Lords Sitting of 19 July 1991

Preamble
The House met at eleven of the clock: The DEPUTY SPEAK ER (Lord Ampthill) on the Woolsack.
Prayers—Read by the Lord Bishop of Liverpool.

UK Armed Forces: Injury Compensation
Lord Molloy Lord Molloy asked Her Majesty's Government:
Whether they will establish a unit within the Ministry of Defence to consider all cases of accidental injury sustained by members of the armed forces with a view to providing compensation.
Earl Howe: My Lords, I am happy to be able to confirm that such a unit already exists within the Ministry of Defence. The Ministry's claim branch considers claims for compensation made by anyone for whom the Ministry has a liability, including servicemen.
Lord Molloy: My Lords, I am grateful to the noble Earl for his reply. I am also most grateful to him for the time he has afforded me to discuss related matters to this subject, which is considered by ex-servicemen to be an extremely important issue. We have the Ministry of Defence Service Invaliding Pension, known by soldiers who have been wounded as SIP, the DSS War Disablement Pension and of course the MoD Service Attributable Pension. All those pensions may be good measures but sometimes they constitute a veritable minefield. Will the Minister examine the case of service personnel who are denied compensation for injuries where it is alleged no negligence is involved? That matter needs to be re-examined. Under the Crown Proceedings (Armed Forces) Act 1987 no compensation can be paid to any soldier, sailor or airman or any female member of those forces unless he or she has been discharged as being unfit for further service. That ruling has created some bitterness. Will the Minister examine it?
Earl Howe: My Lords, the noble Lord is quite correct. The Crown Proceedings (Armed Forces) Act 1987 gives service personnel the right to claim in coma on law for compensation for personal accident or injury through negligence against the MOD. It is never in the interests of the MOD to evade its responsibilities or to be obstructive. Quite the reverse is the case. Many claims for accidental injury have been brought against the Ministry since the passage of the 1987 Act. Some cases have been minor ones, while others have been more serious. In only five of those cases has the matter gone to court. Every possible assistance is given to claimants in terms of providing factual information and guidance. If in the end their claim is unsuccessful, they may take their case to the court. Incidentally, that is not an option which is open to servicemen in, for example, the United States or Canada.
Lord Williams of Elvel: My Lords, will the noble Earl tell the House how many claims for accidental injury against the MoD are at present outstanding? What is the average period of time during which they have been outstanding?
Earl Howe: My Lords, I do not have those precise figures with me but I shall write to the noble Lord.
Lord Molloy: My Lords, is the Minister aware that the Royal British Legion at national and area level, and other ex-servicemen's associations, acknowledge that this matter is a problem? All they are asking is whether they can be consulted in the not too distant future to discover whether a better system can be arrived at.
Earl Howe: My Lords, I am grateful to the noble Lord for bringing this matter to my attention. It is possible for serving personnel to take out insurance against accidental injury. The MoD has negotiated an accident policy through its brokers which can be purchased in blocks of £10,000 at a cost of £1.50 per block. There is a set scale of benefits depending on the type of injury sustained. At the moment there is a fairly low take-up rate on the policy but the Ministry is keen that the rate should be increased if possible.

Kuwait: UK Fire-Fighting Assistance
11.10 a.m.
Lord Mowbray and Stourton: My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In asking this Question, I declare an interest in so far as I am a member of a company which has a slight connection with one of the groups which could be involved in this matter. The Question was as follows:
To ask Her Majesty's Government whether any United Kingdom companies are involved in the capping of oil wells and extinguishing of fires in Kuwait; and if not, whether they will take action to ensure that they are.
Lord Cavendish of Furness: My Lords, the Kuwait British Fire Group has completed an assessment of the Sabriyah oil field which includes damage reports on some 90 wells. That report is now being considered by the Kuwait Oil Company. It is hoped this will lead to a second-phase contract for the Kuwait British Fire Group to put out the fires, repair the wells and restore the field to its pre-war condition. To this end, a follow-up commercial proposal to carry out the recommendations of that report has now also been put to the Kuwait Oil Company. Further British companies are involved in these proposals as specialist sub-contractors.
Lord Mowbray and Stourton: My Lords, I thank my noble friend for that reply. That is satisfactory so far as it goes in that British companies are being allowed to join in this situation. However, does not my noble friend find the whole matter somewhat akin to Nero fiddling while Rome burns? We are talking about an ecological disaster on an enormous scale. Is my noble friend aware that the Americans, and the

361
Kuwaitis under American advice, have heavily lent on companies that use old-fashioned, conventional methods which are slow and expensive? Some British companies have developed new tunnelling techniques which have been approved by the Department of Energy and the Offshore Supplies Office. Those techniques have even been recognised as safe by the Santa Fe KPC. Could those companies not be given a chance to enter this process to speed it up and to carry out the job far cheaper than is the case at present?
Lord Cavendish of Furness: My Lords, I should tell my noble friend that the department does not give approval. It promotes ideas which it thinks are good, but is not in a position to give approval. We are not aware of any direct evidence of the Americans trying to squeeze out old technology. The House should also recognise that, given the difficulties faced by Kuwait, pioneering new ideas is not easy. By way of amplification of that point, although the returns available to the DTI do not allow us to separate orders in the oil and gas sector from other orders, the latest figures from DTI are that 59 UK companies are known to have received orders worth £370 million for work of all kinds associated with the general reconstruction of Kuwait. Our best estimate is that upwards of £200 million of that business relates to oil and gas. We are encouraged by British involvement in reconstruction.
Lord Mellish: My Lords, while I understand the need for British firms to help in the oil fields in Kuwait, is the Minister aware—and I hope that this is relevant to the Question—that the Kuwaitis themselves have estimated that at least £22 billion is required to repair some of the damage which Saddam Hussein and his terrorists inflicted? I ask this straight question: who is going to find the £22 billion, and when?
Lord Cavendish of Furness: My Lords, the noble Lord has asked related questions previously. I have seen that assessment. Compensation is a matter for the United Nations.
Lord Campbell of Croy: My Lords, is it true that the work of putting out the fires is being delayed by the need first to remove the many land-mines laid by the Iraqi army? If so, can more be done to clear the mines?
Lord Cavendish of Furness: My Lords, my noble friend is right. That is a difficulty. The latest report from Royal Ordnance indicates that it is ahead of schedule in its ordnance clearing contract. It has restored safe access to about 200 wellheads and also some gathering stations, water lagoons and pipelines. The contract commenced on 9th May and is to last 10 months. Operations involve nine oilfields and also include areas of Kuwaiti infrastructure not directly connected with the oil industry.
Lord Mackie of Benshie: My Lords, can the Minister give the House some idea of the progress being made in putting out the fires, and how long it will be before they are finally put out? At the same time, I have no doubt that he has knowledge of the damage done to the environment.
Lord Cavendish of Furness: My Lords, I cannot supply an estimate of when the fires will be put out. The latest estimates are that an overall total of 732 wells were damaged, of which 648 are on fire; 196 of the burning oil wells have been capped to date. The few blow-out control companies are all North American. Each depends on a handful of highly experienced personnel. They normally tackle only a small number of fires worldwide each year and never more than two at a time. Moreover, in those cases they can rely on the logistical support of the oil companies concerned. This is a different and new situation, and that is the scale of the problem.
Lord Peston: My Lords, in considering the important Question of the noble Lord, Lord Mowbray, is the noble Lord aware that estimates vary to an extraordinary degree. They range from the suggestion that it will all be over within a year, to the possibility that it will take five years. The first seems hopelessly optimistic, and the second dreadfully pessimistic. Can the noble Lord say any more on that point, bearing in mind that the whole situation seems to be an organisational mess? No one seems to be fully in command and the fire-fighters are having great difficulties simply getting enough equipment to bear on the problem, quite apart from the problem of mines. It is a serious matter. Is there anything that Her Majesty's Government can do to speed things up and make the whole operation more professional?
Lord Cavendish of Furness: My Lords, I have to acknowledge that after a conflict of this kind, the organisation is not everything that one would wish. Noble Lords should understand that every fire and every well represents a different problem and needs individual management. I can assure the noble Lord that we are doing everything that we can, but ultimately it must be for Kuwait to make the final decisions.
Lord Mowbray and Stourton: My Lords, as the British Government, like the rest of the world, have a great interest in seeing that the ecology of the area is cleaned up as quickly as possible, will my noble friend please ask his friends in the Government whether the British Government cannot give British companies the chance to try out some of the new technology? If ever there was an occasion for trying out new technology, which our own department and the Santa Fe KPC have approved as safe and possibly effective, is this not an example of an instance where help should be given and for the new technology to be proven? If it proved effective, it would cut down the time factor enormously and reduce the horrible filth and dirt in the air.
Lord Cavendish of Furness: My Lords, however unpleasant the fires are, I should qualify my noble friend's statement of an ecological disaster. We maintain that it is not an ecological disaster, even though it has severe effects on the immediate area.
More than 250 ideas have found their way to the OSO, and the potential value of most of those innovative ideas has been difficult to assess. It seems unlikely that any will be taken up by UK companies

