. That brings me to the specific measures included in this year's Finance Bill. The Budget which my right honourable Friend the Chancellor of the Exchequer introduced on 20th March was a Budget for savers and the taxation of savings lies at the heart of this Bill.
This Government have always supported the saver. Anyone who put his money in a building society in 1979 will have seen the value of his savings rise by half, before tax. Savers are getting a decent return, and quite right too.
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Your Lordship will know that under the previous Labour Government the real return on savings was negative. The post-tax return was even worse. A top rate of tax of 83 per cent. combined with an investment surcharge of 15 per cent. meant that some savers lost to the taxman all but 2p. in the pound of bank interest or dividend income.
It was no surprise therefore that one of our first priorities when we took office was to reduce marginal rates. This we have done. Successive cuts in income tax and the abolition of the investment income surcharge mean that for many savers—not just higher rate taxpayers but basic rate taxpayers too—marginal rates have been halved.
As well as reducing tax rates, we have created new savings media which allow people to accumulate capital completely unencumbered by demands for income and capital gains taxes. Nearly 4 million people have now taken out personal pensions. Two million employees have been given shares or options to shares through employee share schemes and 850,000 personal equity plans have been taken out.
The success of these schemes has surpassed expectations. It is time we extended similar tax treatment to saving through banks and building societies. That is how most people-34 million of them—save. And that is why we are introducing tax exempt special savings accounts, known as TESSA, through Clause 28. The tax exempt special savings account is a very simple mechanism designed to encourage medium to long-term saving. Savers deposit their money and leave it there for the full five years and they get their return tax free. Savers can withdraw interest as it accrues, albeit on a net of tax basis or they can leave it to roll-up. In either event, they will be entitled to the tax paid at the end of the five-year period.
It will suit all savers. For example, the pensioner with a small capital sum will be able to put up to £3,000 in his account in the first year and £1,800 in subsequent years, up to a total limit of £9,000. Younger people, perhaps saving for a deposit on a flat, will be able to put their annual bonus into a TESSA or, if it is more convenient, enter a contractual arrangement saving up to £150 a month. There have been contractual saving schemes in the past, but these have tended to be over-regulated and dominated by a need to raise money for the public sector. TESSA is different. The banks and building societies will be free to offer competitive interest rates. We believe this scheme will prove immensely popular when it begins in January 1991.
Complementing TESSA will be the abolition of composite rate tax—the sixth major tax abolished by this Government. Composite rate tax paid on bank and building society accounts has always been justified on administration grounds. But from 6th April this year independent taxation has come into operation. For the first time for tax purposes, the wife's savings income is being treated as her own. Many of these women have incomes below the level which brings them into tax but pay it nevertheless in the form of the composite rate. CRT is looking increasingly unfair,

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and it is time for it to go, as it will from April of next year. Five million married women, 4 million pensioners, 2½ million children and 2 million other depositors with relatively low incomes will benefit by an average of £1·40 a week.
Another of our priorities is to reduce the extent to which saving choice is distorted by the tax system. For example, if one transfers money from a bank to a building society, no tax charge is incurred. But if one transfers it from a bank into equities, one pays a surcharge in the form of stamp duty. In 1979, this surcharge was as high as 2 per cent. It was hardly surprising that direct share ownership was going out of fashion. We halved the rate in 1984 and again in 1986. This year we have gone one step further. Clauses 107 to 114 will remove stamp duty on shares—the seventh major tax to be abolished by this Government. Abolition will coincide as far as is possible with the introduction of paperless share transactions by the Stock Exchange, probably at the beginning of 1992. It will ensure that the City of London enters the European single market in as competitive a position as possible. It will also ensure that share ownership continues to widen and deepen. One in four adults in Britain now owns shares; in 1979, the proportion was just one in 14. The benefit of abolition will not just be confined to direct shareholders. Most of the full year cost of £800 million will go to people saving through the institutions in life assurance, pensions and unit trusts.
An improved climate for savers will in time feed through into an improved climate for investors. As I outlined before, in the long term this is the recipe for balanced growth. but there are a number of measures in this Bill designed to have a more immediate effect on business.
Clause 20 will increase the profit limits for the small companies' rate of corporation tax to £200,000 and £1 million and will reduce the tax burden for 20,000 companies. Since this Government took office the lower threshold has been increased by over 60 per cent. in real terms and the higher threshold almost fivefold. This is on top of a reduction in the small companies corporation tax rate from 42 per cent. to 25 per cent.
The VAT changes in Clauses 10 and 11 will reduce burdens on business and represent a major package of deregulation. We have tackled what many considered unduly onerous provisions concerning VAT relief for bad debts. Under the current scheme, bad debt relief is only available in the event of formal insolvency. The provisions in Clause 11 will replace that with an automatic relief for debts which have been outstanding for two years. These proposals will save business £150 million in a full year, and have been widely welcomed.
Clause 10 will make registration for VAT easier. The vast majority of firms will no longer be subjected to three complicated turnover tests. Instead, there will be just one simple test based on turnover in the previous year. This should be of particular benefit to new businesses.
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There are a number of other supply side measures in this Bill that I should like to highlight. Clause 21 will ensure that nurseries provided by employers will no longer be treated as a benefit in kind for income tax purposes. We have always taken the view that it is not for the Government to encourage or discourage women with children to work. That is rightly a matter for personal decision. We remain of the view that in general benefits in kind should be subject to income tax. But it was becoming increasingly apparent that the tax treatment of workplace nurseries was functioning as a disincentive both to women with children who wished to enter or return to the labour market and to employers who wished to provide workplace nurseries.
This measure has been criticised in some quarters for not going far enough. But a wider relief would merely have increased demand, bidding up the price of child care, with little effect on provision. We have instead opted for a targeted approach. The new exemption will involve only a small deadweight cost and, with its focus on the workplace, is consistent with the tax treatment of other benefits in kind provided at the employer's location—for example, canteens and car parking spaces.
This year's Budget was not just a Budget for savers. It was also a Budget for givers. In 1987 we introduced the payroll giving scheme. Over 175,000 people are now participating, and donations are running at about £7 million a year. Clause 24 will encourage the further expansion of such schemes by raising the annual limit by 25 per cent. from £480 to £600.
We are also helping charities to attract one-off donations. Clauses 25 to 27 will introduce the gift aid scheme which will give relief on one-off gifts of at least £600—the annual upper limit for the payroll giving scheme—up to a maximum of £5 million a year. Charities that benefit from large one-off donations—for instance, museums launching appeals for new galleries or for the purchase of major works of art—will be particularly advantaged by gift aid. The combined effect of these two measures should be a further increase both in charitable giving and in the proportion of such giving that is eligible for relief. The Charities Aid Foundation, for instance, has estimated that charities might take in an extra £50 million as a result. I am sure their reaction to the measures as "the best ever by any Government" will be endorsed by those of your Lordships who are involved with charities.
I look forward very much to hearing the maiden speeches of the noble Lords, Lord Tombs and Lord Varley, as we debate this the fourteenth Finance Bill introduced by this Government. The Bill builds on our record of tax reform. It includes a series of measures designed to encourage saving, to offer help to charities and to reduce the tax burden on growing companies. These are important changes which set the right course for the 1990s. I commend the Bill to the House.
11.50 a.m.
Lord Bruce of Donington: My Lords, we on this side of the House would like to thank the noble Earl for the way in which he has addressed the debate today. We must confess to some little curiosity as to why the traditional form of the debate, which is principally at this time of the year to examine and comment upon the state of the economy, has been so studiously avoided. Normally there is a speech from the Benches opposite which talks in the most laudatory terms of the vast progress that has been made in the country in economic terms and which does not go into very much detail on the Finance Bill itself.
As will emerge in the debate, I have every reason to know why the noble Earl has been so modest about the economy and so strong on the details of the Finance Bill. For our part we shall endeavour to examine where, after some 11 years of Conservative government, the economy stands and how it is performing at the present time. We on this side of the House shall also be very glad to welcome and to listen to the maiden speeches of the noble Lord, Lord Tombs, and my noble friend Lord Varley, both of whom have had distinguished careers prior to entering the House.
In the one part of the noble Earl's speech in which he ventured to make some comment on the performance of the country he mentioned that output and employment were at record levels. The term "record" is extremely useful when discussing such matters, because, like athletic records, even though one affects the issue only marginally and does only 0.1 per cent. better than the year before, each 0.1 per cent. counts as a new record.
The Minister has not been quite so forthcoming as to the other records that have been attained by the Government. One is rather surprised at his modesty. As my noble friend Lady Ewart-Biggs has pointed out to the House, there has been a record number of bankruptcies and liquidations. We have had an all-time record adverse balance of trade, particularly in visible trade, in goods which we produce ourselves. We have had record overseas net investment during the period. We have had lower manufacturing output in relation to GDP than ever before. When the Government took office, some 28 per cent. of GDP was in the manufacturing sector; the Government have now successfully reduced that to some 24 per cent.
Every now and again, as your Lordships will be aware, the Government enlarge on further and better vistas. Those are normally in the desired expansion of the social services or future investment in training and matters of that kind. They use rather queer figures for that, which they have not repeated today. They normally take this form: "We are going to spend £6 billion on so and so over the next 10 years", or "We are going to spend £9 billion on so and so over the next 20 years". However, we are not very often given precise indications, other than those in the expenditure Estimates, as to exactly what their future plans are. If one looks through the expenditure Estimates, the figure is not so good.
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However, from the Government's point of view, everything is going well and the economy is buoyant. However, half-way through that buoyancy there is a sudden reverse. After 11 years of unexampled progress and wisdom the Government have stated that things are not really going well at all. The economy is overheating, whatever that term may mean. The term has never been explained explicitly. The noble Earl's right honourable friend the Chancellor of the Exchequer put the matter very aptly only a few weeks ago in a correction of the euphoria which had apparently gripped his own Benches. He said that the economy needed treatment. It is almost like a doctor who has been tranquillising his patients with valium over a period of 11 years suddenly finding that the treatment has been all wrong. He stated in regard to the Government's current measures that if the treatment was not hurting it was not working. So now apparently the ingredient for success is that it has to hurt; otherwise nothing very much is happening for the economy.
So when there is a decline in sales, the Government having previously mentioned how buoyant the economy was, the decline in the sale of commodities is hailed as a victory. Every time the Government are reproached with the fact that there is an increase in house repossessions, that is greeted with considerable satisfaction. Every time there is an increase in bankruptcies and liquidations it is regarded as a sign of a triumphant policy diligently pursued. Increases in unemployment are referred to as a reflection of the Government's wisdom—the medicine is working.
In regard to inflation, I was intrigued by the term "headline inflation" which suddenly appeared after the Government's own specific endorsement of the finding of its committees that it was entirely proper to include the new poll tax and mortgages. They now suddenly find, when it is convenient, that after all that is not the right way of dealing with it.
We have had the Government for 11 years, but they have been 11 years of extraordinary circumstances. The Government cannot complain that in those 11 years they have not had complete power. They have been able to do anything that they wanted to do in that period. They cannot be challenged in the other place, even though they are challenged, peripherally, in this place from time to time. Moreover, during that period they have had the benefit of £80 billion of North Sea oil revenues which were denied to any of their predecessors. Former administrations—and I include that of Mr. Heath as well as our own administrations—had to cope, first, with the consequences of the famous Barber boom, which shoved up inflation enormously, and also with the inflation that arose naturally from the fourfold increase in the price of oil and its effects on the world economy. Therefore, they had all the advantages. Anything they wanted from Parliament they could have.
Yet what has happened? In 1979 inflation was 10.3 per cent. The latest figure, under the same definition, is 9.8 per cent. We are warned by the Chancellor of the Exchequer that presently it will be 10 per cent. The

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Government inherited interest rates of 12 per cent. They are now 15 per cent. They inherited unemployment of 1,300,000 and according to their own figures it now stands at 1,600,000, but when one takes into account the 30 or so fiddles of the figures that have occurred, it is in fact in the region of 2.5 million.
Trade in manufactures with overseas countries has gone down as well. Whereas in 1979 our trade figures were such that the ratio between exports and imports was 110 to 100, the relation of exports to imports is now down to 85 to 100. Worst of all—and this is the most important point—investment in manufacturing industry at 1985 prices is now only very marginally above what it was in 1979, 11 years afterwards. The figure in 1979 was £11 billion and in 1989 it was £12 billion. The latest information from the financial papers, which I take it we all read, is that in all probability after accumulated obsolescence is taken into account, at the moment there is negative investment in terms of any increase that has been made.
I make no apology for concentrating only on manufacturing industry. Manufacturing industry is the core of this country's future. I do not need to resurrect the all-party report of many years ago which made that point perfectly clear. Aside from an argument from the Government that that report was a Marxist document (an observation made without their even having read it) everybody knows that that statement is true.
The key to an increase in the production of manufactured goods is investment in manufacturing industry. I mean investment in the broadest sense, not merely plant, machinery and equipment but also training, research and development and all those other items which, if I may say so, are regularly elaborated on not only from our own Benches but from the Benches beside us. This is a problem that has dogged this country for the past 20 to 30 years. Mr. Edward Heath when in office complained about it. He complained to the Institute of Directors, to the City and indeed to everybody else. Roughly his words were: despite all the tax concessions and inducements that I have given you, you still will not invest.
That has been and remains the problem. Whether or not we join the exchange rate mechanism, whether or not we integrate further within Europe, whether or not we take any steps toward further co-operation with our colleagues in the European Community—whatever happens, whether we are in the ERM or outside it and whether or not we integrate more closely into Europe—until this country tackles the whole problem of investment in manufacturing industry it will continue to decline.
Why is there a lack of investment in manufacturing industry? Investment normally has a number of sources. In the first instance it comes from retained profits of individual companies. Retained profits depend fundamentally on profit margins, which in turn depend not only upon all their costs—I repeat, all their costs—but upon their degree of competitiveness throughout the world. That competitiveness may
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be—indeed over recent years has been—profoundly affected, as I am quite sure my noble friend Lord Jay will inform the House, by the ridiculously high rate of exchange at which the pound has been held against both the deutschmark and the dollar.
However, setting aside those issues, out of retained profits comes a very large percentage of the amount invested in manufacturing industry, and, as I said, that depends not only on competitiveness, containment of costs and so on but also on how much is left after paying dividends. The rule of thumb in the old days was that one devoted approximately one-third of one's profit surplus to pay a dividend to shareholders, one-third was held for increased working capital requirements in the light of the company's expansion and one-third was held in reserve for research and development. That kind of ratio has now gone out of fashion.
What happens now in British industry? Owing to the threat of predators, companies tend to distribute far too much in order to avoid being taken over. Then they have the additional threat of very high interest rates. That is what has happened so far as concerns internal funds for investment.
With regard to outside investment income, there are amounts obtainable via the Stock Exchange but they are a very small proportion of the total that is required. The rest of the money invested by capital normally goes into making money out of money. Part of the trouble with inflation and with the grossly excessive money supply (even though one cannot precisely define money supply) is the amount of capital that has been devoted to takeovers by predators and to the dismantling of companies in many instances or to buying and selling companies. None of those operations adds in the slightest to the country's productive capacity. They add nothing at all to the investment in manufacturing industry.
That is what has been happening. A good deal of the funds that are invested by capital take the form of leverage buy-outs—new money created exactly for that purpose. The net result of the total—although money has been made in the City and very often devoted to opulent and somewhat obscene expenditure in view of the poverty in which 7 million to 10 million of our people live—is an addition to inflation.
We say that there has to be more investment. The Government's reply is that all the trouble comes from what they term wage inflation. They tend to obscure that argument a little by referring obliquely to unit labour costs. The two are not identical. Unit costs have to be kept down in order for companies to remain competitive in the world market. Outside any exchange rate aberrations which may and indeed have disturbed them, unit labour costs, in which the wage level—the hourly wage paid to the operative—although a substantial ingredient, is not at all the only ingredient, must be reduced.
Indeed, Mr. Ridley himself, in a happier context and without having refreshed himself with even a small glass of wine as we understand he did in the