363
involved in the fire-fighting exercise. OSO has given the progenitors of those ideas contacts in UK companies where appropriate or they have been advised to deal with the Kuwaiti authorities directly. We give encouragement where we can.
Lord Mackie of Benshie: My Lords, do I understand the Minister to say that fewer than a third of the fires have been put out? Does that mean that the remainder are the most difficult? Is that not an enormously serious situation?
Lord Cavendish of Furness: My Lords, the figures are correct. Initially, the House was informed that some fires had to be re-ignited. That has stopped. Fires are being put out; there is progress, and there is a modest oil production once again.

Soviet Arms Procurement: Reductions
11.20 a.m.
Lord Mayhew Lord Mayhew asked Her Majesty's Government:
What reductions have been made in the procurement and production of equipment for the Soviet armed forces since 1988.
Lord Cavendish of Furness: My Lords, the most recent Soviet statistics state that between 1988 and 1991 arms procurement spending fell by 29 per cent. in real terms. Over the same period the production of tanks, combat aircraft and artillery was approximately halved, while production of AFVs and APCs fell to around one-quarter of its earlier level. Although the basis of such statistics is obscure, we are in no doubt that both real levels of spending and production have fallen considerably.
Lord Mayhew: My Lords, I thank the noble Lord for that informative reply. However, what further reductions are expected and, in particular, is there any official confirmation of the Soviet statement that they are planning to close or convert 400 arms factories?
Lout Cavendish of Furness: My Lords, it is extremely difficult to give a graphic and accurate description of how the Soviet defence budget works. Perhaps I may answer the noble Lord's second question first. We welcome the Soviet proposals for the conversion of some 400 defence-related factories to civil it production. Diversion of resources from military to civil production would give a great boost to the Soviet economy and we shall look carefully at proposals for Western co-operation.
In January 1989 Mr. Gorbachev announced a 14.2 per cent. reduction in military spending and a 19.5 per cent. cut in military production. That was later revised in various ways, mainly upwards. There are explanations for the differences. The Russians use a much narrower definition of defence spending and prices which do not reflect real costs. However, if it will help the noble Lord, the key is that the reduction in tanks, combat aircraft, artillery, AFV and APC procurement claimed by the Soviet Union is broadly in line with our own assessment.

EC Tobacco Subsidy: Policy
11.22 a.m.
Lord Boyd-Carpenter Lord Boyd-Carpenter asked Her Majesty's Government:
What reductions have been effected as the result of their representations in the amount of subsidy paid by the European Community to the growing of tobacco; and what is the total cost to this country of publicity about the effect of smoking.
The Minister of State, Ministry of Agriculture, Fisheries and Food (Baroness Trumpington): My Lords, price cuts of 9 per cent. and a stabiliser have been introduced since 1988, following sustained pressure from the UK. These have restrained, but regrettably not prevented, an overall increase in the cost of the regime. The Government spend some £3.5 million per year on publicity about the adverse effects of smoking.
Lord Boyd-Carpenter: My Lords, I thank my noble friend for that rather depressing Answer. However, is she aware that it seems to many of us the height of absurdity to use money to finance the production of a commodity and then to use money to persuade people not to use it?
Baroness Trumpington: Yes, my Lords. The Government have consistently criticised the tobacco regime on health grounds and will continue to do so. We support the re-orientation of tobacco production away from high-tar varieties as a useful step, but by no means a sufficient one.
Lord Carter: My Lords, is the Minister aware that there will be some surprise that she did not declare a substantial consumer interest in this Question? Is she further aware that, although her right honourable friend the Minister of Agriculture has criticised the recent MacSharry proposals as they affect the tobacco regime, her right honourable friend the Chancellor of the Exchequer is sending substantial amounts of British taxpayers' money to Brussels to subsidise the regime, her right honourable friend the Secretary of State for Health is now requiring substantial health warnings to be placed on the front and back of cigarette packets, and her noble friend Lady Hooper has recently been in Brussels on behalf of the Government, opposing the Community's attempts to ban the advertising of tobacco? Is it not time that the Government got their act together on this matter?
Baroness Trumpington: My Lords, my reply to the noble Lord's first remark is, do as I say, not as I do. We have consistently campaigned for reductions in support. There has been some progress, but significant change will require other member states to join us. I speak on behalf of the Government. So far, except for Denmark and the Netherlands, they show little willingness to do so. The Government will press for the most radical reform achievable in the forthcoming review of the tobacco regime.
Lord Renton: My Lords, perhaps I may first thank my noble friend for the efforts that she personally has

365
made in order to try to put this matter right. Bearing in mind that the common agricultural policy is now being revised in regard to its cost, would it not be a good thing as part of that provision for the tobacco support, which costs such a lot of money, to be eliminated altogether?
Baroness Trumpington: My Lords, I should like to thank my noble friend for his first remark. Earlier this year I had the pleasure of his company and that of my noble friend Lord Boyd-Carpenter in an effort to explain the situation to them. Obviously, that did not satisfy them, but I shall continue to try to do so. My noble friend asked, why not abandon support? Tobacco is an agricultural crop eligible for CAP support. In criticising the regime, we are one member state among 12. We are alone in seeking fundamental change in the regime. There is strong support for it, particularly from producer states. About 200,000 holdings are involved in tobacco cultivation, employing almost 800,000 people, mostly in the poorer southern member states. In Greece, up to one-third of the agricultural labour force is involved in the cultivation of tobacco. Noble Lords may be interested to know that tobacco is also grown in Germany and France. Because of terrain, soil and climate, the problem is that few, if any, alternative crops are available.
Lord Grimond: My Lords, would it not assist the Government in combating this ludicrous situation if they alerted public opinion to what is happening by marking on all packets of tobacco the announcement, "This comes to you with the help of the EC"? There are many notices in my area telling local electors that good works, such as roads, come to them with the help of the EC and their own council, although the notices should say that they come from the taxpayers of Europe. If they take credit for the good things, should they not also be known for the bad things that they do? Would it not assist the Government in rousing public opinion if that fact were more widely recognised?
Baroness Trumpington: My Lords, in addition to the £3.5 million per year that the Government spend on the Health Education Authority's programme on smoking, health warnings are printed on cigarette packets and advertisements in the United Kingdom, at no cost to the taxpayer. I shall pass on the noble Lord's suggestion to my right honourable friend.
The Earl of Lauderdale: My Lords, has the EC given any thought to the substitution of herbal tobacco as an alternative crop? The taste is so horrible that it quickly kills the taste for smoking.
Baroness Trumpington: My Lords, we shall press for a shift to other crops where there is a valid alternative.
Baroness Phillips: My Lords, bearing in mind that later today we are to discuss the Finance Bill, will the Minister explain where the revenue would come from if we were to abolish the tax on tobacco?
Baroness Trumpington: My Lords, I do not think that I can do that. I shall have to write to the noble Baroness.
Lord Mackie of Benshie: My Lords, is the noble Baroness aware that there is a grave danger in the principle suggested by her noble friend of abolishing all support for tobacco, and that the barley growers and grape growers of Europe might object if that principle were to be carried too far?
Baroness Trumpington: My Lord, I note what the noble Lord says.
Lord Molloy: My Lords, bearing in mind that the noble Lord, Lord Boyd-Carpenter, made a fundamental point in his supplementary question, is the Minister aware of the growing concern about the rapid increase in smoking in schools throughout the nation? Could not that money be well spent in assisting the teachers and headmasters in our schools who are trying to eradicate that evil?
Baroness Trumpington: My Lords, the Government are funding a £2 million a year teenage anti-smoking programme which is now in its second year. Teenage smoking declined from 13 per cent. of 11 to 15 year-olds in 1984 to 8 per cent. in 1988.
Lord Boyd-Carpenter: My Lords, is my noble friend aware that her explanation to my noble friend Lord Renton and me by its clarity increased my disturbance at the whole of this operation? Is she also aware that her argument that the production of tobacco gives good employment would apply with even greater force to the production of cannabis?
Baroness Trumpington: My Lords, I entirely agree with my noble friend that it is paradoxical to support farmers in growing a crop that is harmful to health. That is why we have consistently sought major reform of the tobacco regime and shall continue to do so. As I said to my noble friend when I saw him, major reform will only become possible when our European partners start to adopt the same firm line as we do.
Lord Kennet: My Lords, can the Minister say why the Government resist a Community proposal to ban tobacco advertising altogether? She may have spoken about that and I missed it. On the other hand, perhaps she did not; in which case, it would be most interesting to know the reason.
Baroness Trumpington: My Lords, we believe that the best way to regulate tobacco advertising is through our system of voluntary agreements. The evidence in support of a total ban on tobacco advertising is equivocal.
Lord Airedale: My Lords, as one who had the pleasure of taking part in the meeting with the Minister to which the noble Lord, Lord Renton, referred, does she agree that the root of the problem is that Europe, even southern Europe, is not suited to growing tobacco? The result is that much of the subsidised crop is not of merchantable quality and has to be thrown away, which may be good news for the anti-smoking lobby but is bad news for the taxpayer.
Baroness Trumpington: My Lords, I could have answered all those questions by saying that I agree with noble Lords. But at least we can try to have low tar tobacco grown where it will successfully grow. Many areas in which high tar tobacco is currently grown are, for soil and climatic reasons, unsuited to low tar varieties. Where conversion is possible, it will be difficult because the farms tend to be small and fragmented and conversion involves considerable capital investment in equipment and retraining. In addition, it will reduce employment opportunities as the processes are less labour intensive.

Economic Summit
11.32 a.m.
The Lord Privy Seal (Lord Waddington): My Lords, with the leave of the House I shall now repeat a Statement made in another place by my right honourable friend the Prime Minister on the Economic Summit which took place from 15th to 17th July 1991. The Statement is as follows:
"With permission, Mr. Speaker, I will make a Statement on the Economic Summit held in London from 15th to 17th July and the subsequent meeting with President Gorbachev. I was accompanied at the summit by my right honourable friends the Foreign Secretary and the Chancellor of the Exchequer. The economic declaration and the separate political declarations issued at the summit have been placed in the Library of the House.
"The themes of this summit were 'Building World Partnership' and 'Strengthening the International Order'. Our common aim was to build on the movement towards freedom, democracy and the open economy which was the theme at last year's Houston Summit. I believe that we have achieved valuable and productive results.
"In the political discussion there was full support for our proposal for a UN register of arms sales. We agreed to consult on the guidelines that apply to conventional arms sales. And we agreed on restraint in the transfer of advanced technology weapons. We agreed that donor countries should take account of military expenditure when deciding on aid programmes. We also agreed a number of steps in preventing the proliferation of nuclear, biological and chemical weapons.
"We agreed that we should make preventive diplomacy a top priority in the United Nations. We proposed the establishment of a UN disaster relief co-ordinator so that the UN can in future take the early action that has sometimes been missing in the past.
"We agreed on the need for confidence-building measures by both sides on the Arab-Israel dispute including the suspension of the Arab boycott and of the Israeli policy of settlement in the occupied territories. We encouraged South Africa to pursue policies which will permit normal access to all sources of foreign borrowing. That is vital to enable the economic growth that will be necessary for a successful conclusion to the political negotiations.
368
"In our debate on the world economy we recognised increasing signs of economic recovery. These are welcome but require us to maintain policies aimed at sustained recovery and price stability. This means prudent and vigilant fiscal and monetary policies to bear down on inflation.
"All the summit leaders recognised that the world cannot afford a failure in the Uruguay Round of trade negotiations. We committed ourselves to completing the round by the end of this year. Crucially, we committed ourselves to remain personally involved and to intervene if necessary to ensure that that happens, and to intervene to resolve any disputes. Action will be needed on services, intellectual property, trade access and agriculture.
"We reaffirmed our commitment to support reform in the countries of Central and Eastern Europe. For them trade access is vital. We cannot encourage them to build market economies and then deny them a market place. The European Community has led the way in offering access through these association agreements which are now being negotiated.
"We devoted a lot of time to the problems of developing countries and secured agreement on the need for additional debt relief measures for the poorest, most indebted countries, going well beyond the 'Toronto' agreed in 1988. I have been pressing for this since I launched the Trinidad initiative as Chancellor.
"At the summit, we committed ourselves to work for a successful United Nations Conference on Environment and Development in June next year. By the time of the conference, we aim to have achieved, in particular, a framework convention on climate change and agreement on principles for forest conservation. We also hope to negotiate by the end of next year a framework convention on biodiversity. And we agreed to support financially the implementation of the preliminary stage of a pilot programme for the conservation of the Brazilian rain forests.
"Earlier summits have stimulated effective action in tackling the trade in illicit drugs. This year, we asked the Customs Co-operation Council—on the basis of an initiative put forward by the UK—to intensify its work and liaise with international traders and carriers to curb the spread of drugs.
"These global issues require the involvement of all. Developing countries and East European nations are playing an increasingly active part. But one great country has been until now largely detached from the international economic system. That is the Soviet Union. We had a productive, substantive session with President Gorbachev. It was an historic occasion. The emphasis was on informal, frank and direct discussions. We reached agreement on six specific points.
"The first was special association with the IMF and World Bank. Both the fund and the bank have a wealth of experience in helping governments to