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company of the proprietor or editor of a well known magazine, delivered himself of the following opinion. He said:
"Britain also has one of the lowest labour costs in the EEC".
That was in the Daily Telegraph on 15th May last. So it is not the wage rate. That is perfectly true. The real answer on unit costs is that lack of investment adds to the unit labour cost. If training, research and development, proper marketing and market research (where it occurs) are absent or below what they ought to be in competitive terms and in comparison with our colleagues in other parts of the world, they add to the labour costs.
I hope that the Government will abandon any endeavours to blame wage increases for the country's troubles. Since the Government have been in office there have been wage increases. I believe that the current round on average is about 9 per cent. Why do workers want wage rises? Stopping them appears to be one of the Government's preoccupations. The answers are these. There is the inflation factor which the Government do not yet have under control. Then there has been the decline in the social wage which most employed people receive. The social wage under this Government has gone down progressively. It is all very well to refer to marginal increases of 9 per cent. or 10 per cent. (whatever it may be) in comparison with the 100 per cent., 33⅓ per cent. or grossly higher percentages from a higher base which are paid to the managers. But there has been a decline in the social wage.
There has been a deterioration in social services. Prescriptions cost 3,000 per cent. more than they did. There are increased optical and dental charges. There has been the non-indexation of child benefit and a series of other factors which for individual employed workers represent part of the household's total income. As those go down, wage demands through unions or otherwise are bound to go up.
Part of the responsibility for the alleged wage explosion lies within the hands of the Government. One must also bear in mind that many employed workers also have mortgages and are obviously affected by the increase in mortgage interest rates. But above all, in formulating their wage demands they are affected by the obscene extra awards from a higher base that are paid to those who presume to lecture them on their profligacy.
Those are matters to which the Government have to pay attention. They must actively assist British industry through investment and through a proper determination of the social wage to maintain and indeed improve its price competitiveness with the remainder of the world. But the key is still investment. The Government have no plans for investment in manufacturing industry. They continue to leave it to the market. But there are grave problems ahead and the Government have no clue how to deal with them.
One of the challenges that we shall face over the next five to 10 years is the closing down or diminishment of the arms industries. To provide
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employment and to secure production in the production industries requires a considerable transfer of resources both of men and money.
Another great challenge that faces the country is to try to resolve as best we may the contradication between the exploitation of resources on the one hand and the protection of the environment on the other. That forms a profound and important economic problem. Those matters have to be addressed.
It has often been said that when it comes to the point the British people are fully able to rise to the occasion. I very much doubt whether they will be able to rise to it under the type of administration that we have at present. One of the reasons why our German colleagues have been able to address these matters so successfully is that it was a Labour Government, and in particular Mr. Ernest Bevin, who helped to design the whole structure of the German Republic, the relations between capitalists and trade unions in their country and the machinery for arriving at a consensus on economic policy. That has been very successful indeed.
The word "consensus" is repugnant to the Government. I should be kind if I were to refer merely to the Government's incompetence over the past 11 years in addressing any of these problems. I prefer to say that by their philosophy, by their whole drive, by their emphasis on greed rather than need, they are not the Government to lead this country into the future.
12.16 p.m.
Lord Jenkins of Hillhead: My Lords, I sometimes take the view that your Lordships' House is entitled to assert itself more than is welcome to the Government business managers. I do so in particular at a time when centres of countervailing power are thin on the ground in this almost uniquely arrogant and incompetent Government. I do not, however, take the view that we should contemplate interfering in a Finance Bill. Although it is nearly 40 years since I wrote a little book called Mr. Balfour's Poodle which endeavoured to expound what happened to your Lordships' House when it rejected a Finance Bill on Second Reading, I still retain the tone of slightly shocked surprise at the behaviour in 1909 that I felt when I wrote the book in 1951 or 1952.
If we are properly impotent before a Finance Bill, there may not be a great deal of point in going into the details of what we cannot change. However, I believe that there is a great deal of point in using the occasion for a general consideration of the economy. It is some time since we did so in this House. We certainly look forward to the two maiden speeches of the noble Lords, Lord Tombs and Lord Varley, both of whom in differing ways have major experience in the practical business of running the economy.
I do not believe that there is now anybody, except perhaps the Prime Minister, who regards the economy of this country as being in a good shape today. I certainly do not think that Mr. Major does. Indeed one of his more engaging characteristics is that he does not indulge in the language of triumphalism or bombast. Even Dr. Pangloss himself in the shape of

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the noble Lord, Lord Young of Graffham, from whose mouth words of complacent wisdom used to pour with such effortless ease, has fallen silent both in this House and outside it.
We thank the noble Earl for his speech this morning. I have come to respect his doggedness. Of course he holds his end up but, if I may say so, he does not introduce an offensive note of excessive conviction into the defence of the indefensible. From the point of view of inflation, interest rates, balance of payments, the competitive position, investment, import penetration export sluggishness the picture is not encouraging.
In winding up I should like the Minister to try to reconcile a number of propositions which the Government have been advancing but which I find difficult to fit together. The first is that during the past 11 years we have achieved one of the most successful economies in Europe. We have heard that proposition frequently advanced from the Government Front Bench. The second is that the most important aspect of the Government's economic policy should be their anti-inflationary thrust. We understand that today that is the central objective of the Government.
Then we have the third proposition, which I find difficult to fit in with the other two. It is that this supremely successful Government, who have concentrated on the evils of inflation, have, nonetheless, during the past 10 years been prevented—and uniquely so among the countries of the EC with the exceptions of Greece and Portugal—from entering the exchange rate mechanism principally because our inflation is so much higher than that of any other country.
If the noble Earl could be so kind as to reconcile those three propositions he would do me a great service and I should be grateful. Indeed, he might qualify as one of the more ingenious magicians that we have seen for several centuries.
When we contemplate not merely its state today but the history of the British economy, there is little room for hubris on any side. The economy was in a mess in 1979 and it is in a mess again today, 11 years later. Indeed, if one goes back a further decade to 1970, when I had some responsibility for what was handed over, one finds that, although the indices were in good order—that is, the balance of payments and the Budget were in substantial surplus, inflation was half the present rate and unemployment was about one-third of today's reduced rate—we had not solved many of the underlying problems of the British economy.
During the early 1980s the Government undoubtedly slayed one dragon—that of excessive union arrogance and domination and the consequent stultification of significant parts of the economy. It was done at a somewhat unnecessarily high price in terms of the destruction of much of the manufacturing sector. However, it was a dragon which had to be stayed. I wonder whether the ethos and outlook of the Government have not brought in its place a different dragon but one which could be equally dangerous.
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Indeed, perhaps it is more insidiously dangerous because it is less obvious and less easily perceived. It is the climate in which the pursuit by industrial firms of short-term profit at almost any cost is made almost inevitable for management.
That situation certainly does not apply in Japan; it does not apply to anything like the same extent in France, Germany or Italy; and it may have applied in the United States but it is receding even there. It stems from the disintegration of any stable relationship between industry and finance in the United Kingdom and from the control of about 65 per cent. of all British equity by approximately 200 managers of pension funds, insurance companies and so forth. The duty of those investment fund managers is to maximise the annual profit yield of their institutions' investment portfolios. They are closely competitive with each other. The results are constantly surveyed and compared on a short-term basis. The managers are directly rewarded, or in some cases sacked, depending on the performance shown by the portfolios over a short period.
Alongside that—and to some extent they are allies because they help to put up the short-term return—are the new industrial heroes of Thatcherite Britain, the corporate raiders. They cruise around looking for companies whose current share price does not reflect the break-up value. Companies with weak managements are vulnerable, but that does not matter too much. What matters is that companies with strong managements are also vulnerable if in the view of the corporate raiders they are too far sighted and put too much money into research and development while holding back on dividends in order to pursue a long-term strategic plan.
The result is that, in contrast with Japanese industry above all, where the primary aim is a steady increase in world market share, British industrial eyes are concentrated on defence against next year's hostile take-over bid. A further result is the massive and growing import penetration and indifferent export performance. For many years almost every new factory which has opened in Britain has been Japanese, American or Swedish owned and those which have closed down have been overwhelmingly British owned. The corporate raiders and their supporting shoals—the arbitragers, the junk bond dealers, the City solicitors, the accountants, the advertising and public relations firms—all do extremely well out of this state of affairs. Yet the British economy has a massive balance of payments deficit which still persists, even with the greatly reduced level of activity which normally brings the balance of payments position into considerable improvement. Our long-term market share certainly does not grow and we move increasingly towards a subordinate industrial system.
That is the system which the Government wish to import into Europe and they become indignant towards the so-called hypocrisy of our European partners when it is not universally welcomed. The Government would be better advised to consider strongly whether there should be a fundamental

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reappraisal of this short-termism, this elevation of doing a deal over making something, this concentration of the energies of management upon making or defending take-over bids, this get-rich-quick atmosphere co-existing with Britain becoming steadily competitively weaker. It would be a remarkable and sad, but not impossible, achievement if this long Government were first to promote the total elevation of financial manipulation over industrial strategy and then, having left us with the City and all its ramifications, and little else, when the oil runs down, were in turn to undermine even the City by standing on the sidelines and handing over the financial leadership of Europe to Frankfurt.
12.29 p.m.
Lord Tombs: My Lords, it is a daunting task to follow three wide-ranging speeches from experienced parliamentarians such as the Minister and the noble Lords, Lord Bruce and Lord Jenkins. I wish to speak from a more restricted point of view; that of an industrialist. I declare my interest as a chairman of Rolls-Royce, not because I wish to make points on behalf of the company but because I propose to illustrate some of my points by reference to it.
My industrial career has been divided between the public and the private sectors. I have no doubt about which is the better sector for a company to occupy if it is to contribute adequately to the economic life of the nation. It is, of course, the private sector. The Government should be given full credit for the privatisation programme upon which they have embarked during the past decade. That is not to say that all privatisations are in any way ideal. In some cases there is limited competition and in some cases—perhaps concerning electricity privatisation—the organisation proposed is excessively complex.
Given those disadvantages, nevertheless I believe that removal of the dead hand of state control and its substitution by enterprising management is good for the company and the country. I should like to illustrate that from the experience of Rolls-Royce, which was returned to the private sector just over three years ago. In that period its order book for aero engines has trebled, partly due to the buoyant civil engine market, but more due to the ability to grasp the opportunities offered by that market.
I should like to turn to a topic which I think is unchallenged on all sides of the House; that is, the health of manufacturing industry. That is important to the balance of payments, to employment and to our ability to spend money on desirable ends. The noble Lord, Lord Bruce, was critical of the investment level in manufacturing industry and, to a degree, rightly so, although there are exceptions to his general strictures. However, I believe that the principal reason for the relatively poor investment in manufacturing industry in this country is the lack of stability offered by post-war administrations. We have a history of volatile exchange and interest rates under successive governments. In those circumstances it is very difficult to invest on a substantial scale when faced with the resultant uncertainties.
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Today, industry has two principal problems: namely, the exchange and interest rates. Those have been problems for us for many years, but are especially so today for reasons which have been discussed. The European exchange rate mechanism will not solve those problems, but joining a larger organisation should help to dampen the volatility at least of the exchange rate and, by extension, of interest rates. To that extent, I hope that we join soon and I welcome the Government's commitment to doing so.
I should like to suggest that the role of government towards industry is providing an encouraging climate. To that extent, the reduced personal and corporate tax rates are beneficial.
I thought that the noble Lord, Lord Jenkins, was uncharacteristically unfair in ascribing to the present administration the title "uniquely arrogant and incompetent". That ignores the very powerful claims of earlier administrations to a similar title.
I believe that the Government's attitude to industry should not be interventionist but, on the other hand, should not be as laissez faire as it sometimes is. In my contacts with government through the years, I have noticed that government policies in defence, energy, environment or fiscal matters rarely take into account at an early enough stage their likely effect on the manufacturing base. That is a discipline which should commend itself to all parties. Of course it should not be the dominant factor, but it should be a factor in the examination of any new policy. I speak not only of the costs imposed on industry by a policy but also the manufacturing opportunities often arising from those new policies where an early consideration might enhance them.
Government can help greatly in a more purposeful use of purchasing power than is often the case and in the promotion of technology demonstrators in suitable areas. There are a number of reports by the Advisory Council on Applied Research and Development and its successor, the Advisory Council on Science and Technology, both of which I have had the honour to chair and few of whose recommendations have been taken up. There are some opportunities there which would pay for revisiting.
My simple message is the need to create wealth before arguing about how to distribute it. To do that we need a much closer understanding of the problems of industry. We do not need intervention, as I said earlier, but a better association. I close by commenting that our industrial competitors in Europe in particular are much better at that symbiosis than we have been post-war in this country.
12.35 p.m.
Lord Boyd-Carpenter: My Lords, my first and most agreeable duty is to express your Lordships' admiration and enthusiasm for the admirable maiden speech to which we have just had the privilege of listening. The noble Lord, Lord Tombs, gave us the advantage of his very distinguished practical and successful experience of industry. That is precisely the kind of contribution which is of particular value to your Lordships' House, because although many of