369
work out their own economic reform programmes, especially in the crucial areas of fiscal, monetary and structural policies.
"Secondly, the international institutions—the OECD and the EBRD, as well as the IMF and the World Bank—are to be asked to work closely together in their support of the Soviet Union. They can provide the Soviet Union with practical advice, know-how and expertise to help create a market economy.
"The third agreement was intensified technical assistance. We believe there should be greater co-operation in the following sectors in particular: energy, defence conversion, food distribution, nuclear safety and transport. Yesterday, I announced an increase in Britain's know-how fund assistance from £20 million to £50 million.
"Fourthly, there was agreement on improved trade access to markets for Soviet goods and services. That would also help to attract more inward private investment.
"Fifthly, it was agreed that, as chairman of the summit, I should, on behalf of summit colleagues, follow up our meeting and visit Moscow before the end of the year to review progress. I look forward to doing so. Sixthly, we agreed in response to President Gorbachev's invitation, that Ministers of Finance and of Small Business should go to Moscow for discussions with their Soviet counterparts. My right honourable friend the Chancellor hopes to do so soon.
"This was a landmark meeting with President Gorbachev. It will, I believe, be seen as a first step towards helping the Soviet Union become a full member of the world economic community. I believe that it was a successful summit and I commend the outcome to the House".
My Lords, that concludes the Statement.
11.40 a.m.
Lord Williams of Elvel: My Lords, the House will be grateful to the noble Lord the Lord Privy Seal for repeating the Statement made by the Prime Minister in another place. We agree that the meeting with President Gorbachev was a landmark and welcome it.
There are other points in the Statement, and indeed in the G7 communiqué, which we also welcome. We welcome the commitment to completion of the Uruguay Round of GATT, although I shall have some questions about that. We welcome the strength of, and commitment to, the United Nations. We welcome the agreement on arms sales and transfer. We welcome initiatives on the Gulf and the Middle East. There is much in the Statement that we welcome and support.
I have specific questions on GATT. Will the noble Lord help me on one point? It is my understanding that in order to benefit from the fast track arrangements that Congress in the United States has approved, the Uruguay Round has to reach agreement before the end of the year. The end of the year is not just an aim, as expressed in the communiqué. It is an absolute, final deadline; otherwise, the fast track procedure has to go back to
370
Congress and it is hardly likely that Congress will approve it for next year. We therefore need—and I hope that the noble Lord will be able to add strength to the commitment—not just a target at the end of the year but a commitment from the G7 countries that they will reach agreement.
The problem is the status of the European Commission because it is the Commission which negotiates on behalf of the Community. Will the noble Lord tell the House whether the Commission, in whatever shape or form, was involved in discussions on the Uruguay Round that took place at the G7 summit? It seems important that they should have been at least aware of what was going on.
Again, we welcome the commitment to the United Nations. However, I have a question for the noble Lord. It seems to us that the G7—which started off as an economic group holding economic summits—is looking perilously as though it is becoming a political group holding political summits. Is it the case that the French in particular regard this development as undesirable? They do not wish to see the world's richest countries constituting what they call a directoire of the political world. Is not the proper place for all discussions of political matters the United Nations?
Possibly the greater disappointment of the summit was movement on the environment. Is it the case, as one newspaper reported, that only 15 minutes were spent on the environment during the whole of the summit after all that we have heard from the Prime Minister about its importance?
The third world debt problem will need to be much more carefully scrutinised than it was at the summit. In the communiqué, the G7 leaders simply called on the Paris Club to continue its discussions on how the debt relief measures can be implemented properly. Will the noble Lord give more detail of the measures and the instructions given to the Paris Club? For instance, were the so-called Trinidad terms secured or are they still left in the air?
On the world economy, apart from the commitment to GATT—which we welcome—there seems to be a good deal of doubt about what the G7 view of world economic growth is. The Statement that the noble Lord the Lord Privy Seal repeated picks up the words of the communiqué, which require, as I understand it—and I shall be grateful for confirmation from the noble Lord—continued monetary tightness. In other words, there was no attempt at the summit to co-ordinate a concerted plan to reduce interest rates and thus promote world economic growth. Will the noble Lord confirm that there is now no G7 concerted plan for lower interest rates and world economic growth?
On the Soviet Union, we welcome very much the visit of President Gorbachev and, so far as they go, the arrangements that were agreed. However, will the noble Lord say why full membership of the IMF was not suggested? Indeed it was turned down. Will he say why no arrangement was made to promote the convertibility of the rouble? That would be an important step forward. Those arrangements have worked well in the case of Poland. Can he further say

371
why the G7 countries refused to remove the COCOM trade restrictions on high technology goods to the Soviet Union? All those are steps which, if carried out, would indicate the earnest of the commitment of the G7 towards the Soviet Union. It is a question of the commitment towards the Soviet Union which is important. I have asked many questions of the noble Lord the Lord Privy Seal. I hope that he will forgive me. However, it is an important Statement, and it has been an important summit.
Finally, in view of the need to avoid doing anything which would make the parlous condition of the Soviet economy even worse, will the Prime Minister speedily reverse his decision to send the Chancellor of the Exchequer to Moscow?
Lord Jenkins of Hillhead: My Lords, I too thank the noble Lord the Lord Privy Seal for repeating the Statement. We can all take some satisfaction from the fact that Mr. Major seems to have acquitted himself well both as host and as chairman, although it must be said that it is rare—though not unheard of—in the now 16 year-old history of summit meetings for visitors not to express satisfaction with the maître d'hotel at the end of the proceedings.
Over the 16 years, summits have changed their character enormously. Apart from the move into the political field, referred to by the noble Lord, Lord Williams, when the first meeting took place at Rambouillet, President Giscard's idea was to have a fireside chat without staff or international circus trappings. We have clearly moved a considerable way from that idea.
However, the essential but limited value of summits remains the same. I do not believe that they can be expected to make many hard decisions. They are not geared to that. They are geared to open the minds of world leaders to world problems for a few days and thus encourage them to be less domestically concentrated and selfish in their outlook. That is a limited but worthwhile objective. It is perhaps the reason why the almost indefinite escalation of razzmatazz has certain dangers.
There are one or two hard issues on which more can be expected. I believe that the key test of the summit, the Gorbachev supplement apart, is whether it unravels the GATT knot. That is the hard criterion by which I guess that the success of the summit will be judged in six months' time. Will the noble Lord tell us whether it is the intention of the Prime Minister to resummon the summit in the autumn if progress is not being made towards a GATT solution?
The Gorbachev visit stole much of the thunder. I noted with amusement that he was the first person to be half invited to a summit since I had my joust with President Giscard at the London Summit of 1977. The question was whether I, as President of the Commission, should be invited. On that occasion I was half invited but that led to a full invitation to Bonn the following year and in subsequent years.
Mt. Gorbachev, as a half invited guest, succeeded in dominating the proceedings in the press to an extent which eluded me. Does the Leader of the House expect Mr. Gorbachev to become a full guest next year? Do the Government envisage a group of eight? What is
372
the noble Lord's appraisal of what Mr. Gorbachev took back? Was it worthwhile? And was it as much as the British Government intended?
Lord Waddington: My Lords, I am grateful to the noble Lords, Lord Williams of Elvel and Lord Jenkins of Hillhead, for their comments. The noble Lord, Lord Williams, gave a general welcome to the outcome of the summit. I am sure that the majority of people recognise that it was a historic occasion and that important progress was made. I am grateful to the noble Lord, Lord Jenkins, for his congratulations to my right honourable friend the Prime Minister.
The importance to the GATT round of what happened at the summit was the personal commitment of each head of state or government to complete the round successfully by the end of the year. That is the aim. M. Delors was present throughout as was the President of the European Council. Therefore there is no doubt about the involvement of the European Community.
The noble Lord, Lord Williams, was right to point to the fact that what began as an economic grouping is now making a substantial contribution to political developments. However, the proof of the pudding is in the eating. Many of the agreements reached at the summit are of the greatest importance. No one would doubt that the agreement to establish a UN disaster relief co-ordinator is a substantial development as a result of work undertaken at the summit.
As regards the environment, I believe that the foremost message that comes from the summit is that an open market helps to create the resources needed to protect the environment. One cannot look at the problems of the environment in isolation and say, "We will have just one little session dealing with the problems of the environment". We shall never sort out the problems of the environment in Eastern and Central Europe and in Russia unless those countries are fully integrated into the world economy with its free market creating the wealth without which we shall not be able to do all that is necessary.
I do not know how many minutes were spent dealing specifically with the environment. Its problems permeated all the discussions at the summit. However, there is no doubt that the summit established the aim to achieve a framework convention on climate change and agreement on the principles for forest conservation. It was also agreed that that should be done in time for the UN Conference on Environment and Development in Rio in 1992. It is also hoped to negotiate a framework convention on bio-diversity. It was agreed to support the implementation of the preliminary stage of a pilot programme for conservation of the Brazilian rain forests. No one can seriously contend that the outcome of the summit as regards the environment was puny and unimportant.
Initiatives on debt relief were pioneered by the British Government. I cannot give the noble Lord all the details because I do not have them in front of me. However, I know that it is intended not only to preserve the Trinidad terms but to go much further and to make additional progress.
It was said at the summit that there was a recognition of increasing signs of economic recovery.

373
However, there was also a recognition of the need for prudent and vigilant fiscal and monetary policies to bear down on inflation. The British Government believe that to be right and are often attacked for making that their priority. It is comforting and reassuring to see that the Government are not alone in the world in doing so; indeed, ever major country takes the same view.
I do not know the detailed argument for full membership of the IMF for the Soviet Union. We all know that a great deal of progress has yet to be made in the Soviet Union before it can take its place alongside the G7 nations in the sense of having achieved a market economy. Unfortunately, it still has a long way to go. Our job is to assist the Soviet Union along that road and to help it to mobilise its enormous resources which it has not been able to use as a result of the highly inefficient socialist system that has existed for many years to its enormous disadvantage.
The noble Lord, Lord Jenkins of Hillhead, was right to say that summits are not for detailed negations. On the other hand, there is a place at international conferences for ringing declarations and the reaffirmation of commitments. It is important that that should be done by the world's leaders. I cannot answer the noble Lord's question about the possibility of a resummoning of the summit if no GATT outcome is likely by the autumn. However, I shall pass on his remarks to my right honourable friend.
11.58 a.m.
Lord Boyd-Carpenter: My Lords, is my noble friend aware that many of us will wish to join the noble Lord, Lord Jenkins of Hillhead, in congratulating Her Majesty's Government in general and the Prime Minister in particular on the great success of the meeting? Many of us believe that the success was due largely to the leadership of my right honourable friend the Prime Minister who served this country and the world with great distinction.
I wish to ask two questions, the first of which relates to a point made by the noble Lord, Lord Williams. Is it not right that summit meetings should not seek to confine themselves strictly to economic problems? It is impossible to draw an arbitrary line between economic and political problems. Does my noble friend agree that if the summits are to maintain and expand their significance they must deal with strictly political matters as well as strictly economic matters?
Can my noble friend say whether there was any indication at the meeting that our friends in Europe are prepared to accept, in order that the Uruguay Round should be successful, a radical review of the common agricultural policy? Is my noble friend aware that those of us who view these matters from outside have seen no indication of such willingness and it is plain that the success of the Uruguay Round will depend in large measure on considerable flexibility being shown by Europe as regards agricultural policy?
Lord Waddington: My Lords, I am grateful to my noble friend for his remarks about the leadership of the Prime Minister. His contribution throughout the summit has been quite outstanding.
I agree with my noble friend that it would be a great pity if such a gathering were to concentrate only on economic matters when important world events are taking place around it. Indeed, it would be artificial if it were to try to do so. In any event, almost every economic circumstance has a bearing on the political situation in one country or another.
At the summit we were not engaged in negotiations with individual members of the EC. Therefore, it is impossible to say that during the course of that meeting there were indications that individual European countries, which are perhaps not showing the same enthusiasm as we are for reform of the agricultural policy, have changed their ways.
Lord John-Mackie: My Lords, is the noble Lord aware that in the Statement quite a lot was said about the environment and the saving of forests in various countries? Does he appreciate that government policy in this country has reduced planting by over 50 per cent. both by the Forestry Commission and private forestry? He should do something to see that that is reversed.
Lord Waddington: My Lords, I am sure that now the noble Lord has put that matter on the record it will be read. One cannot compare any problems which may arise in this country because of our reluctance to plant more forests with the situation in Amazonia.
Lord John-Mackie: My Lords, does the noble Lord not believe that it is rather unwise to make that statement? He must know that an acre of trees—for example, conifers—sucks in something like five tonnes of CO2 per year which takes a lot out of the atmosphere. Has he not noticed in the newspapers today that scientists are saying that the ozone layer is much thinner than was originally thought to be the case?
Lord Waddington: My Lords, I have no doubt that the noble Lord has a point. However, on reflection perhaps he will recognise that the conference was not designed to discuss whether we should have more acres of forest in the United Kingdom.

Finance Bill
12.2 p.m.
The Minister of State, Department of Transport (Lord Brabazon of Tara): My Lords, I beg to move that the Bill be now read a second time.
We are here today to debate the Finance Bill. But because it bears so closely upon the fate of business, I should like to discuss the Bill's many proposals against the background of the current recession and the prospect for recovery as outlined in the Budget forecast. It is the Government's view that developments since the Budget are consistent with that outlook.