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your Lordships have experience of government and the public service we have not anything like enough industrialists of the noble Lord's distinction who can tell us from the point of view of their practical knowledge of the realities of industry what the noble Lord, Lord Tombs, has been able to tell us.
In addition, he expressed that with great wit and clarity. It was—I hope he will not mind my saying this a real Rolls-Royce of a speech, and I should be the first to warmly congratulate him upon it. I express the hope that he will have the time and opportunity to contribute further to the debates in your Lordships' House whenever it is possible for him to be here. I assure him that he will be listened to with ever-increasing interest when he finds the opportunity to make a contribution to your Lordships' House.
The noble Lord, Lord Jenkins, rightly said that a debate in your Lordships' House on the Finance Bill tended to some extent to concentrate on questions of economic policy. Inevitably it brings in also the effects on the economy of what is being legislated in the Finance Bill. Therefore, although obviously all your Lordships will give their general views on the economy, there is some advantage in relating what one says both to the terms contained in the Bill and perhaps to expressing regret for what it does not contain.
For that reason I say, first, how much I personally resent the fact that we did not receive this Bill which we are debating until less than 48 hours ago. I believe that it is bad management of parliamentary business when a major Bill—and a Bill not without its complexities—is only available to your Lordships within, as it turned out, about 43 hours of the beginning of the debate. I hope that my noble friend the Paymaster General will represent to his noble friends that that is not the way to treat major measures or your Lordships' House.
The matter was complicated further by the fact that although copies of the Bill as finally amended were in existence early on Wednesday, some extraordinary bureaucratic prohibition attempted to ensure that they were not made available to your Lordships until the mystic hour of four o'clock. It was only because my noble friend the Leader of the House exercised his considerable influence that some of us obtained the enormous advantage of obtaining a copy of the Bill at about half-past three. I take very serious exception to that. I hope that the noble Earl the Paymaster General will feel that that is a fairly general view held throughout this House and that when business is arranged in future on important measures it is essential that the Bill before us and which we are being asked to approve is in the hands of noble Lords in sufficient time to enable them to study its highly complex provisions.
I say at once that if in the course of my few remarks I err as to what the Bill does or does not do, there is a simple explanation for that; that is, that it has not been possible to give it proper study.
Having said that, I very much agree with what my noble friend said about the desirability of encouraging
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savings and of expressing support for the not unimportant provisions in the Bill for savings schemes of one sort or another. However, we cannot leave the matter there. One of the great deterrents to saving is that if one saves and derives an income from those savings, despite recent changes one undoubtedly continues to pay a substantial amount of the income on the savings back to the Government in tax.
Our rate of income tax is still very high. When earnings reach a little over £20,000 a year it rises to 40 per cent.; that is to say, two-fifths of what a man earns above that level is taken away in income tax. It could be suggested, and no doubt will be, that at that level no one should mind. However, people on substantial earnings do not have those earnings indefinitely. There is a period in a man's life when he earns highly. But he has to save money to provide for his old age. It is very unusual for someone to maintain a very high rate of earnings into advancing years.
I was sorry that my noble friend the Paymaster General did not give any indication—perhaps he could not—of the possibility of further reductions in the level of income tax. The rate of 25 per cent. from the starting point and 40 per cent. at £20,000-odd per year are high rates of tax. They are a real discouragement to saving. I also express doubt as to whether they are really necessary in order to raise revenue. It is our experience, and that of other countries, that if the rate of tax is lowered the revenue obtained from it is not necessarily lowered also. If the rate of tax is lowered the incentive is removed for people to avoid in one way or another paying tax, either by fraudulent concealment or by perfectly honourable and respectable practices such as going abroad or to the Channel Islands, as many people do for reasons of taxation.
If the Government face up to that reality and make substantial reductions in income tax they will find, surprisingly, that the losses of revenue are a great deal smaller than they apprehend. Despite other problems that exist today I hope that the Government will not resile from what used to be their declared policy of progressive reductions in the standard and higher rates of income tax. I hope also that they will remind people in this country that it is only from a Conservative Government that it is possible to hope for further reductions in income tax. I do not think the noble Lord, Lord Bruce of Donington, will deny that a Labour Government would certainly raise the higher rate. They said they would raise it at least to 50 per cent. and probably higher. Therefore I hope that in his reply my noble friend will be quite firm upon this very important subject.
If we want to encourage people to save we can do it not only by the various devices of tax-free schemes, and so on, but also by making it seem worth while to people, so that if they put money by at the time they are earning well they will be able to obtain a good return on that money without excessive deductions of tax either under the present Government or under other governments. That is essential.
That has a great deal to do with what was said by both the noble Lords, Lord Bruce of Donington and

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Lord Jenkins of Hillhead, regarding the need for investment. I agree with them that modern industry calls for very high levels of investment, and that the development of competitive equipment in most of our industries involves substantial investment. It is in that context that I take a somewhat different view from the noble Lord, Lord Bruce of Donington, regarding foreign investment for British industry. It always seemed to me that the fact that foreign countries, particularly the Japanese, think that this is a good country to invest in and are prepared to bring their money here is not only a compliment to Her Majesty's Government as to their management of the economy and shows confidence in the way that that is done, but is also beneficial to this country directly by way of providing additional employment and by increasing the output of British goods. I see that the noble Lord, Lord Bruce of Donington, is exhibiting symptoms of upheaval.
Lord Bruce of Donington: My Lords, I am grateful to the noble Lord for giving way. He may recall—if he does not, an examination of tomorrow's Official Report will confirm it—that at no point in the remarks I was privileged to make to your Lordships did I pass any comment at all upon overseas investment in this country.
Lord Boyd-Carpenter: My Lords, I am obliged to the noble Lord. During a speech which did not err on the side of brevity I obtained the impression that the noble Lord had taken that line. If he did not, I apologise to him and am glad to know that at least on one point he was right.
That was the only point I wished to make to my noble friend on income tax. I have one or two more points to make on taxation, and one goes in the other direction. I am sorry that Clause 2 of the Bill does not further increase the tax on tobacco. If people, by smoking, are taking a step which undoubtedly in the long run will increase the cost of the National Health Service, they should be made to pay for it. One of the ways in which they can be made to pay for it is by a swingeing increase in tobacco duty. Not least for that good reason, and for the additional reason that it would bring in some revenue without doing any economic harm whatever, I hope that Her Majesty's Government will take a much firmer line on the taxation of tobacco. I realise that one or two noble Lords who are persistent smokers may not wholly share my view, but it is one that I hold very strongly.
One of the troubles in our taxation system arises from VAT, which is a very bad tax. It lacks the flexibility of the old purchase tax, in which I had some share at one time in administering. Purchase tax could be moved about so that it fell very heavily on luxuries and exempted necessities. VAT, in my view, is highly inflationary.
It may be argued that by subtracting a certain amount of purchasing power for the payment of VAT, inflation will be eased. However, that does not happen. By increasing the RPI, as VAT does, one simply ensures that wage demands—which are
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increasingly based on RPI figures, quite understandably—are higher than they otherwise would be. Therefore by making everything more expensive by the imposition of 15 per cent. VAT, we are simply pushing up wage demands unnecessarily. Nobody receives any additional benefit but prices are in fact being raised.
I was delighted to see that the courts turned down the efforts of the VAT authorities to impose VAT on airline meals. It seemed to me to be a peculiarly silly proposal even for those who organise VAT. I was delighted to see that they failed. However, I am sorry that the present Finance Bill does not deal with the point raised in last year's debate in respect of VAT; that is, the extraordinarily oppressive arrangement in respect of motor cars.
I do not know whether noble Lords recall this, but if one buys a car one must first pay car tax on it. One is then mulcted in VAT, not on what one paid for the car alone but on what one paid for the car plus car tax. There is therefore a 15 per cent. tax on a tax. That is extraordinarily oppressive. For a government committed to tax reform I must express very great regret that that has not been remedied. I hope that my noble friend the Paymaster General will deal with that.
There is then a better story over the composite tax which your Lordships discussed last year. I understand that it is to go. It is of course an indefensible tax because it involves imposing income tax on people with incomes below the income tax level. That is outrageous. I am only sorry to learn, if I understood my noble friend and the Bill aright, that it is not to go until 6th April next year. I had hoped that it would be abolished at once. It is indefensible to set a level of income below which people are not supposed to pay tax and then make them pay tax because they have put their money into a building society or a bank. The result is that a great many people, particularly widows, are made to pay tax when other people with identical incomes are paying none. Is it not possible, even now, to expedite the waiving of that tax at an earlier date than 6th April next year?
I do not altogether agree with the emphasis that the noble Lord, Lord Bruce of Donington, put on industrial development. This country is also very reliant on service industries; on finance, tourism, and many other useful sources of income which far more frequently than industry in past years have shown a credit on the balance of payments. For that reason I looked with some interest at Clause 81, which deals with various City taxes.
At this stage I should declare an interest as director of an investment trust. Although Clause 81 makes some considerable improvement, it does not go the whole way. I understand that the so-called bond washing rules unintentionally catch the options of pension funds, thereby preventing them from taking advantage of the broader tax exemptions for derivatives contained in Clause 81. I hope that that will be looked at because it is increasingly important that the position of the City of London as a financial centre should be fully maintained in the coming years.

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With our closer contacts with Europe it is particularly important that the position of the City should be maintained. If our tax system, in return for a negligible yield, is operating to prevent City companies undertaking lawful and proper operations which assist their conduct and assist them to handle money brought in from abroad, that is very damaging. I understand from responsible sources that although the Government apparently accept that that is the position and are bringing forward proposals to improve it, they do not go the whole way and there are still considerable risks and difficulties arising over the limitations into which the caution of the Inland Revenue has no doubt pushed them.
This is a vastly important Bill. Although we say we are discussing only economic policy, the Finance Bill each year is one of the major instruments by which economic policy can be conducted. I fully support the general line of the Government. I do not believe that our position, although it obviously has its problems—it would be foolish to dispute that—is anything like as serious or difficult as suggested by the noble Lord. Lord Bruce of Donington, and, for that matter, the noble Lord, Lord Jenkins of Hillhead. One need only look around this country today to see that the general standard of life has shown a considerable improvement over the years. People are, as a whole and on average, very much better off than they have ever been before and that despite the difficulties of the time. That good situation is due largely to the efforts of the present Government, which I hope and believe will continue for many years to come.
12.55 p.m.
Lord Varley: My Lords, it is a great privilege to address this House for the first time. After spending nearly 20 years in another place and the last six years working in private industry, it is a pleasure to be back in the Palace of Westminster. I am particularly fortunate too to be making my maiden speech on the same day as the noble Lord, Lord Tombs. I have fond memories of working closely with him in the public sector when I had the honour of being at the Department of Energy. He was of course chairman of the South of Scotland Electricity Board. He then went on to the Electricity Council and was a distinguished member of the Nuclear Power Advisory Board, which I had the privilege of chairing.
I listened to the noble Lord's strictures about government intervention. I bet that as chairman of Rolls-Royce he is delighted that Mr. Heath took the opportunity of intervening massively to take it into public ownership and that successive governments should then put millions of pounds into the organisation in order to get it into a prime state for privatisation. I know the company and wish it well.
I wondered whether the Finance Bill would be an appropriate subject on which to make my maiden speech because I am keen to observe the courtesies and conventions of the House. I shall endeavour not to be too controversial and, better still, I do not want to take too long. However, the Bill provides an opportunity to refer to the general economic situation and the conditions applying since the Budget speech.
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It is five months since the Budget and nearly three months since the Finance Bill was published. A great deal has changed since that time. Some would say that our economic and industrial problems have worsened.
I believe that the economy is slowing down and the recession is much more virulent than some commentators suppose. Clearly Mr. Major has had a great deal to concern him since he took over as Chancellor of the Exchequer. He is wise not to use the phrase "economic miracle" which used to trip off the tongue of Mr. Nigel Lawson. With high interest rates as the chief economic weapon—I know that the Government claim that that is not so, but many people believe that it is the only economic weapon being employed by the Treasury—unemployment is again rising, inflation is close to 10 per cent. and our trade deficit stands at a record level. Therefore, the Chancellor is right to urge caution, as I understand he did earlier this week at a meeting of his political friends. I do not believe that there is a pot of gold at present.
It must be a matter of great regret for the Government to see the public sector borrowing requirement for the first three months of this financial year. At the time of the Budget the public sector debt repayment was being anticipated. It may be that a surplus will still arise at the end of the financial year and I look forward to the noble Earl perhaps telling the House whether that is still the Government's expectation when he speaks at the end of the debate. If that happens as a result of the electricity supply industry moving from being a public monopoly to a private monopoly—to all intents and purposes—it will stretch credulity to the limit.
The British people have had the great good fortune in the 1980s of being self-sufficient in primary energy, as mentioned by my noble friend Lord Bruce of Donington. Now we seem to take North Sea oil and gas for granted, as though we have been fortunate to have such supplies for decades. It is worth recalling that not a drop of North Sea oil came ashore until the middle of 1975 when the Argyll field owned by Hamilton Brothers came into production. The full economic benefits, which have been massive, did not arise until the 1980s and they have been to the benefit of the present Government during the whole of their period of office. However, in my judgment, those supplies have allowed us as a nation to be quite cavalier with much of our manufacturing industry. Our manufacturing base has shrunk. We have neglected it.
That point was brought to light very vividly by the Select Committee of this House, chaired by the noble Lord, Lord Aldington, to which my noble friend referred. The revenue from North Sea oil has certainly cushioned the impact of the mass unemployment of the early 1980s. It provided money broadly to maintain our social security payments, although I accept that the social wage has been reduced. However, I am absolutely certain that history will show that we failed to make the best use of our unprecedented good fortune and strength in energy resources.

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British manufacturing industry has not only been neglected but its problems have been aided and abetted by what has come to be known, and what was referred to by the noble Lord, Lord Jenkins of Hillhead, and my noble friend, as the short-termism of the City and of the institutions that form the City. In the boardrooms of British Companies, they not only have to deal with the high interest rate policy, tighter margins and now in some cases profit decline, but, even when the economy was strong and growing, a disproportionate amount of time was spent by boards of directors on taking the temperature of the share price, whether they could maintain its strength, improving the year-on-year dividends and analysing closely the share register to ensure that there were no predators around and that corporate raiders were not eyeing their company.
British industry is forced to pay far too much attention to City interests rather than long-term investment, product development and good old-fashioned risk taking. Unless the pay back on investment is fast—usually within three to four years—it is rarely put in place. That is the case for many companies in Britain.
It is quite inconsistent that, while we properly welcome inward investment from Japan, as the noble Lord, Lord Boyd-Carpenter, said a moment ago, and we are prepared, again quite rightly, to devise all kinds of special inducements to attract Japanese industry to these shores, those industries have grown in strength as a result of the long-term development and practices which are anathema to some of the City interests and to the Treasury.
I hear Minister after Minister proclaim that they are creating a framework for industry to thrive, only to see the inexorable rise in our trade deficit. If manufacturing industry was thriving, our propensity to import would have been much less over recent years. No one can put all the blame on all governments. It must be a matter of great distress that inflation is nudging 10 per cent. and unit labour costs are rising quite alarmingly. Again, I make the distinction, as did my noble friend Lord Bruce of Donington, between unit labour costs and wage increases.
There are two ways of reducing unit labour costs. The first is to increase demand, but at the moment that is not an option open to the Government because their policies are quite in the opposite direction—high interest rates to dampen demand. The second, which is much more preferable if it is possible, is to increase productivity by increasing output per head, but that can be achieved only on the shop floor of the individual firm. There is no general policy through which a government can perform that vital objective. What we pay ourselves—what we call unit labour costs—unlike raw material costs or imported material costs is wholly within the control of the British people. If we ignore that issue, the impact on our international competitiveness and on the value of our currency will be devastating.
There is much discussion at this time in the context
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of our economic problems about our possible entry into the European exchange rate mechanism, which has been mentioned by several noble Lords during the debate. During my period in another place I was a reluctant European. When the Government of my noble friend Lord Wilson of Rievaulx applied for entry into the Common Market, I voted against. Again, when in 1975 my noble friend Lord Callaghan of Cardiff, as Foreign Secretary, renegotiated the terms of entry into the EC—the terms which had been agreed by Mr. Heath's Government—I was one of seven Cabinet Ministers to vote no in the subsequent referendum.
I always believed at that time that there was a British way and that we could thrive and prosper on our own. I must confess that I was wrong. I am certainly wrong now in the light of everything that has happened over the past few years. I now see no point whatsoever in being a reluctant European for those who have a genuine fear about the economic might of Germany, following integration, lead me to believe that only full-hearted participation in European institutions can now help the United Kingdom.
Although it is by no means a panacea—I hope that I am not disappointing my noble friend Lord Jay entry into the European exchange rate mechanism may bring a discipline to our monetary affairs that has so far escaped us. It may allow us at least to have the manoeuvrability to put in place some long-term, strategic investment in training and, above all, in public transport and industry. It may diminish the narrow short-term view of company performance by those in the City.
By the time we come to consider next year's Finance Bill, I hope that many of the problems that we face today will be resolved. However, I doubt very much whether they will be.
1.6 p.m.
Baroness Seear: My Lords, I am privileged to be the Member of this House who is able to express and has the pleasure of expressing to the noble Lord, Lord Varley, real appreciation of that quite remarkable maiden speech. People always say that maiden speeches are remarkable, but this is a remarkably remarkable maiden speech in that the noble Lord managed to bring in many matters of great substance which were potentially—and not even potentially; in actuality—controversial, but he did it in a way to which no one could possibly take the slightest exception. It was a real contribution to the subject that we are discussing today and not just an entry ticket to our debate, as maiden speeches inevitably sometimes tend to be.
Listening to the noble Lord, Lord Varley, one realised how fortunate your Lordships' House is to be able to draw on people of such varied experience from which they have obviously learnt so much. The noble Lord's life story, starting in industry, with great parliamentary and ministerial experience, followed by experience and responsibility in the private sector, makes him quite exceptionally suitable as a further addition to your Lordships' House. When his

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colleagues think about tidying up this House, I hope that they will bear in mind the importance of being able to continue to incorporate into the upper House people with the kind of experience of the noble Lord, Lord Varley. Although the noble Lord, Lord Boyd-Carpenter, has already congratulated the noble Lord, Lord Tombs, I should also like to say how much we all also enjoyed his speech.
I have been somewhat surprised that, so far as I can recall, no one in the debate has yet challenged one very import ant aspect of the Finance Bill. We all agree that inflation is enemy number one and that it must be control led at all costs. There can be no doubt that the effect of inflation on personal expenditure, mortgage rates, bankruptcies, indebtedness, the problems that industry faces and the success of manufacturing industry, large and small, makes its control of the greatest importance. However, no one has said that high interest rates are the only way to control inflation.
It is perfectly possible, as has been repeatedly said by my honourable friend Mr. Beith in another place, to use fiscal means as well as interest rates in the control of inflation. It is one of the arguments for going into the single market. It was very restrained of me, I think, in welcoming the noble Lord, Lord Varley, not especially to stress the importance of his conversion to the Common Market and to the ERM. One of the great advantages that will be gained from full participation in the exchange rate mechanism is that the discipline of the mechanism will force us to look at methods other than high interest rates to control inflation. Fiscal means are one way of doing it.
I should like very much to have spent a limited time elaborating that point. However, with unusual self restraint, I have decided today that I shall not talk about the general economic situation and the other ways in which inflation can be controlled but concentrate instead on Clauses 24 to 27 of the Finance Bill which have not so far been mentioned during the debate. Those clauses deal with changes in taxation in relation to charities.
I say straight away that I congratulate the Government on the introduction of gift aid and on the way in which it has been made much easier for larger sums to come forward for charitable giving. However, give-as-you-earn, which was introduced in an earlier Budget, has not been the success so far that it ought to be. Give-as-you-earn is at present producing something in the range of £7 million a year. More than 26 million people are employed in industry. It is impossible to believe that that figure of £7 million cannot be raised through a properly organised and run give-as-you-earn scheme. We like to pat ourselves on the back for being very generous people. According to the Charity Aid Foundation we give on average £2 per month per household. I have not worked that out in cigarettes but it is not very many. It should surely be possible to improve the level of giving.
I understand that some of the major charitable foundations have raised with the Government the possibility of matching funds for a very much better information scheme to boost give-as-you-earn. One of
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the reasons for its relative failure—one must regard £7 million as relative failure—has been the lack of information to both employers and employees. Will the Government consider a powerful information exercise on a matching funds basis? If the charity produced £500,000 the Government would then give £500,000 to invest in getting more money out of give-as-you-earn.
I choose this subject for today because I want to raise a much wider question in connection with charities and charitable giving. The Government have talked a great deal—and it has been well received on the whole in this country—about the importance of partnership between statutory bodies, the private sector and the voluntary sector. That is a very nice term and, if properly carried out, has a great deal to be said for it. But the fact of the matter is that it is not working. We are relying on the voluntary sector, in participation with others, to carry a very heavy share of a wide range of social and economic developments. For the voluntary sector to do this it has to be able to rely on adequate funds and, even more importantly, has to be able to retain a proper degree of independence.
Over recent years, and particularly over recent months, many voluntary organisations which have undertaken heavy commitments have found themselves in an almost impossible position because of the way in which the statutory bodies have, not to put too fine a point on it and in the absence of the noble Lord, Lord Cledwyn, welshed on their commitments to the voluntary organisations. It is no secret that, in regard to Employment Training, contracts were cancelled at a month's notice to voluntary organisations which had heavy commitments in rents, in payments to staff and in other expenditure. Those contracts were renegotiated at a very much less favourable level.
When such things happen—it is only one illustration of the difficulties—voluntary organisations have turned to the private sector. It is part of the policy that there should be this partnership between statutory bodies, the private sector and voluntary organisations. Many members of the private sector have responded admirably. I can say from my own experience—I name no names—that we have been saved by the timely and generous intervention of the private sector when the public sector has let us down. That is not good enough for a number of reasons. The voluntary sector should not be so dependent on either the statutory sector or on the private sector. Nor is it really right, without a good deal more thought, to take it for granted that the private sector will be a major partner in this kind of enterprise.
Giving by the private sector is fine up to a point but it is not really the private sector's primary task to be bailing out social schemes which should be financed very often in other ways. Its primary task, as has been made clear by speaker after speaker this morning, is to invest in industry, to get down prices, to pay decent wages and to pay decent dividends. Yes, it is good that the private sector should fund from its additional money when it has some opportunities to help schemes of social importance of one kind or another,

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but it should not be relied upon to deal with emergencies in the way that it has been called upon to deal with them in recent years and months.
There is another point here. The private sector does not have expertise to understand how that money should best be spent. It is not expert. Why should it be? It is not expert in which organisations and which undertakings should receive these resources. It does a good job in difficult circumstances but it is not expert in making those decisions. In many cases giving by the private sector is well informed and well carried out. But it must be no secret in the House, where so many noble Lords are involved in schemes of this kind, that if one wants to get money out of the private sector at the present time one needs to know someone on the board, one needs to twist his arm, one needs to know someone's wife, one needs to know what the particular favourites are. That is not always the case but inevitably that is the way in which things tend to be done. It is, to put it mildly, a second best way.
What is the alternative if we are to maintain the idea of partnership between those three sectors, which we all support, and if we are not to run into the difficulties which I have attempted to outline? The only way is to build up private giving through a development of trusts and foundations, of which at the moment we have many but not enough. They will be staffed by people expert in the problems of those areas for which appeals are made. They will carry out the distribution of the money offered through the private sector to these foundations, as is more frequently done in the United States of America than here. That would ensure that the distribution is made by people who are expert and who are becoming increasingly so, in dealing with the schemes' problems and the areas asking for help, be it the arts, social services, sport or all the other multifarious schemes which require financing.
This new approach calls for a new look at the way in which people can be encouraged to give. That is why I have spoken for 13 minutes, which is much longer than I intended. I do not expect the Minister to be able to give me a reply today. However, will the Government look very hard not at welcome but minor changes in taxation but at ways in which we can build up a far more effective system of encouraging and canalising private and private sector giving so that it is used in the best possible way, and thus make this partnership which we all applaud a reality, which is not the case at present.
1.20 p.m.
Lord Molloy: My Lords, I should like to join other speakers who have already expressed their sincere appreciation of the maiden speeches of my noble friend Lord Varley and the noble Lord, Lord Tombs. One of the great things that I remember about when my noble friend was a Cabinet Minister, is that he was always available to listen to what some of us might have assumed was advice or guidance. His great gift was that he realised that the importance of Parliament was on the Benches behind the Cabinet Ministers.
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I should also like to congratulate the noble Lord, Lord Tombs, on his remarkable experience both in the public and in the private sector which he brings to this House. I can remember a time when the words Rolls-Royce were magic to everyone, even to those who never stood a chance of ever riding in one, let alone owning one. Everyone was proud of the Rolls-Royce. Some of us also understood that the creators of that wonderful motor-car—that is, the scientists, the engineers, the technicians, the industrial specialists, the fitters and the machinists—all depended in turn upon the steel workers and the miners, where the process started, and also upon many other tradesmen. It was a great example of a British industrial corporation which produced the magic name of Rolls-Royce.
The Minister said that there are people who will not agree with the claim that the Government's policy is not working. He continued to say that he had to say that they are all wrong. Whoever gave him that advice, gave him a very dangerous and unfair instruction.
There is one aspect in this area which I do not believe we are examining in enough detail. What happens to the families who form part of the millions who are unemployed? I refer to the agony and the quarrelling within the family. I know about it because I had to witness it. My mother and my father argued brutally. Why did my father go up to the pits when there was work on Swansea docks? He did so because he thought that if he went to the pits he might get some work. That caused terrible confusion and agony in the family. That kind of attitude does not seem to appeal to the present Tory Government—not that it did to the Tory Governments before the war.
The Government continue to make excuses for unemployment, knowing that they created it. However, after they have pushed up unemployment to 8 million and then brought the figure down over four or five years, they have the nerve to claim that they have reduced the number. That is one of the most crass and almost obscene claims that any government can make. I hope in the future that they will realise the appalling stress which is imposed upon a family through years of unemployment.
I turn now to deal with the point made by the noble Lord, Lord Boyd-Carpenter. He said that it was to the credit of this Government that the Italians and the Japanese are coming over here to buy British water companies, and to purchase British organisations which were once publicly-owned industries and undertakings. In my view, Lord Stockton put it correctly when he said that what the Government were doing was selling the family silver.
We should all appreciate—as I am sure we do—that a Finance Bill, like all other Acts of Parliament, concerns people. It concerns their standard of life and their guard against inflation. So far as is humanly possible, we should always try to ensure that there is fair play. I regret the fact that the present Government do not seem to be concerned with the latter. They seem to be aiding inflation. The cost of living is increasing. For example, prescription charges are above the rate of inflation. This affects the poor and the sick more

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than anyone else. It is deplorable to target the poor, the sick and the disabled in this way. The situation has been going on for some time.
I believe that that it is a highly deplorable situation, especially when one realises that drugs will cost an extra £15 million a year, and that to pay for those extra costs there will be yet another increase in prescription charges and probably many others, based on the idea that the sick, the ill and the crippled must pay. Only one-third of the cost of drugs is available, and government policy seems to suggest that they will have to depend upon people becoming ill. I know that the Government are not particularly fond of the BMA or the Federation of Health Service Employees. They sometimes seem to detest the Royal Colleges. However, all these institutions say that it is a tax on illness, which is disgraceful.
We should remember that Aneurin Bevan, with the aid of my noble friend on the Front Bench Lord Bruce of Donington, did great work in introducing the National Health Service. At that time we had just fought a tremendous war which was the most difficult war in our history. But, right or wrong, we had overcome an almost implacable foe. Yet, as soon as peace was restored, they embarked upon a policy of civilised behaviour and introduced that great Act of Parliament which created the National Health Service. It was to become, and I believe still is, the envy of the world. Nevertheless, there are indications that it will slowly be chipped away.
The Social Services Select Committee in another place, which has a majority of Conservative Members, employed the Institute of Fiscal Studies to look into the matter. It condemned the Government's attitude in every aspect of taxation, and their attitude toward the great services. It is of the opinion that the poorest families will receive the smallest increase in every respect except taxation. The committee is so alarmed by the situation that it is to call for more details to examine what can be done for the future.
In discussing a Finance Bill, we should also be concerned about housing. I think, on reflection, that it might have been a wise thing to encourage people who were living in council houses to own them. However, what was deplorable when they set about buying their homes was the fact that the interest and mortgage rates became so high that they had to give up their homes. In this Great Britain of ours, many of our cities are spoilt and shamed by the increase in the number of cardboard beds in the main streets. Anyone on arty evening can walk down London's Oxford Street or Tottenham Court Road and many of the equivalent streets in Cardiff, Nottingham, Manchester or Glasgow and see tens of thousands of people sleeping rough.
People in local government of all parties are desperately ashamed about the housing situation. They deserve some appreciation of the situation by the Government to help them overcome the appalling housing shortage. A large percentage of British families have an income below the Council of Europe's decency threshold. Our country is the one
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country which has been singled out in this respect. Is it a question therefore of those people being out of sight and hence out of mind?
There is one remarkable development of which the House should take note. It is the sensible approach of the TUC and the CBI, whose general secretaries have said some remarkably wise things about British industry. Both condemn stupid and unrealistic wage claims, and absurdly high directors' salaries. They both agree, as my noble friend Lord Bruce of Donington, said, that it is vital that we increase investment in British industry. We cannot go on telling the workers and trade unions, "You must not put in for a wage claim wanting another £30 a month", when we read in the Financial Times of a director who received £8 million for five days' work. That is an abomination. That is read not merely by people in Glasgow, Edinburgh, Yorkshire, Cardiff and London but by people in Paris, Rome and Germany. We are laughed at. People wonder, have we lost our way? Wage and salary restraint is necessary to combat inflation, and therefore I agree with the general secretaries of the TUC and CBI.
We must maintain and protect our care services. Unfortunately, they have to be protected from possible government brutalisation and the destruction of the principles of compassion. Our children are our future. In co-operation with local authorities, Parliament must see that they receive the best possible education. Our children have two fundamental needs: the best of health protection and the best possible education. Child benefit helps. It is a great benefit and has done a great deal of useful service. It is essential that we have investment in our industry, and we must see that the best possible education is provided for healthy British children or we are in danger of becoming a divided nation.
It is remarkable to recall that during the war we had fair play. Fair play was the principle lying behind everything. It was maintained after the war with the creation of the welfare state. The mixed economy ensures that there are no dead hands in any part of industry, public or private. A dead hand is bad for both. We have had it in both. It must be removed from both sectors. There must be sensible collaboration and co-operation between both sides of industry—between the workforce and the managerial force. We should maintain the welfare state and keep compassion at the top of the agenda. That will be good not only for this country; it will provide a civilised example for many other nations.
1.33 p.m.
Lord Monson: My Lords, there is just time for me to say how much I enjoyed the two excellent and stimulating maiden speeches. Faced with a Bill of 133 clauses and 19 schedules, one obviously has to be highly selective. The first topic that I should like to mention is not dealt with directly in the Bill; nevertheless, it is highly relevant to government finances, inflation and so forth; not least because, amazingly, it is now reflected in the retail prices index. I refer of course to the poll tax. The disproportionate costs involved in the collection of that tax and the