375
Some people have queried the source of the recovery. We have always stressed that, just as the consumer led us into the recession, so the consumer will lead us out. A revival of consumer confidence, buoyed by falling inflation, will lead to a renewal of consumer spending and a return to growth in the economy at large.
The recovery will not just come from consumer spending. In the three months to May exports were at their highest ever level. This signal of a pick-up in growth is amplified by the increasing expectation of a recovery in the United States.
Business recovery will lag behind that in the rest of the economy, as it usually does. Business was at the centre of the late 1980s boom and has taken longer to adjust to the subsequent slowdown.
In the late 1980s, total private sector spending exceeced income by a large margin. Much of this spending went on investment; for example, business investment rose by 43 per cent. in the three years to 1989. But the result was a private sector financial deficit of historic proportions.
As it became clear that rising inflation was threatening to undo the achievements of the 1980s the Government responded by raising interest rates. This eventually brought about the necessary financial retrenchment.
The pace of growth and the confidence which it generated meant that adjustment took time. So when it did happen it was all the more painful for being postponed. This was particularly true of the corporate sector, whose indebtedness had reached new highs by the late 1980s.
No one denies that that policy has been tough. But it is working. RPI inflation has fallen from almost 11 per cent. last autumn to 5.8 per cent. in May and June and is set to fall to 4 per cent. by the fourth quarter of this year. This prospect is confirmed by indicators of underlying inflation. Producer output price inflation has fallen sharply since the new year and is now also on a clearly downward path.
As inflation has come down, so interest rate cuts have been possible. Since joining the ERM last autumn the Government have made it clear that interest rates would be lowered only when this was consistent with our commitment to keep sterling within its ERM bands and to bear down on inflation. We have held to that commitment and as a consequence we have cut interest rates seven times since October, by a total of four percentage points.
We have done this in a cautious way, despite the calls for larger cuts and more of them. Those who advocate this course claim to do so in the interests of industry or home-owners. The Government are aware that high interest rates have created difficulties and do not seek to play down the extent of the problems people have faced. But we believe that a resurgence of inflation would cause greater damage.
We have made it clear where we stand on inflation and it is a message to which consumers and businesses are responding. The EC/Gallup consumers' poll has shown the trend in consumer confidence to be rising since March 1990; and the sharp fall in retail sales through last year now appears to have come to an end.
376
This is in line with the prognosis for recovery the Chancellor described in his Budget speech. We would not expect similar signs of recovery from the business sector as yet. But there are indications that the adjustment which represents the prelude to recovery is taking place.
This is clearest where wages and settlements are concerned. An enduring and credible commitment to low inflation is now bearing fruit: average earnings growth has fallen by one percentage point so far this year.
We have long stressed the need for firms to control costs for the sake of competitiveness. Though it has seemed until recently that their first means of doing so was to shed labour, this message too is at last getting through. Wage moderation means that the burden of costs control is now being shared more equally.
As is to be expected at this stage in the recession, unemployment is still rising, though more slowly than it was earlier this year; and of course, since it lags behind changes in output, we cannot expect to see it stop rising until some time after the recovery is under way. But its rise will be arrested sooner the more quickly bargainers realise that the UK is now on course to become a permanently low-inflation economy.
This bodes well for business recovery. But industry as a whole has weathered this recession far better than it did the last one. The fall in manufacturing output has been only half that in 1980–81 and productivity is already starting to recover.
While the recession may have dented confidence at home, it has not undermined the confidence of the inward investor. According to the latest OECD data, in 1988 and 1989 the UK accounted for a higher proportion of inward investment to the EC than any other member country. Sixty-two per cent. of US investment and 42 per. cent of Japanese investment in the EC came to Britain. Japanese data show that the UK share of Japanese inward investment in the EC rose to over 50 per cent. in the last fiscal year.
The recession is in many ways the inevitable legacy of the excessive growth of the late 1980s. But we must be clear that it will not have wiped out the gains made in the 1980s as a whole. The Budget forecast suggests that in 1991 GDP will be 26 per cent. higher, manufacturing output will be 24 per cent. higher and total investment will be 47 per cent. higher than in 1981, the previous trough. Those are tangible achievements which will stand industry in good stead. Along with the help for business we propose in the Finance Bill, it will provide a sound base from which to prosper into the early 1990s and beyond.
I hope therefore that it will be helpful if I now outline some of the principal measures in the Bill. I shall start with the business measures which form the core of this year's Bill. They give help to all sorts and conditions of business. There is immediate help for business this year as it copes with the recession. Clause 23 of the Bill cuts the rate of tax for 1990 from 35 per cent. to 34 per cent. That cuts companies' tax bills this year and improves their cash flow by £380 million. There is more help this year with bad debts. We know the domino effect which bad debts can produce. A

377
company gets into trouble and runs up bad debts with its suppliers. Its suppliers may be perfectly sound businesses, but they find that they are carrying a burden of bad debts. If they have to pay over VAT which they have never received because the debt has turned bad, that is an added burden.
Last year my right honourable friend, now the Prime Minister, introduced a new scheme for VAT relief on bad debts. It gave relief after a waiting period of two years. The scheme was widely welcomed, but many businesses said that two years was too long to wait for relief. Clause 15 halves the waiting period from two years to one year. Traders can obtain relief now on bad debts they incurred a year ago. The relief will boost traders' cash flow by £340 million this year. That help is immediate. It goes to VAT traders of all sizes. I believe it is particularly important to growing businesses, for whom the burden of bad debt can be overwhelming.
The total help given to business in this year by the Budget was more than £750 million. But just as important are the measures which will underpin the recovery, which we believe will get underway in the second half of the year and gather pace next year. Clause 24 sets the main rate of corporation tax for 1991 at 33 per cent. That means next year companies will have an extra £830 million available for investment, just at the time when the recovery will be giving companies confidence to increase their investment plans. It will ensure that Britain remains an attractive home for investment from abroad. We shall have the lowest rate of corporation tax among the nations which have met at the Group of Seven summit—and among our EC partners too.
Some have called for increased investment allowances targeted on particular parts of industry. The present arrangement of allowances for investment is already generous, but it also reflects commercial reality. The system of 25 per cent. writing down allowances means that most plant and machinery is written off for tax purposes over seven to eight years. But the evidence suggests that the average life of such investments is about 17 years or longer. To return to 100 per cent. first year allowances would be to reverse the reforms made to corporation tax in 1984. It would mean a return to investment decisions being taken as much by the tax advisor as by the business manager. It could also mean higher tax rates for business as a whole. I cannot believe that it would be right to return to the pre-1984 rate of 52 per cent. Another criticism made is that cuts in corporation tax only help those making profits; but that is to ignore important measures elsewhere in the Bill.
Clause 73 and Schedule 15 are specifically targeted at companies which are temporarily making losses. At present companies can carry back losses to set against earlier profits up to one year. But this provision will extend that period from one year to three years. So it means losses made this year can be set against profits made from 1987 onwards. It means that the Government will repay to companies next year an estimated £250 million of tax already paid. That help
378
will go directly to those companies with a healthy record of profits who find themselves temporarily making losses.
There is also assistance to loss-making small businesses. Clause 72 allows unincorporated firms to set trading losses against capital gains of the same or following year. That brings those firms into line with the treatment of companies. For small companies, Clause 25 raises by 25 per cent. the profits limits for the small companies' rate of corporation tax and for marginal relief. That increase means that since 1988 those limits have been raised by 150 per cent., so taking more companies out of the main rate of corporation tax.
The burden of complying with the tax system can be particularly heavy on small firms. My right honourable friend consequently announced in his Budget a number of deregulatory measures to reduce the compliance burden on small firms. Many of those do not appear in the Bill because they do not require primary legislation. But they are valuable, nonetheless. Such measures include the raising of the turnover threshold at which traders are required to register for VAT. It has been raised by 40 per cent. to £35,000, its highest-ever level in real terms. It means that up to 150,000 traders need not go to the bother of being registered for VAT.
One such measure which does appear in the Bill is Clause 18. The VAT penalty regime has been the subject of widespread representations, particularly from small businesses. My right honourable friend the Chancellor therefore announced that it would be reviewed before the next Budget. But in the meantime, and without prejudging the outcome of the review, this clause reduces the VAT serious misdeclaration penalty from 30 per cent. to 20 per cent.
The measures I have mentioned amount to a substantial programme of help to businesses of all sorts, both immediately and for the future. They show that the Government have taken seriously the anxieties of business and I make no apologies for concentrating on them. But although business is the priority, rightly, in this year's Bill there has also been room to continue the Government's record of tax reform. There are important provisions for the family. I shall briefly draw your Lordships' attention to one or two of the most important of these other measures.
Clauses 83 to 92 and Schedules 16 to 18 are important provisions which tackle the avoidance of capital gains tax through the use of non-resident trust. Clause 27 limits mortgage interest relief to the basic rate of income tax. That means that each mortgage payer receives the same amount of tax relief. The £3,000 increase in the threshold at which higher rate tax is paid, introduced by Clause 21, means that higher rate taxpayers are largely compensated for the end of higher rate relief.
For the family generally, your Lordships have already approved, in the Community Charges (General Reduction) Act, the reduction of £140 in the standard community charge. That reflected the Government's judgment that local taxes were being