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enormous problems of non-payment need no elaboration; nor will the almost universal feeling that the tax is unfair fade into oblivion as the Government hope, notwithstanding the latest trivial concessions announced yesterday.
For all the talk of all-embracing rebates for the poorest, the fact remains, as I pointed out a few weeks ago, that in Oxford, for example, young people earning less than £94 a week pay approximately 10 per cent. of their gross income in poll tax. That is shocking. As I understand it, in France no one with an income at that level pays any form of direct tax. In Oxford, a single person with an income of £12,000 a year pays proportionately as much income tax, national insurance contributions and poll tax as does a single person with an income of £24,000 a year who is in all probability living in a much larger house. The progression in our taxation system to which we have become accustomed over the past seven or eight decades is virtually disappearing.
A great opportunity was missed in the Bill to make up for the non-progressive nature of the poll tax by making the income tax system more progressive by way of compensation. For example, the single person's allowance could have been raised by £400 with all other personal allowances raised pro rata; or a reduced rate of tax on the first £6,000 or so of taxable income would have been introduced, balanced by the introduction of an intermediate rate of tax of 35 per cent. and a top rate of 45 per cent., or by limiting tax relief on mortgage interest to a maximum of 32.5 per cent. this year and to the standard rate next year, by which time interest rates should have come down so as to make the move relatively painless.
Such a move would, incidentally, help to counteract the rise in the price of larger houses which all economists agree will be the inevitable consequence of the introduction of the poll tax. Some move in that direction would have gone a long way towards reconciling the public to the flat-rate nature of the poll tax but, alas, it was not to be.
Another topic which is not in the Bill but which impinges upon it is that of child benefit. There are some who maintain that we should reintroduce tax allowances for children. If there are to be tax allowances for wives, why should we not reintroduce them for children? That is logical, but the trouble is of course that the greatest benefit goes to the better off. The solution might be to treat child benefit as a dividend, paid net of the standard rate of tax with a tax credit attached. Let us suppose that the weekly sum were to be increased to £7.50 per child. Parents who were not liable to pay tax would be able to reclaim an additional £2.50, bringing their total up to £10 per week per child; parents taxed at the standard rate would receive £7.50; and parents liable to the higher rate of tax would eventually repay £1.50 leaving them with £6 a week net.
Lastly, I turn to two specific clauses in the Bill: Clause 22 slightly increases the tax on company cars; but as an honourable Member—a Conservative honourable Member, let it be noted—said in another
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place a few days ago, that did not go far enough. The rationale of lowering the top rate of tax—ours is about the lowest in Western Europe, and, what is more, lower than that of Japan—was that perks would no longer be necessary; they would gradually wither away. They have not done so. We have a higher proportion of company cars than anywhere else in Europe. That cannot be a good thing. Company cars tend to have larger engines than private cars. Larger engines use more fuel and cause more pollution. For prestige purposes company cars have larger bodies, which take up more space in our overcrowded island. In an average London street one could park 10 private cars in the space occupied by seven company cars, with their burglar alarms going off seemingly 23 hours out of 24.
Nor is the British motor industry helped since most of those cars are now foreign made. That was not always the case: there was a time when most company cars were British. This is no longer so. I therefore agree with the honourable Member who, I re-emphasise, was a Conservative. I say that because I am trying to argue from the point of view of fairness and not doctrine.
That brings me neatly to the point touched on yesterday in Question Time which was certainly not resolved to the satisfaction of many people. Clause 54 of the Bill among other things removes all accumulated indexation from highly respectable, long established, gilt-edged, onshore unit trusts—and once more I declare a minor interest. The noble Earl, Lord Caithness, tried to argue that the sudden disallowance of indexation which has accumulated month by month for up to eight years was not retrospective. If it was not retrospective, then the overnight imposition by some hypothetical future Left Wing government of, let us say, a capital gains tax on 10-year insurance policies or income tax at the highest rates on accumulated pension fund contributions, must equally not be retrospective. I cannot see a future Conservative opposition ever accepting such an assertion. However, no matter. The point is that it is an extremely dangerous precedent to set.
It is true that building society indexation was disallowed overnight, but building society indexation was essentially a freak event which nobody ever expected. Consequently nobody expected it to last. Against this, Mr. Jeremy Hanley, the honourable Member for Richmond and Barnes, in a Standing Committee in another place on 5th June, at column 132 of Hansard, gave five examples where perfectly reasonable notice of tax changes had been given. I added another example yesterday.
Furthermore, I specifically wish to ask the noble Earl—and I hope that he will have time to reply when he sums up—why the new rules apparently apply, according to all the professional advice I have received, from midnight on Budget eve and not from midnight on Budget day, or even from 6 p.m. on Budget day, after the exchanges have closed. It thus catches people who had perfectly innocently sold on

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the morning or early afternoon of Budget day, rendering them liable to enormous capital gains tax bills.
Apart from the recognised evils of retrospection, there is the simple matter of what is fair and what is unfair. On 9th March 1982, Sir Geoffrey Howe, in his Budget speech, after talking about the injustices attaching to capital gains tax, said at column 755 of Hansard:
"It is intolerable for people to be permanently condemned to pay tax on gains that are apparent but not real—gains that exist only on paper".
On 8th May 1985, Mr. Peter Rees, as he was then, Chief Secretary to the Treasury, replied to an indignant question from Sir Brandon Rhys Williams. He stated that it was a matter of profound regret that capital gains remained a levy purely on inflationary gains. In his Budget Statement on 15th March 1988, at columns 1004 and 1005 of Hansard, Mr.Nigel Lawson said:
"capital gains tax … should not be a tax on the original capital at all … the tax [which] falls largely on purely paper profits … bites deeply and capriciously, into the capital itself.
"This has long been recognised as manifestly unjust. Indeed, from the time I first entered the House I have argued that capital gains tax should fall only on real gains and not on paper gains".
However, it now seems that the policies and the strongly and sincerely held sentiments of Sir Geoffrey Howe, the noble Lord, Lord Rees, in his previous incarnation, and Mr. Nigel Lawson are being thrown into reverse, as is their policy of fiscal transparency, as it is called. As I pointed out yesterday, paper profits are again going to be taxed and possibly quite heavily taxed. A major unfairness is being introduced to cope with a minor abuse which could be dealt with by other means.
Speculation in commodities, futures, and so on is benignly treated from the taxation point of view. Collective investment in solid government stock—one is talking about a total of £736 million invested by 64 trusts—is in contrast being treated as something sordid and disreputable. This is especially hard on elderly and retired people who tend to invest in trusts like these—rather foolishly, one has to say, considering how badly gilts have performed over the past 10 years or more. That is contrary to what an honourable Member on the Labour side alleged in another place. Gilts unfortunately are a risk investment.
The new clause will tempt elderly and retired people to invest in latter day Barlow Cloweses because something like Barlow Clowes is not a unit trust but invests clients directly into gilts, so they avoid what is effectively a tax rate of 55 per cent. when one takes into account corporation tax on underlying profit.
It will make the position of Lloyd's members who are already reeling from massive losses on Piper Alpha and other disasters even more difficult. Moreover, the Government have effectively changed the terms on which they issued stock originally so as to entice investors. It is not in the long term interests of the Government or the country. Mr. Sam Brittan's article on the centre pages of the Financial Times yesterday
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was entitled, "Goodbye to those Budget surpluses". It may well soon be the case that the Government will have to start issuing gilt-edged stocks once more. This ruling will mean that the new gilt-edged stock will have to he issued on more generous terms than would otherwise be the case.
Mr. Peter Lilley, in Standing Committee, seemed tacitly to acknowledge that the new clause is unfair on certain unit holders, while arguing that it would be too complicated to rectify. In any case, only the better off would suffer. That is a totally unacceptable argument, even leaving aside the fact that anyone with more than £10,000 0,000 in gilt trusts will be hit by the new clause. I do not think that anyone would argue that £10,000 represents a fortune nowadays.
Two remedies have been proposed. The first involves confining the new ruling to offshore trusts into which most of the efforts at tax avoidance are concentrated. That is a possibility but better, in my opinion, would be to proceed with disallowing indexation on losses, although the retrospective aspect is still abhorrent, but to continue to permit indexation of gains, which is what the Inland Revenue press release on 20th March suggested was in the Government's mind. What the press release said and what the Government said later are two quite different things.
In this way, deposit trusts, into which most tax avoidance schemes are concentrated, would be hit, but gilt trusts in general would not. That would allow the equitable and just treatment of purely paper gains initiated so splendidly by Sir Geoffrey Howe and Mr. Nigel Lawson to continue. I hope that, come November, the Government will see fit to introduce a short Bill to remedy the injustice of Clause 54 as it stands.
1.47 p.m.
Lord Ezra: My Lords, we are coming to the close of this wide-ranging debate. Many noble Lords have talked about broad issues of policy. A number have talked on specific clauses in the Bill. The noble Earl did so when he introduced the debate, as did the noble Lord, Lord Boyd-Carpenter, my noble friend Lady Seear and the noble Lord, Lord Monson. Others dealt with broader matters, in particular the two noble Lords who made their most impressive maiden speeches today. I was pleased to be present when they did so because I have known them for many years in the period when I was in the energy industry.
The noble Lord, Lord Tombs, was successively chairman of the South of Scotland Electricity Board and then of the Electricity Council. I met him in varied capacities, as I was in one sense a supplier and in another sense a competitor of his great industry. We met on a body which was quite big in those days. I have no idea how large it is now; somewhat diminished I fear. It was known as the Nationalised Industries Chairmen's Group. Noble Lords opposite have done something to reduce the membership of that group. It was quite a good thing while it lasted because we had interesting discussions.
Lord Molloy: All British nationalised industries.
Lord Ezra: That is right. I never thought it would receive this amount of praise.
I knew the noble Lord, Lord Varley, over many years because of his close association with the mining industry—not only himself but his father and other members of his family. I knew him particularly when he was Secretary of State for Energy. I shall always owe him a great debt for the help he gave to the coal industry at that time in one of the many difficult periods in the life of that great industry. We are particularly fortunate to have these two noble Lords with us participating in our debate.
Of the broad issues of policy which have been raised in the debate today I believe the two most important are inflation and investment in industry. Those were the two big matters that came out of the debate, although a number of other important issues were also raised. However, I shall concentrate on the two issues of inflation and investment in industry.
Everyone is agreed that the malady of inflation has to be dealt with. The Government are adopting strong measures and taking steps which they believe are right to deal with the problem. There have been signs recently that the medicine may be starting to take effect, at least as regards high street spending and private credit. However, the thing which is worrying, and which was referred to by my noble friend Lord Jenkins and the noble Lord, Lord Tombs, is our long term-policy towards inflation. Are we getting back to the stop-go situation? Are we getting back to the situation of up and down inflation, where inflation is up today but no doubt will be down tomorrow, and who knows what will happen the day after? Will we find that situation recurring over the years?
When we look to the Continent and to our major partners there, in particular France and Germany, we find that they seem to have found a way to stabilise inflationary trends. We have the immediate problem of bringing our inflation down, but what will happen after that? Have we given any attention to ways of achieving not only a low level of inflation that is comparable with that of other countries within Western Europe, but also a stable level over the years? That is a phenomenon which seems to have eluded us. That position might be achieved in many ways. I hope that the noble Earl will take us into the confidence of the Government's thinking on this matter. I am sure they have given it some attention.
I wish to put forward two suggestions. One concerns a matter which we have discussed in this House many times. I was delighted to hear the remarks of the noble Lord, Lord Varley, on the subject. I believe that prospective early entry into the exchange rate mechanism will eliminate one element of instability in the whole monetary scene; namely, that of getting a more stable currency relationship with the currencies of other countries.
However, there is one other thing which needs to be done. The conduct of our monetary policy seems to be subject to the exigencies and the timetable of the electoral scene. When an election approaches, governments tend to relax their policies in order to
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woo the voter. That is of course a natural inclination on the part of any political party in a democratic society, but it is not much good for maintaining a firm, consistent monetary policy. Again other countries have found the way round the problem by giving a more independent status to their central financial institution. I have asked a number of questions about that matter in the House and I have always been met with the answer that this whole question of monetary policy is too important for any government to give up in any way.
Therefore I wish to suggest a compromise. I am not suggesting that we should invest the Bank of England or any central bank with total independence. Democratic accountability is the whole basis on which we operate in our country. Let such an institution become more directly accountable to Parliament, and let it be less accountable to the Executive.
I am concerned about what will happen in the next 12 months. There will undoubtedly be a relaxation of the monetary measures presently in place because of the approach of the election. That relaxation might or might not be justified, but all of us believe that it will take place. In a way it is wrong to put that kind of responsibility on to a government. Let it be held separately by a body that is accountable to Parliament. I have made two suggestions on the way in which, if we look to the long-term solution to the inflation problem we may be able to help solve it, but others may have other ideas to add.
I now turn to the question of industry, and particularly manufacturing industry. I believe that noble Lords on all sides of the House quite rightly emphasise the importance of a greater level of investment in productive manufacturing industry. The noble Lords, Lord Bruce of Donington and Lord Boyd-Carpenter, my noble friend Lord Jenkins and the noble Lord, Lord Tombs, among others took that view. So I can say, not only from the evidence of today's debate but from our general approach to these problems, that we are totally in agreement that this needs to be done so that we can build up our manufacturing capability in order to compete more effectively with the rest of the world.
There are, however, a few problems here. The first problem arises from the current fight against inflation. The trouble is that while the main measure adopted by the Government to fight inflation—the high interest rate—is having some impact or could have some impact on inflationary levels by restraining excess private expenditure, it is also having an impact on investment in industry, particularly in medium and smaller sized enterprises. The large companies in this country are now almost multi-national companies. They have substantial operating interests abroad and therefore can invest a good deal in those other countries without running into the difficulty of the high interest rate that is imposed here. However, the smaller companies who have to raise all their money on the UK market are in great difficulty.
The problem here is how to offset the broad impact of the high interest rates on industry and on industrial investment so as to enable that investment to go ahead

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without suffering too much damage. In looking through the debates in another place I noticed that there was a proposal for increasing investment allowances. That proposal was rejected by the Government. Such allowances would be a good way of offsetting the high interest rate. Investment allowances on plant and machinery at present stand at 25 per cent. A not unreasonable suggestion was made that this figure could be increased to 40 per cent. I know that that proposition has been put forward by the CBI.
If the Government were to contend that this is hardly the time to be giving money away when we are facing such a parlous financial position, I would like to rally to the point of view expressed by the noble Lord, Lord Boyd-Carpenter, when he said that it is not the level of tax that counts but rather the revenue that one gets from tax. I believe that stimulating investment in industry would lead to more tax being collected, even though that investment results from a reduction in tax.
I also believe that if we want to take the same long-term view of our industrial expansion as I have suggested that we should take in dealing with inflation, we have to reconsider what the role of government should be in regard to R&D in industry and in regard to training. We have debated that many times in this Chamber. We must still do some further thinking.
Thy remarkable situation of research and development in industry is that no more than 20 companies carry out some 50 per cent. of industrial research; 80 companies do 80 per cent. I need hardly remind your Lordships that there are 6,000 companies quoted on the Stock Exchange alone; there are countless thousands of companies which are not quoted. We are not only talking about the total quantum, which is inadequate; there is an imbalance in the amount of R&D conducted in this country when considered in industrial terms. I believe that it is essential that something should be done to stimulate smaller and medium-sized companies to innovate and research.
I am the chairman of a medium-sized company. I am afraid that we limit our own research. We depend on the bigger companies in our particular technology to come forward with the instrumentation in which we are interested—which happens to be energy instrumentation—and to develop it for our benefit. We then select what is best on the market in our opinion. However, I believe that we could contribute a good deal ourselves, but we cannot afford it. Therefore, here again I believe that a measure of tax incentive, of remission of tax, for direct research by medium and smaller-sized firms would be a desirable way to proceed.
The same applies to training. I have worked in all sizes of companies, as other Members of your Lordships' House will also have done. I have noticed invariably that when times are difficult the items which are cut back are those which are less visible such as research, training, promotion and publicity. Those are the items which go. I believe that those are the very ones that we should seek to retain. We need to stimulate more in-house training of personnel in
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British firms. Again, I believe that a carefully devised fiscal incentive could do the trick. The fiscal measures which I suggest, far from diminishing the total amount of tax gathered, would increase it by enabling companies to grow faster in the future.
I conclude by saying that we all agree that we are faced with very serious economic problems. In dealing with them immediately, as we must, I believe that we are losing sight of the equally urgent necessity to look at them on a longer-term basis. I have made certain proposals to that end.
2.2 p.m.
Lord Jay: My Lords, it is with more than usual enthusiasm that I offer my congratulations to both the maiden speakers today. In the case of the noble Lord, Lord Tombs, that is partly because I recall that in the 1960s the Board of Trade gave a good deal of encouragement and support to Rolls-Royce for the RB211 engine. Even though I believe that the noble Lord was not with the company at that time, he will nevertheless agree that it received a good deal of help from the Government. In the case of my noble friend Lord Varley, I offer my congratulations in the spirit of my belief that there is no former colleague from the other place whom I would welcome here both as a parliamentarian and a colleague with more enthusiasm than I would him.
The Minister spoke at the beginning of the debate about the Government's scheme called the personal savings account. I should like to ask him whether it is possible under that new scheme which carries tax concessions for anyone simply to acquire considerable sums by selling securities, pay them into such an account and, by leaving the amount in the savings account for some years, obtain the tax concessions. If that is so, no saving is involved. It is merely a transfer from one asset to another. If I am correct in thinking that that is what will happen, I do not see why we should concede large amounts of revenue for that purpose.
More generally, the best that can be said for the present Chancellor's Budget and Finance Bill is that they are a good deal less damaging than those of his predecessor. He has at least not stoked up a further consumer and import boom by giving large tax cuts to people who do not need them. There was a time last autumn and winter when it seemed that the present Chancellor might have the inkling of a balance of payments policy when he let the sterling exchange rate fall somewhat nearer to its natural level. Now he has let it bounce back again to an overvalued level.
As a result of the policies of the 'seventies and 'eighties this country is now further from paying its way in the world and is adding to its international debts faster than at any time since 1947. In 1988 we ran a balance of payments current deficit of £15 billion, in 1989 it was £21 billion and in 1990, against a forecast of £15 billion, it looks more likely to be nearer to £18 billion. The previous Chancellor invented the argument that it did not matter because we were borrowing those huge amounts annually from overseas. That is surely just the trouble.

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By the end of this year we shall have increased our overseas debt by about £50 billion, mainly in the form of short-term withdrawable funds. Simple arithmetic suggests that an extra £50 billion of debt, even at 10 per cent. interest, means extra annual interest payments across the exchanges of £5 billion and at 15 per cent. of £7.5 billion. It is that huge new external interest bill, together with larger EC budget payments, which have more or less extinguished our invisible surplus on the balance of payments for the first time in our history.
So after 11 years of this Government we have a deficit in visible trade, a deficit in trade in manufactures, an invisible deficit and a total payments deficit equal to some 4 per cent. of GDP, the largest at any time since the war. Every month the interest bill is getting larger, and the Government apparently have no policy for stopping the rot. Yet, even in the 1950s and 1960s we had largely overcome the effects of our wartime losses and were earning a payments surplus—a current surplus—in most years. We earned large balance of payments surpluses, as the noble Lord, Lord Jenkins, in particular will remember, in 1969, 1970 and 1971 without any help from oil. But instead of tackling the remaining long-term causes of our economic weakness, which much evidence now suggests derived largely from our antiquated systems of both training and education (but I leave that matter aside), we gratuitously laid new burdens on ourselves.
Today we have been talking about labour costs. We raised all our labour costs with the artificially high food prices involved in the common agricultural policy. At the same time we removed all remaining restraints on manufactured imports from the European Continent. It was from that time in 1973 that the deficit on our manufactures trade began, though partially concealed by oil revenues in the 1980s. I congratulate the Treasury on having now admitted specifically that the common agricultural policy costs every individual in this country about £4 a week at present in higher food prices. That has in part led to higher pay demands. In order to maintain real living standards an average family requires an extra 3 per cent. or 4 per cent. at all pay levels and therefore in labour costs. Together with largely free manufactured imports, as any sensible person would have predicted and many did, that has landed us now with a £15 billion annual deficit in manufactured trade with the rest of the EC.
I should have thought that when one has added short-term weaknesses to a long-term underlying weakness one would need both a short-term and a long-term remedy. The present Government show little sign of having a policy for either one or the other.
Let me give one example of what I mean by a genuine long-term policy. As we all know, 25 years ago France, knowing that she had little coal and virtually no oil or gas, planned and created a major nuclear power industry. That industry is apparently able to produce nuclear power very much more cheaply than we can. Perhaps someone would explain the reason why; no one yet seems to have done so. We
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have now exhausted much of our oil and gas and discovered that in our case nuclear power costs too much.
However, we have one great asset: coal. We have coal reserves which will last for 200 years. The noble Lord, Lord Ezra, and my noble friend Lord Varley know far more about coal than I do, yet it looks to me as if we are now on the brink of allowing our coal industry to dwindle away because the use of highly sulphurous coal in so many power stations will pollute the atmosphere. Coal-burning power stations can be desulphurised, but one is told that the cost would be prohibitively high.
It seems odd to me that we propose to expend £7 billion or perhaps £10 billion in capital resources on an attempt, which will probably fail, to save 30 minutes or perhaps 20 minutes on a train journey to Paris rather than spend that same amount of capital to make this country self-sufficient in power supplies over the next 50 years. I wonder how that will look 50 years hence.
I ask the Minister—in case my guesses about magnitudes are wrong—what would be the capital cost of desulphurising all our power stations which use high sulphur coal. What does he expect the cost of the present Channel Tunnel scheme to have been by the year 1993?
So much for the long term. As a result of those policies we find ourselves in a short-term balance of payments crisis, with £30 billion or £40 billion of short-term funds owed across the exchanges. Incidentally, we used to hear a great deal at one time about the sterling balances and how they were a frightful burden round our necks when they never stood at more than £3,000 million. Now that there are £35 billion to £40 billion in foreign balances we seem to hear much less about them.
The Government's only response is incantations. They hope that the speculators will be blinded to the realities by promising or hinting that we shall fix the exchange rate possibly some time in the near future. However, the short-term cause of our payments crisis is the overvaluation of the sterling exchange rate. To think that one can cure the payments crisis by artificially fixing the exchange rate is like thinking that one can control the weather by jamming the barometer.
The only short-term weapon that we now have left after all the mistakes of the past 20 years is the exchange rate. Most of the economic history of the past 50 or 60 years shows not merely the importance of the exchange rate in a modern economy but also that what most weakens the structure of the economy is an overvalued rate. The lowering of the sterling rate in 1949 gave us the payments surpluses of the 1950s; and the lowering of the rate in 1967 made possible the large surpluses in 1969, 1970 and 1971.
The overvaluation of 1980, temporary though it was, was probably the main factor in destroying 20 per cent. of British industry in the three years after 1979 and producing 3 million unemployed. Do not let us forget this. The fixing of the exchange rate in 1925 at

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an overvalued rate meant six years of strikes, unemployment and depression; and only the fall of the rate in 1931 gave us six years of recovery.
It is also worth remembering that Germany's genuine economic miracle in the 1950s was greatly helped by a largely undervalued deutschmark in 1948–49 when German industry was prostrate and, very shrewdly by the Germans, devalued with sterling in 1949. Now that East Germany has had its mark up-valued by 100 per cent. it will be interesting to watch what the consequences will be for internal employment in Germany.
For a country like the UK today, with a weak economy, a weak payments deficit and an overvalued exchange rate, to fix the rate at that level would be a recipe for decline and unemployment. Indeed, it would not be merely a repetition of 1925 and 1931 because in this case it would result in putting ourselves politically as well as financially in the hands of our creditors. Worse than that, a new fallacy seems to have sprung up recently, that once one has the exchange rate right, it will stay right. But of course it will not. With a deficit such as ours and an economy as weak as ours compared with the greater Germany, until the long-term remedies have been applied, what is the right exchange rate for sterling against the mark one year will almost certainly be the wrong rate two years later.
As I see it, what would happen if we were so blind as to fix the sterling rate against the mark at anything like its present levels in the near future would be some euphoria for a few months or perhaps weeks when people believed that a miracle had been achieved. But after that the old forces would reappear, made worse by the overvalued rate. Interest rates would be raised, exports would flag, unemployment would grow and the whole struggle to defend an indefensible rate which we have had so often before would re-emerge.
It should therefore be a prime aim of the British economic policy in the next few years to keep management of the sterling exchange rate to the maximum extent practicable in British hands. With none of the long-term remedies yet in force, I believe that this is the worst possible moment for rash expense. For government to view joining the ERM as a magic charm which will strengthen sterling just because they say it will is short-termism gone mad. It would create a false sense of relief for a very short time at the cost of prolonged trouble thereafter. That is the evidence of experience and history. Indeed it would be to throw away gratuitously the one effective short-term weapon that we still have left.
2.19 p.m.
The Earl of Caithness: My Lords, we have had an interesting and constructive debate this afternoon. The debate has given rise to a large number of points both in general on the economy and, for some of your Lordships, on specific matters on the Bill. I hope to deal with as many points as possible.
Many of your Lordships inevitably mentioned the question of the manufacturing industry in the United
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Kingdom. On most objective indicators, the performance of the UK manufacturing in recent years has been very good. Productivity growth has averaged 5 per cent. per annum in the nine years to 1989. Profitability as measured by the net real rate of return has risen to the highest level for nearly 20 years. Manufacturing investment has risen by 25 per cent. in the three years to 1989. The UK has more or less maintained its share of world trade in manufacture since 1983.
The state of the UK manufacturing industry in 1979 was parlous. The UK was bottom of the league on most indicators of economic performance. The manufacturing industry was overmanned, uncompetitive and, as we all recall, prone to strikes. The UK's share of world trading manufacturers had been falling steadily for decades. That state of affairs could not have continued indefinitely and some kind of shake out was inevitable at some stage. That is what, in effect, the recession of 1980–81 induced. Manufacturing output fell by 40 per cent. during a period of two years. Manufacturing employment was also reduced by 14 per cent. during that period. Investment also fell sharply.
That period was undoubtedly a traumatic time for all those involved. The manufacturing industry which emerged from the shake out at the beginning of the 1980s, was more productive, more profitable, less strike prone and better equipped to hold its own in world markets. That is borne out by the much-improved performance of UK manufacturing since then.
Investment also plays an important part. The improved investment performance is a reflection of the improved quality of investment which is now taking place. I stress the phrase "improved quality of investment" because, as a result of what has been said today, it appears that it is not the quality of investment that matters but how much money one can throw at the problem. The Government have removed tax distortions which affected investment and which led to much of the inefficient investment during the 1970s. The quality of investment is now much higher, as is shown by the dramatic improvement in productivity, (up 60 per cent. since 1980) and in profitability (up four times since 1981). UK manufacturing is well placed to meet the challenges and take the opportunities of the 1990s. A few weeks ago John Banham, Director General of the CBI, remarked:
"We enter the 1990s with the supply side of the British economy in a comparatively better shape than at any time in our history".
Manufacturing is only one side of the coin. It is vital that it thrives and is profitable. However, the UK must also be a strong service sector which contributes more than twice as much to output and nearly three times as much to employment. It is an area in which the Budget helps and one on which we must concentrate as with manufacturing. In his excellent maiden speech the noble Lord, Lord Tombs, put his finger on the point when he said that the creation of wealth is important before we can start talking about

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spending it. The noble Lord, Lord Bruce of Donington, is keen to come to this side of the Chamber and spend, spend, spend as usual. However, I hope that he will give a great deal of thought to how he will create the wealth before he begins to distribute it with largesse.
The noble Lord, Lord Bruce, also spoke about the record number of bankruptcies. It is not surprising that he looks at one side of the coin, and it is only right that I should give your Lordships the other side. It is the net position which is important. The net business start-ups, based on VAT registrations, reached a record rate of 1,500 per week in 1989. The indications are for a continued number of net start-ups and show that the trend has continued in 1990, although not to the same extent.
Apparently I disappointed the noble Lord, Lord Bruce, in my opening speech because I looked at the Finance Bill and commented upon it as I did last year. I must say that the noble Lord, Lord Bruce, disappointed me. After all the talk we have heard from the Labour Party about their new policies, I should have thought that he would have lifted the curtain just a little and would have been keen to grab both sides of the Dispatch Box and tell your Lordships what he had in store for the British people and what they could look forward to. We did not hear a word of that from the noble Lord. Nothing came from him to tell us about the new power to be given to the DTI in order to give it the same lobbying power in Whitehall as the Ministry of Agriculture has provided for the farmers—to quote the famous phrase. Nor did he tell us what the economic shape of Britain will be and how different it will be. We all know that it will be different because none of the Labour Party's proposals are new. They take us right back to the failed policies of the 1960s and 1970s. However, the noble Lord, Lord Bruce, is a consistent man and he will support those policies. He has not become a convenience politician.
I am sad, too, that the noble Lord did not tell us about the new taxes which the Labour Party intends to impose, or about the new training level which will do so much to increase employment! He did not tell us about the new taxes which will take place on savings, on capital and inheritance, or about the roof tax, nor did he mention the hoof tax for Scotland. We do not know the details. However, it is likely that not everyone will be affected by what the noble Lord's party has in mind. However, those who will be affected will be those with homes, jobs and savings.
I was sad, too, that the noble Lord, Lord Bruce, did not take the opportunity to reinforce his party's commitment to defeating inflation. That is something to which we give very high priority. Nor did the noble Lord reveal to us that he had taken the Damascene conversion, as has the noble Lord, Lord Varley, who made an excellent maiden speech, in becoming European and pro Common Market. There is an increased need for us to work very closely with our European partners.
The noble Lord, Lord Jenkins of Hillhead, mentioned the point which I made about the necessity
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for controlling inflation being the primary aim of government policy. Indeed, it is. We all know that the effect of tightening monetary policy to reduce inflation by increasing interest rates has a temporary perverse effect on increasing the RPI. The effects of the community charge also distort that figure. Together, those add up to about 3 per cent. of current inflation.
However, I say to the noble Lord that there are clear signs that the policy is working and that inflation will fall sharply next year. Some of the short-term measures which have been taken are one-offs which will come out of the RPI next year. We should see a substantial fall to a more sustainable and better rate because nobody likes the present rate. We can then proceed in a more orderly fashion than has been the case in the recent past. As I explained in my opening speech, that will be to the benefit of industry in this country as well as to everyone else.
The noble Lord, Lord Jenkins of Hillhead, took a quite contrary view to the noble Lord, Lord Jay, on the question of joining ERM. I do not have to make it clear that it is the Government's intention to join ERM. The question is when is the right time to do that. The conditions as set out by my right honourable friend the Prime Minister in Madrid made clear the requirements which we believe are necessary before we take the decision to enter. Good progress has been made since the Madrid summit which I have explained on previous occasions. For example, all those countries required to abolish their exchange controls by 1st July 1990 have done so and progress has been made also on competition policy and on the liberalisation of financial services. However, there is still work to be done on that matter.
As regards inflation, which is such an important part of the preconditions, my right honourable friend the Chancellor of the Exchequer has made it clear that he wishes to be certain that UK inflation is on a downward trend and closer to the levels of our EC partners.
My noble friend Lord Boyd-Carpenter was concerned about the tax burden. I admit that this year's Budget was the first since 1981 not to contain cuts in income tax or national insurance. As a result the tax burden is expected to rise slightly in the year ahead. However, it is important that I say this. It is easy to maintain a low tax burden while continually increasing spending if one is prepared to borrow to make up the difference. I know that my noble friend will agree that all that does is transfer the tax burden on to future generations or, worse still, give government an incentive to fuel inflation.
Of course we could have done that, as indeed the previous Labour Government did. But that would mean mortgaging our children's future to pay today's bills. Running a PSBR averaging 6¾ per cent. of GDP would cost £35 billion today. That is not the Government's way. It never has been and never will be. Instead, we have chosen the path of fiscal rectitude, running a surplus since 1987 and reducing the ratio of public sector debt of GDP from 50 per cent. in 1979 to 28 per cent. today. The consequent saving in debt interest means more room for public spending on