379
asked to assume too great a burden. Consequently, there needed to be a shift from local to central government taxation.
Clause 13 increases the standard rate of VAT from 15 per cent. to 17½ per cent. That is a fair way to raise the necessary finance and it is consistent with the Government's objective of shifting the burden of taxation from taxes on income to taxes on spending. The zero-rating of essential items such as food, domestic fuel and power, children's clothes and shoes, means that the burden of VAT falls more heavily on the spending of the better-off. The zero rates are an important part of the structure of VAT. Your Lordships will be glad to know that at an ECOFIN Council in June which considered VAT rates in the Single Market, my right honourable friend the Chancellor ensured that we retained the ability to apply our existing zero rates.
I hope that that gives your Lordships a flavour of the contents of this year's Finance Bill. It is a Bill directly addressed to the needs of business. As such, it gives priority to building on the recovery which the Government's wider economic policies are bringing about. I commend the Bill to the House.
Moved, That the Bill be now read a second time. —(Lord Brabazon of Tara.)
12.18 p.m.
Lord Jenkins of Hillhead: My Lords, the noble Lords, Lord Cockfield and Lord Boyd-Carpenter, made a considerable fuss last Tuesday regarding the attenuation of the opportunity for this House to have a proper end of the summer term debate on the state of the economy. By a fairly classic deployment of the art of tu quoque, which is the basis—perhaps a sterile basis —of a great part of our parliamentary exchanges, the noble Lord the Leader of the House managed to produce a fairly effective reply.
The fact remains that a staple diet of Friday Finance Bill Second Readings in this House is not satisfactory. No one would suggest that a Finance Bill for this House is legislation in the normal sense. Whether a specific Finance Bill be a money Bill or not, no one would suggest that we go back to the 1909 position and throw it out on Second Reading or that we should have an effective Committee stage and there should be any question of amending it. Therefore, it has become a peg on which we are able to have a debate at an appropriate time of the year on the state of the economy.
The fact that that is so is an additional reason why the Government should make sure that it comes at a suitable time for a wide-ranging debate, and by no stretch of the imagination is Friday morning such a time. While one may dispute what could be called "Cockfield's law", that no one who knows anything about these matters can ever be here on a Friday morning, the noble Lord, Lord Peston, immediately held up his hand and said "Please, teacher, I shall be here on Friday morning", Nonetheless, I see that his view has been fortified by the Parliamentary Labour Party having voted to abolish Friday sittings
380
altogether. That does not seem to be a very dedicated way of preparing for the next wave of socialist legislation.
Diligence does not seem to be the strongest characteristic of the official Opposition in another place. In preparing for this Second Reading debate I looked up the last Commons debate on the state of the economy. The amazing fact is that, since the Budget in March, there does not seem to have been an occasion on which the Chancellor of the Exchequer has been called on to give a general account of his stewardship. So at a time when the British economy is bumping along at the bottom of a recession and the centre of the Labour Party's indictment of the Government is their mismanagement of the economy, with all its privileged command over time in the House of Commons the official Opposition allow the Chancellor to get away with impunity. The Commons is slack and we are relegated to a Friday morning. There is nothing that we can do about what happens in the other place. The noble Lord, Lord Peston, might have a quiet word with his colleagues and remind them that great parliamentary gladiators should occasionally take to the arena.
Something can be done about Friday mornings. I very much hope that the noble Lord the Leader of the House will do something by next year: he should try to get the Finance Bill here a little earlier. A point that I endeavoured to make was that the Budget is now habitually a month earlier than used to be the case. That should give a little more room for manoeuvre. The Leader of the House can defend himself by saying that this Government are no worse than most of their predecessors in that respect. But they should try to do better. In any case they should take note of a considerable desire in the House that we should not continue by automatically having the debate on a Friday but that it should take place on an ordinary weekday.
I now turn to the substance of the position. There is no doubt now that Britain's recent performance has been at the bottom of the Group of Seven and one of the worst in the European Community as a whole. Recession has hit us worst and it seems likely to remain with us the longest. The best hope is that in 1992 we may be dragged up following a recovery elsewhere, particularly in North America. That is completely incompatible with the view that the recession was caused by world consequences and has little to do with mismanagement at home. You are not first in and last out of a recession, which we are likely to be on this occasion, if you are merely reacting to the weakness of others. Judged by growth rates, investment performance or the rate at which unemployment is rising, Britain's performance has become almost the weakest of the lot.
As regards unemployment, some other countries —Spain is a notable example—have a greater structural unemployment problem than we do, but we have produced the worst cyclical performance as regards this recession. What all this means is beyond dispute. The sedulously propagated myth of the economic miracle of the 1980s is dead. The period from 1979 onwards produced one bad quinquennium,

381
followed by one good quinquennium and a third bad one of which we are just about in the middle. It depends entirely at which point on the slope you stand and in which direction you choose to look as to whether you can produce good or bad comparative statistics. The idea that a sea change in the quality of the performance of the British economy was brought about is no longer sustainable.
I believe that many businessmen were persuaded that a beneficent revolution had occurred. However, to put it bluntly, it was the level of their reward and not the performance of their industries which has been transformed. The period during which the noble Lord, Lord Young of Graffham, stood at the Dispatch Box and told us how the British economy had become the envy of the world now seems almost infinitely remote. The voice of the turtle is no longer heard in the land.
I am not sure that there is much comfort in all this for anyone. The weakness of the British economy has been allowed to become very deep-seated. The taming of the trade unions has had remarkably little effect on our propensity to wage inflation. The natural position of the balance of payments is one of chronic deficit and only the most strenuous efforts, which have not recently been forthcoming, can get it right for a period. When an investment spurt comes, it falls away about as quickly as a ridge of high pressure this summer. Overall, there is the dangerous short-termism which the takeover bid mentality run mad, much encouraged by the Government, imposes on industry.
I said that there is not much comfort in this situation for anybody. I fear that, starting from the present position, if a Labour Government were elected they would find it extraordinarily difficult to achieve the steady 2.5 per cent. growth rate on which their public expenditure plans are all predicated. So I guess that there would unfold a story of counting chickens before they are hatched, of disappointed hopes and then abrupt cutbacks.
Perhaps I am in too pessimistic a mood this morning. It may be that if we have an afternoon debate next year I shall approach it more cheerfully. However, the circumstances of next year make it very unlikely that the normal rhythm of the Finance Bill will be followed. It may be that we shall have to look two years ahead. In the meantime perhaps we can have more concentration on the underlying problems of the economy—on training, investment and the stemming of the tide of short-termism—and, above all, an avoidance of the ridiculous complacency which pretends that 12 years which have landed the economy in its present state are a tribute either to the doctrines or the competence with which we have been governed.
12.28 p.m.
Lord Renfrew of Kaimsthorn: My Lords, it is with considerable diffidence that I rise to follow the illuminating speeches which we have heard this morning from my noble friend Lord Brabazon of Tara and from the noble Lord, Lord Jenkins of Hillhead. Since my principal point today relates to the visual arts may I as a very new Peer observe that the magnificent setting in which your Lordships'
382
deliberations take place—this supreme expression of the Gothic revival, conceived by that great innovator, Augustus Pugin, within the framework of Sir Charles Barry's grand design—promises to add significantly to one's sense of privilege at being able to participate here. I add that it is significant evidence of state patronage for the arts.
There is much to commend in the Chancellor's first Budget. It was clearly a work of prudence and sound judgment at a time of international financial difficulty. However, my reason for rising to speak is to comment on Clauses 68 and 71 of the Bill relating to charitable giving, which has not yet received attention today. These two clauses carry further the much needed encouragement to charitable giving which the Government have given in recent years; they add to the long-standing concessions, through deeds of covenant, to give income tax rebates; they add also to the pay-roll giving scheme which was introduced some years ago, and to gift aid which was introduced last year.
Clause 71 abolishes the upper limit imposed on tax relief under gift aid, but it is to Clause 68 that I want to draw attention. The clause covers an area hitherto much neglected; that of gifts of goods—that is to say of things not only of cash—in this case to educational institutions. For example, computer and laboratory equipment. Tax relief is offered for these items. To a large extent that is a new principle and it is welcome. However, I wonder whether it is not time that Ministers should seek to construct a more coherent structure of incentive for gifts of works of art to national institutions and charities. I should like to ask whether we are doing enough to encourage such gifts by appropriate tax incentives to enrich our national collections and the collections of educational institutions and other charitable bodies.
My contention is that we are not at present doing enough. If that contention borders on the controversial, I hope my noble friend will take it within the context of my positive observations on the general trend of the Government's provisions for charitable giving.
However, it is the sad case that purchase grants provided by Her Majesty's Government to national museums and institutions have failed to keep pace with inflation. Three years ago the Tate Gallery was in receipt of a purchase grant of about £1.8 million. The same figure last year; the same figure this year. I do not believe that the Tate Gallery's purchasing has been very significantly supplemented by the National Heritage Memorial Fund.
I compute that at that rate if the purchasing funds for the Tate Gallery over 10 years were added together, the funds would still not purchase a single painting by Van Gogh at current market rates. In the context of that rather limited scale of funding for purchase—and there may be good reasons for it, but it is perhaps not a matter which we would expect to deal with in the Finance Bill today—would it not be appropriate to offer greater encouragement to the private sector to make gifts of works of art to national museums and institutions? I wonder if it is not time that one should be thinking more in terms of