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priority programmes and more room for tax reductions. It is also of great benefit to our children and our grandchildren.
The Government may not be cutting taxes this year, but it is worth recalling what 10 years of tax reform has achieved for the individual taxpayer. If the tax system was still as it was in 1979, indexed to inflation, a married man on half average earnings would be paying 50 per cent. more in income tax and NICs than he is paying now. I am sure that that would not please the noble Lord, Lord Molloy.
Lord Molloy: My Lords, perhaps the Minister will allow me to say that if I had a choice I would choose that rather than throw 8 million of my fellow citizens out of work for four years.
The Earl of Caithness: My Lords, I am not sure from where the noble Lord obtained his figure of 8 million. That does not tie in with any figure that I have.
In response to my noble friend Lord Boyd-Carpenter, perhaps I may repeat something that my right honourable friend the Chancellor said in his Budget Statement. He confirmed that it is the Government's aim to reduce the basic rate of income tax to 20p in the pound, but only when it is prudent and sensible so to do. It would not have been prudent or sensible to make a move this year.
I understand the points raised by my noble friend regarding the tight timetable for the taking of this Bill. It was agreed between the business managers, and I understand that it was parliamentary procedure that prevented my noble friend from receiving the Bill earlier in the week. I believe he is aware of that.
The noble Lord, Lord Varley, made an excellent maiden speech. He mentioned two points I should like to answer. The first concerned the forecast for the PSBR. I am sure the noble Lord will understand if I say that the new forecast will be in the Autumn Statement, as is usual. The other point concerned the privatisation of electricity. I must disagree with him when he says that it is a transference from a public to a private monopoly. I take issue with the noble Lord on that point because there are to be 12 regional electricity companies. There is a real incentive to encourage competition.
The noble Baroness, Lady Seear, raised a matter in which I was lucky enough and honoured to take a very active part in the past year; that is, payroll giving. I agree with her that the scheme has built up more slowly than we should have liked, but within that there is a trend that is encouraging. Many people are generous in their support for charities but may not change their giving habits overnight. As more people realise the advantage to themselves and to charities of giving even modest amounts regularly through payroll giving, the scheme will come into its own.
The Government have taken every opportunity to publicise the scheme, and I am glad that charities are doing the same. There was a time when an appeal was made for charity and at the end of that appeal there was no mention of payroll giving. Whenever I hear an appeal now I hear also that there is an opportunity for
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payroll giving, and that must help. Many charities have risen to the challenge of promoting the scheme, but others are still less aware of its potential than I would wish. I should like to see all charities encouraging their supporters to use the scheme. The Payroll Giving Association, which was set up specifically to promote payroll giving, can do a valuable job in that respect. I can tell the noble Baroness that the Government have agreed to match, pound for pound up to a limit of £50,000, any funds that the association raises for publicity purposes. We have already released £25,000.
The noble Lord, Lord Molloy, took the debate from the economy into prescription charges. I agree with him that it is right that those who can afford to do so should contribute to costs in order to enable more resources to be spent on improvements to primary health care. There are wide exemptions applying to those who cannot pay. I do not think the noble Lord acknowledged that fact. Although increases may be above inflation, the cost of providing pharmaceutical services has risen on average by about 13 per cent. a year in recent years, reflecting the higher cost of providing better and more sophisticated drugs. That trend is expected to continue.
The new charge announced in April this year will continue to represent less than half the cost of average prescriptions in the NHS. I know that the noble Lord will agree that over 75 per cent. of prescription items that are dispensed are free of charge. That was not the impression that he gave in his speech.
The noble Lord then turned from prescription charges to the homeless. That is an area in which I have been involved. I repeat that we are concerned about the plight of the single homeless. The problem is mainly caused by the break-up of families and by other social reasons. We are determined that there should be no excuse for sleeping out on the streets. The noble Lord will know as well as I do that a recent initiative was taken by the Government and that a further £15 million is to be allocated in new initiatives to provide additional subsidised accommodation. That is over and above the £250 million homelessness package announced last year.
The noble Lord, Lord Monson, blasted the community charge. I felt that he took a very odd angle in his attack. I was hoping that in mentioning Oxford he would go on to ask why the local authority had not curbed its spending in the first place and not pushed up its community charge. Living in Oxfordshire, I am paying the penalty of local authorities not controlling their spending. The noble Lord did not mention that what the local authorities imposed this year was equivalent to a rate rise of over 13 per cent. I had hoped the noble Lord would join others in condemning local authorities for that.
The debate enables me to respond more fully to the noble Lord's Question yesterday which was on a highly technical matter. He has declared his interest but I am not sure what it is. At present, units in all unit trust and offshore funds attract indexation allowances. That is the case even where unit trusts or offshore funds are invested in assets such as sterling bank

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deposits which do not attract indexation. The purpose of the change is to ensure that someone who invests in a unit trust or offshore fund does not receive the benefits of indexation if he or she would not have obtained indexation had he or she invested direct in the same underlying assets. In other words, as I said yesterday, the aim is to close off a loophole through which capital gains tax losses can be artificially created.
The change applies to remove indexation from units in unit trusts and offshore funds that are at any time during the period of ownership of the units at least 90 per cent. invested in capital gains tax exempt assets, such as sterling bank deposits or gilts, building society shares on which there is already no indexation, or both. As the noble Lord reminded us, it applies to disposals on or after 20th March.
The change affects a relatively small number of gilt funds and sterling money funds. Unit trusts and offshore funds investing in shares which form the bulk of the market will normally be unaffected. Thus, the vast majority of investors are not affected by the removal of indexation, including those invested in the funds covered by the change. That is because the £5,000 annual exemption, which is effectively £10,000 in total for married couples under independent taxation, means that most individuals do not pay CGT.
The noble Lord quoted various passages from my right honourable and learned friend Sir Geoffrey Howe, my right honourable friend Mr. Lawson and my noble friend Lord Rees. The policy has not changed. The noble Lord is trying to defend a system whereby, due to indexation, an artificial tax loss could be used to be set off against change. The policy therefore has been to close that loophole through which a significant risk of tax in the future might have occurred.
Lord Monson: My Lords, I intervene only briefly. I was not defending the creation of artificial tax losses. If the noble Earl reads my speech in Hansard tomorrow, he will see that I did not do so. This is no time to go into a long argument, but I asked him specifically why the changes took effect from midnight on Budget eve and not from midnight or 6 p.m. on Budget day, thereby catching people who had quite legitimately made transactions and sold shares early on Budget day before the Chancellor's speech.
The Earl of Caithness: My Lords, I heard the noble Lord clearly on his request for information. I was not sure whether I would reply to him on that point or the previous point. I have replied to him on the previous point. I shall write to him on the point about which he has reminded me.
The noble Lord, Lord Ezra, requested that capital allowances should be increased. Capital allowances are now broadly in line with commercial depreciation. Increased capital allowances would re-introduce accelerated depreciation which distorted investment decisions in the past and ran counter to the 1984 business tax reforms. A 25 per cent. writing-down
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allowance is a generous average rate for plant and machinery and allows a cushion for inflation. As noble Lords will know, there is a special regime for short-life assets which can be written off more quickly.
The noble Lord, Lord Jay, asked whether, within TESSA, people would merely switch funds from their current deposits into a TESSA deposit and whether there would therefore be no increase in saving. He has failed to understand fully that the maximum amount is £9,000 over a five-year period. It is £3,000 in the first year and up to £1,800 in subsequent years, so it will not be possible to switch large sums of money across from one form of account to another. That might happen, but it is important to note that we are providing a new opportunity to save and an encouragement to save which many people who are not able to do so at the moment will have the opportunity to use in the future. We believe that it will prove worth while overall.
Lord Jay: My Lords, would it then be possible for someone who possessed a large amount of funds to transfer a small amount of funds up to the maximum and in effect gain that concession without having saved anything at all?
The Earl of Caithness: Yes, my Lords. I do not deny that, but it opens up a whole new avenue for many other people who have not saved to date and whom we are keen to encourage to save.
The noble Lord, Lord Jay, also mentioned training. I had hoped to hear from the noble Lord, Lord Bruce of Donington, about his party's proposals for that. It is wise to remind the House that companies are already spending £20 billion a year on training and that the number of people reporting recent training is up over 70 per cent. in the five years to 1989.
The Bill contains a number of important reforms. Foremost are the changes to the taxation of savings. The abolition of stamp duty on shares removes a tax which was introduced in the last year of Queen Anne's reign and has come to look increasingly anachronistic in an ever more competitive world. The abolition of composite rate tax removes an anomaly of almost 100 years' standing and will help married women, pensioners and children alike. The advent of TESSA will provide further encouragement to savers. The scheme has been widely acclaimed for its innovation and already—even before the final details have been settled a number of banks and building societies have said that they will participate.
Since this Government came to power the British economy has undergone a transformation. Of the major EC countries, only Spain matched the UK's growth record in the 1980s. Living standards have risen rapidly and real personal disposable income is at a record level. After such rapid expansion the economy is due for a breather for a year or two. We need to restore the balance between savings and investment; and with its emphasis on the saver I believe that the Bill can contribute to this process. I commend it to the House.
On Question, Bill read a second time.
The Earl of Caithness: My Lords, 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.

Education (Assisted Places) (Amendment) Regulations 1990
2.46 p.m.
Baroness Blatch Baroness Blatch rose to move, That the draft regulations laid before the House on 27th June be approved. [22nd Report from the Joint Committee].
The noble Baroness said: My Lords, the draft regulations provide a number of small amendments to be made to the Education (Assisted Places) Regulations 1989 which were consolidated last year.
The assisted places scheme was established in 1981 for the purpose of widening the educational opportunities of able children from less well-off families. It provides their parents with assistance towards the fees of some of the best independent schools in the country. The assistance is on a sliding scale based on parental income and the principal changes embodied in the amending regulations are concerned with the annual revision of those scales.
In past years there have also been technical amendments to keep the definition of "total parental income" for the purposes of the scheme constant as tax legislation changes. This year one such amendment takes account of the position of APS parents who are eligible for relief on medical insurance in pursuance of Section 54 of the Finance Act 1989.
Regulation 1 of the draft regulations deals with citation, commencement, application and interpretation. The regulations are to come into force on 21st August 1990. Regulation 2 provides for grant-maintained schools (within the meaning of the Education Reform Act 1988) to be included in the definition of "publicly maintained schools" referred to in Regulation 19(2) of the principal regulations. I would mention at this point that the APS is not a means of supporting those families whose children would, in any event, have entered the independent sector without the aid of an assisted place. The scheme is intended to offer this type of education to the children of parents who, without assistance, would never have been able to afford it. Consequently, under the principal regulations, participating schools must ensure that at least 60 per cent. of their assisted pupils attended state schools immediately before taking up their assisted place. It is worth noting that in practice at this time 71 per cent. of those children attended state schools before taking up assisted places.
Regulation 3 of the draft regulations updates the 1989 regulations and relates to those parents who pay medical insurance. Its effect is to discount deductions
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from total income allowed on payments for medical insurance made by those parents aged over 60. For obvious reasons, few people will fall into this category.
Regulation 4 sets out the income scale used for assessing parents' contributions towards fees. As has been the case in previous years, this has been uprated to take account of movements in the retail prices index. The threshold at or below which parents pay nothing towards fees is raised from £7,584 to £8,200.
The provisions and amendments I have just described will ensure the continued smooth running of the assisted places scheme and I trust that they will find favour with noble Lords. I beg to move.
Moved, That the draft regulations laid before the House on 27th June be approved. [22nd Report from the Joint Committee}—(Baroness Blatch.)
Lord Peston: My Lords, I thank the noble Baroness for introducing the regulations. I have a number of specific questions to ask her but, not surprisingly, I take this opportunity to make one or two comments. I shall not speak at great length because I feel that this is one of those areas where there is no meeting of minds, or perhaps there is a meeting of minds, in the sense that we simply agree to disagree. In the past I have railed against the method of using public funds, as have my predecessors. However, the Government have stuck to their view and I do not think that either side has made any concessions.
We believe that the assisted places scheme has been a method of reintroducing selection via the back door. The evidence which we have—I shall return to the point about evidence—shows all the deficiencies of selective schemes which have existed in the past. We also believe that the funds involved could have been used for better purposes. In anticipation of what might be said, I think that I should stress the fact that noble Lords on this side of the House, and our party, are fully committed to abolishing the assisted places scheme, if for no other reason than that we see no sign whatever of any evidence to suggest that any educational benefits have been derived from it.
I turn now to deal with the scheme itself. The noble Baroness did not say what the anticipated cost of the scheme would be for the coming year. I assume that it will be more or less of the same order of magnitude as it was in the financial year which has just ended; namely, of the order of £60 million, plus some uprating for inflation. I take it that the figures mentioned in the regulations are uprated as regards inflation. However, can she tell us what rate of inflation was actually used to readjust them. The noble Baroness referred to the so-called 60 per cent. figure, in that at least 60 per cent of the assisted places should be for pupils who have attended maintained schools. However, she said that the actual percentage is 71 per cent. I believe that this point is covered in the legislation, although it may be in earlier regulations. Can she clarify what meaning we are to place upon the importance of pupils having attended maintained schools? Is the criterion that pupils must have spent all of their time in education up until that point in maintained schools, or is it that they must have spent

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some time in maintained schools? It is most important that that point should be clarified in order to enable us to interpret the significance of those figures.
I turn now to deal with gross family income. I have tried to do the relevant calculations myself, but I simply do not have the ability to do so. However, can the noble Baroness tell us, for example, in the case where there were two assisted pupils, what the gross family income would have to be—I refer to the income before allowances are made—before no money would be forthcoming for an assisted place? I emphasise the word "gross" as I had some difficulty in working it out for myself. Therefore, if those who are advising the noble Baroness cannot make the calculation on the spot, I should be perfectly happy to have the information sent to me.
On the question of costs, perhaps I may make a point which is often ignored. The matter has been debated here and in another place. I put it to the noble Baroness that comparing the actual unit cost of an assisted place with the unit cost of a place in a maintained school, and arguing that that throws light on the cost of the scheme, is an incorrect calculation. There can be no doubt that the unit cost of a young person in the scheme is a cost to the tax payer. But to cite the unit cost of a place in the maintained schools in comparison is erroneous because it must be compared with the amount which would be saved in a maintained school. The amount saved in the maintained school is a marginal cost.
Where we have an excess of maintained school places—in many of the areas about which we are talking we have an excess—the marginal cost of those pupils is zero. On clear economic grounds, the whole cost of the assisted places scheme falls upon the taxpayer. There are few savings to be offset against it. That is a piece of elementary economics, and it is something which I put to the noble Baroness or those who advise her, for them to think about.
My next question relates to research. Most of the debates on the subject, especially in the other place, have been of a knock-about kind: "Don't you know that your Miss Such-and-such has an assisted place? Her father is poor and she ended up a Cambridge", or some other fate worse than death, and, "Isn't that an example of the benefits of the assisted places scheme?" Such anecdotes are not research. They do not answer the question: how do you know that that person with ability would not have gone to Cambridge having been at a comprehensive? Vast numbers of young people from poor backgrounds do precisely that. To quote such anecdotes is of no help. We must ask whether any research has been undertaken to show whether there are positive benefits of the kind that we have in mind.
Secondly, we must ask whether there has been any serious research into the effect the assisted places scheme has on the schools to which those young people might have gone. Is there any evidence, as was argued at the outset, that allowing those people to leave the maintained system would act as a spur to an improvement in the maintained system? I ask those
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questions because the only research of which I am aware shows nothing of the kind. It shows the opposite: that on the whole it is impossible to demonstrate any net benefit from the assisted places scheme or any net benefit to the maintained system.
After the £200 million that has gone into the scheme since it started, I should have thought that the Department of Education and Science would have felt that it should fund a great deal of research to test those matters. I do not suggest that it is easy. I can think of hundreds of reasons why it is hard to do such research, but, since claims were made about the scheme's benefits, the proper use of public funds requires that we study the effects.
I regret to say that I have spoken for longer than I wanted, especially considering the time of the day and the day of the week. However, we are debating important matters. I thank the noble Baroness. I do not require all the answers to my questions immediately, but that does not mean that I do not regard them as not worth answering.
Lord Ritchie of Dundee: I too thank the Minister for her exposition of the new regulations. I am sure that the figures are what the Government intend them to be and I understand that the scheme is thriving. I have no doubt that the pupils, the parents and the school are happy about the scheme. The schools are having some nice, bright pupils whom they would not otherwise have. They are also getting an egalitarian image, which must please them.
I hope that the House will forgive me if I become apparently irrelevant for a short time. The only excuse for irrelevance is that one will not be long. I have just been reading an HMI report about some schools in Hackney. It is pretty hair-raising. I shall read a few excerpts. I want to emphasise that the report does not apply to all the schools in the borough of Hackney, some of which are excellent. I have seen some of them, and I know how well they are working. However, there are others which are not so good.
The inspections were carried out in January of this year. The report states:
"in the smaller sample of primary schools visited in January 1990 the percentage of unsatisfactory lessons was 55%. These figures are to be compared with the national figure of 30 per cent. for all primary school lessons in the academic year 1988–89. Considering each school as a whole, none of the primary schools inspected is outstanding; most range from adequate to poor; about half a dozen give cause for concern".
That is the most serious comment the inspectors can make, "cause for concern".
In addition, the report says about primary schools that old school buildings pose problems:
"over half the primary schools visited provide a dismal setting for teaching and learning; untidy classrooms, poorly organised resource rooms and a low standard of cleaning contribute to the shabby environment. In some schools the quality of facilities such as the toilets raises questions about the attitudes which are conveyed, consciously or unconsciously, to pupils by the school. For example in one primary school a single toilet roll was left hanging at the entrance to the building".
Regarding secondary schools, the report states:
"Visits to eight of the ten secondary schools in Hackney revealed that overall standards are significantly below the

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national average of one in three lessons judged to be good or very good; in Hackney only one in five lessons could be so described. Nationally a third of all lessons are judged to be less than satisfactory or poor; in Hackney the figure is over 40 per cent. and a tenth of all lessons displayed serious shortcomings. The core subjects fare no better than the rest: half the science lessons, half the mathematics and two-fifths of the English lessons were unsatisfactory or poor".
The inspectors basically do not blame lack of funding for materials and equipment. It is the shortage of teachers that concerns them. They say:
"Most Hackney schools are unable to recruit and retain sufficient teachers of any kind and find even more difficulty in attracting those with the experience and quality needed to teach effectively in the difficult conditions prevailing in the Borough…
Despite all that local effort Hackney entered into in the 1990s knowing that some children will not receive any teaching at all unless vacancies can be filled. Many more pupils will experience a succession of temporary teachers passing through their classrooms, each trying to pick up where the last left off, but leaving before they get to know the children and develop any secure idea of their capabilities. Some schools will continue to struggle without a permanent head and some without a permanent deputy either".
We all know that the basic cause of this is not the ILEA, which was responsible at the time of the inspections. It was the underfunding of the system as a whole. No less a person than David Jewell, chief master of Haileybury and chairman of the Headmasters' Conference, said:
"Underfunding of state education has been scandalous. Teachers' salaries are absolutely scandalous".
Dr. Rae, former headmaster of Westminster, also considers that the scheme should be funded by the schools themselves, not by public funds.
We On these Benches are all for parental choice and opportunity for the less well off. But these benefits must be balanced against the obligation of a government to provide public services. Education is a public service like health, and in a civilised country we consider that it is a birthright. What justification can there be for diverting taxpayers' money—that is, public funds—into private interests, when the public service stands in such dire need?
There has been a fair amount of talk in recent years of a two-tier society, and, more ominously, of a growth of an underclass. It seems to us that the assisted places scheme is likely to contribute to precisely that.
Lord Dormand of Easington: My Lords, the Labour Party has opposed the scheme since its inception. The regulations being considered today, the way in which the scheme is working and the principle involved have not led us to change our view. The cost per year for each assisted place pupil for 1989–90 was £2,364. This information came in a written reply to me yesterday from the Minister. She also stated that the equivalent national cost of a pupil in secondary education for that year is not yet available, but for 1988–89 it was £1,985 in the maintained sector.
The fact that there is a difference, in that the cost of an assisted place represents the greater cost, is unacceptable. The difference may not be very great but the assisted places scheme as a whole is expensive and unnecessary. I do not know what the total cost of
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the scheme is but it must run into many millions of pounds. As the noble Lord who has just spoken said, the scheme is being implemented at a time when the maintained sector is crying out for money. Every day we hear tales of crumbling schools, serious shortages of teachers and inadequate supplies of teaching materials, not least of text books.
The scheme was intended to help children from disadvantaged backgrounds. I have no doubt that some children in the scheme come from such backgrounds. However, I should like to ask the Minister—my noble friend on the Front Bench touched on this—how much detailed research is being carried out on that point. I assume some research is being carried out. If that is the case, it should be published so that we can see what is happening. I ask particularly about that matter because that is why the scheme was instituted. When it first came before your Lordships' House, that reason was quoted as the raison d'être of the scheme. Further, I ask about this matter because of a book entitled The State and Private Education: An Evaluation of the Assisted Places Scheme written by Edwards, Fitz and Whitty. The study was funded by the Government through the Science and Engineering Research Council, so presumably it has some respectability.
As far as I am aware, the study constitutes the most detailed investigation into the scheme. Its conclusions cannot make happy reading for the Government. The authors reveal that only 10 per cent. of assisted place pupils have fathers who are manual workers, while 50 per cent. of such pupils have fathers who are employed in service industries. The figure of 10 per cent. condemns the scheme as a failure in its main objective.
It would also be useful—I believe I have made this point in previous debates on the subject—and interesting to be given the numbers of assisted place pupils by region. That is a genuine query on my part. I have no information on that aspect, nor have I ever seen any published. I suspect, however, that my region, the northern region, has fewer such pupils than, say, the South East. Perhaps the Minister will tell the House what information there is on that regional aspect. I hope that if it is not readily available she will consider trying to obtain it and will place it in the Library.
Supporters and Members of the Government frequently ask what the Labour Party will do about the scheme when it comes to office. My noble friend has already dealt with this point, but I shall add a few further remarks. I repeat that the Labour Party has said many times that it will end the scheme but that all pupils in the scheme will be allowed to complete their courses. That process will permit money and resources to be used much more effectively.
I hope the House will forgive me for repeating myself, but I must say once again that my main reason for intervening in the debate is to say that the main objective of the scheme is not being achieved. As I have already said, it is not working to the benefit of the children of disadvantaged parents. When one considers the amount of money and the amount of time and effort which have been spent on the scheme

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since it came into operation in 1980—it has now been in operation for a decade—particularly in the context of the huge problems of education at the present time, one begins to despair of this Government ever getting anything right.
Baroness Blatch: My Lords, the assisted places scheme is now in its ninth successful year. I can assure noble Lords opposite that any doubts which they may have about it are not shared by the many parents whose children have benefited and will continue to benefit from it.
There are now 27,000 pupils in the assisted places scheme, of whom about two thirds come from families with incomes under £12,000 a year. The scale for determining the amount of fee remission is intentionally a demanding one and only those families with incomes currently below £7,584 qualify for completely free places. That figure will be uprated to £8,200 in future. Even so, in the current school year one third of all assisted pupils are eligible for full remission of fees. It is quite clear that the scheme is working to the advantage of those less well off families for whom it was intended.
The noble Lord, Lord Dormand of Easington, suggested on the basis of the research to which he referred that only 10 per cent. of all young people taking advantage of the scheme come from families whose parents are involved in manual work. I prefer to think of salary levels rather than of what people do for a living. All sorts of people work at salary levels comparable to those of people who do manual work. I cannot restate too often that one-third of the children who are being helped under the scheme come from families in which the salary level is at or below £7,400 a year. Two-thirds of all the children helped under the scheme come from families earning £12,000 or less a year, and only 18 per cent. of children come from families where the salary level is above £14,000 a year. That means that the majority of children helped under the scheme come from families earning very low salaries, whether manual workers or not. I believe that the scheme is reaching those young people of ability who come from low-salaried families.
Lord Peston: My Lords, perhaps I may interrupt the noble Baroness so that we know what we are talking about. Are the salaries that she quoted what I refer to as net income and what the regulations refer to as relevant income, or was she quoting the figure that I asked for, which was gross salaries? I have a feeling that she quoted the former.
Baroness Blatch: My Lords, I am talking about the income that is taken into account when allowances are deducted. Nevertheless a salary of £7,400, by anyone's standards, even taking allowances into account, is a very low salary. The level of £12,000 is the net salary. I shall ask for more details, which may come before the end of the debate. Otherwise I shall write to the noble Lord.
The APS provides excellent value for money. In the 1988–89 academic year the average cost to the taxpayer of each assisted pupil was £2,121. The
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corresponding average cost of a pupil in the maintained sector, as the noble Lord, Lord Dormand of Easington, pointed out, was £1,985, a difference of only £136. It is also worth noting that one of the reasons for the marginally higher cost is that the rate for young people under the scheme staying on into the sixth form is much higher than in the maintained sector. The fact that the taxpayer bears that cost annually for these young people bears out the point that we are spending the money on children from lower salaried families. The children we are supporting in the scheme are those we have to support to a higher level because they come from families earning at the lower end of the scale.
Even that small difference is due to the high proportion of sixth form provision which the scheme supports. The excellence of the output from the assisted places scheme expenditure is beyond question. Of those young people entered for A-levels, assisted place holders achieve on average a pass rate of around 90 per cent. The average for the maintained sector is 75 per cent. Not only are those young people from low salaried backgrounds entering the system; they also benefit greatly from it.
Like noble Lords opposite, we believe in equality of opportunity for all pupils. We believe that the assisted places scheme plays a vital part in that process and does so by levelling up rather than by levelling down.
I am pleased to say that from September, 17 more schools will be able to offer pupils assisted places under the scheme. These schools are mainly in regions of the country where the provision of assisted places has been relatively poor. In addition to this limited expansion we are continuing with plans to achieve a take-up rate of 100 per cent. by redistributing unfilled places to schools where demand exceeds supply. Thus, the opportunities offered by the scheme will be opened to even more families throughout the country.
The assisted places scheme is plainly achieving its objective of opening up some of the best independent schools to children who almost certainly would not otherwise have been able to look to them as an option. That can only be to their and the nation's advantage.
One or two other points were raised during the debate. For the benefit of the noble Lord, Lord Peston, I am now advised that the figure to which I referred earlier was a gross figure.
Lord Peston: My Lords, I take it that the noble Baroness is completely confident about that answer. I must say that I find it almost impossible to believe. Nonetheless I am willing to wait for further consideration.
Baroness Blatch: I am assured, my Lords, that it is a gross figure. As a gross figure it supports even more the case that I was making earlier.
The noble Lord, Lord Peston, asked me about the length of time that a child may have been in a maintained primary school before going into the assisted places scheme. I am assured that it is the school immediately prior—in other words, the school

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from which the young person comes into the assisted places scheme has to be a state school. The minimum percentage is 60 per cent.
I was asked about the estimated cost of the scheme in the coming year. I am advised that it is around £61 million. That again is the figure mentioned by the noble Lord, Lord Peston. It will be subject to final adjustment because it depends upon the number of young people who take up the scheme.
As leas been said before, the figure for children who benefit from the scheme now is around 27,000. The aim is to take the target figure up to 35,000, and bringing the new schools on stream may help us to achieve it.
The noble Lord, Lord Ritchie, spent most of the time talking about schools in Hackney. There are not many noble Lords still in the Chamber this afternoon. But most noble Lords would agree with him that there is enormous cause for concern. However, I do not believe that it is right to invalidate a scheme which costs the taxpayer of this country less than half of 1 per cent. of all that is spent on education and which benefits upwards of 27,000 young people. The fact that the results are very poor in Hackney is not a good reason for invalidating the scheme.
I was also asked by the noble Lord, Lord Peston, about the level of income at which benefit falls away. It depends where one starts. Not only is there a banded income which determines how we help people, but it also depends very much on the fees charged by a school. In order to be specific, I should need to know the fee for any school mentioned. I could then give specific figures about the level to which we would help a young person. If the noble Lord cares to give me an example of the fees of a specific school, I shall write to him on this point.
The noble Lord, Lord Dormand of Easington, asked about regional statistics. I can write and send them to him. I have already made reference to the 17 new schools which are coming into the scheme. Their geographical spread is designed specifically to assist where assisted places are not available in some parts of
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the country. I made some mental calculations while listening to the debate. I believe that something like seven of the 17 are in the North and North East, eight are in the Midlands, one is in East Anglia and one is in the South.
I shall write to noble Lords if I have missed any other points that were raised when I have had the opportunity to read the report of this debate. I believe that I have answered—
Lord Dormand of Easington: My Lords, I am most grateful to the noble Baroness for giving way. Are we talking of the same thing? I spoke of the origin of pupils from a region, not the number of schools, although that would be interesting too. For example, in my part of the country, I refer to the number of pupils from the northern region, the West Midlands, the South East and so on. Are we talking of the same figure?
Baroness Blatch: My Lords, I shall be more specific when I write. I shall take proper note of the question. What I said was not entirely irrelevant because most of those young people have assisted day places and inevitably they will go to a local independent school. In the North East one would expect that the children attending would come from the North East. However, we shall give the noble Lord a breakdown of the children in the system.
If I have missed any points I shall write to noble Lords. I commend the regulation.
On Question, Motion agreed to.

Aviation and Maritime Security Bill
Returned from the Commons with the amendments agreed to.

Government Trading Bill
Returned from the Commons with the amendments agreed to.
House adjourned at twenty minutes past three o'clock.