383
incentives comparable with those in the United States where gifts of property—in particular works of art —to national museums, galleries and charitable institutions, attract tax relief at a significant rate.
I have mentioned also the need for a coherent structure. It is the case that there remain at present a number of disincentives under our fiscal regime towards the offer of gifts of works of art to charities. By way of example, I should like to allude to what we might term the difficult case of the bronze horse. Here I must declare an interest in that it relates to my own college in Cambridge which, like many other educational institutions, wishes to encourage the contemporary arts. We were delighted therefore earlier this year when one of Britain's leading sculptors—a figure internationally acclaimed—decided to make a donation to the college of a life-size bronze horse which he had created some years ago. I began at once to inquire whether there might be any tax incentives which would encourage him in this benefaction, though he needed no encouragement. However, I was astonished to learn that far from incentives, it turns out that if a sculptor offers to an educational institution or a national museum something which he has made he is liable to pay VAT on his own benefaction. That seems to be an extraordinary disincentive.
I had hoped after reading the press release following the Budget Statement by the right honourable gentleman the Chancellor of the Exchequer, that Clause 68, as it turned out to be, in the Finance Bill would offer some relief. That is the clause to which I have referred where benefactions of materials—goods—can attract tax relief. But this tax relief relates to income tax and corporation tax and offers no alleviation of any kind for value added tax. I was a little mollified to learn that value added tax is chargeable on the production cost rather than the market cost of the item. However, it remains the case that this distinguished sculptor makes his gift to the college in question he will have to pay value added tax of between £3,000 and £5,000 upon the production costs relating to his gift. It is therefore no surprise that at present what was to be a gift to the college, has become an indefinite loan. This is something which I deplore.
I should be very grateful if my noble friend would think about these matters and discuss them further. I realise they are not easy matters; they relate to common market Directives. It may be that in order to change these provisions, there would be need of some co-operation at European Community level.
The broader issue is that we live at a time of exceptional vitality in the visual arts. Britain has undoubtedly a leading international reputation in the field, perhaps as never before. Nor is the matter an entirely aesthetic question. I was present at the debate on tourism on Wednesday evening which was initiated by the, noble Lord, Lord Pitt of Hampstead, when it was widely recognised that there is significant financial benefit to the nation through having museums and galleries which attract many visitors. At the present time we have in the Tate Gallery the works of Constable on show; we have in the Hayward Gallery
384
the works of that remarkable contemporary of ours Richard Long, and the works of Hamish Fulton in the Serpentine Gallery. However, my anxiety is that works such as these by contemporary artists will not find their way in sufficient numbers into galleries and public collections unless we have a more coherent strategy for the fiscal support of giving by the private sector.
I urge that further consideration be given to the structure of tax incentives relating to works of art so that we can see within the framework of the very welcome developments which Her Majesty's Government have brought about in relation to giving —but so far mainly to giving in cash—comparable developments relating to giving of objects in kind and particularly works of art.
12.37 p.m.
Lord Marlesford: My Lords, it is a particular pleasure for me to follow my noble friend Lord Renfrew of Kaimsthorn in his maiden speech. When the list came out of the so-called working Peers, of which I have the honour to be a member, his was one of the illustrious names on it. To have him in your Lordships' House will clearly be a major asset for all of us. He is one of Britain's foremost archaeologists. He is head of one of the great colleges of the greatest university —I declare my interest. It is not surprising that he would observe the beauty of the Palace of Westminster, as he is also the head of one of the most beautiful colleges in Cambridge. His speech was full of real depth of knowledge. I suspect that a government of whatever complexion would always find it quite hard to argue against the kind of case which he has put before your Lordships today. I hope that we shall frequently hear contributions from him in the future.
I am glad that in opening the debate my noble friend Lord Brabazon made it clear that the central point of the Government's economic policy is still to fight inflation. I believe that, as the election approaches, it is probably good for all of us to focus our minds to some extent on the differences between the approach of the two main parties to dealing with the economic situation.
On inflation, I must admit that I have always detected an infirmity of purpose on the part of the Labour Party. Indeed, I have also detected in the past some ambivalence towards inflation. I am glad to see from the list of speakers that we shall have the opportunity later on of hearing from the noble Lord, Lord Murray. I well remember attending a meeting of the American Chamber of Commerce in the Savoy Hotel shortly after the February 1974 election and hearing the noble Lord, who at that time was at the height of his powers as the General Secretary of the TUC, extolling the virtues of inflation as a means of redistribution. I shall be interested to hear whether he still holds that view.
However much the Labour Party changes its policies—one welcomes many of the changes—and however much I may personally agree with many of the social objectives of that party, I am afraid that there is an unbridgeable gulf between us on central economic policy, especially on the aspects referred to

385
by my noble friend in his opening speech. It is to some extent basically a matter of philosophy. Last night I looked at that extremely good book Choose Freedom by Mr. Roy Hattersley, who is probably the person in the Shadow Cabinet most entitled to claim to be a real intellectual. After rejecting the concept of equality of opportunity Mr. Hattersley says:
"The equality we seek is equality of outcome—the state organised to reduce rather than accentuate natural differences".
He goes on to say:
"A Socialist government committed to real equality will clearly embark on a massive programme of redistribution, confident it is more likely to improve overall economic performance than to depress it".
Then, putting flesh on the bones, he says:
"We need to re-gear the whole tax system with the explicit and overt intention of making it an instrument of redistribution".
The book was published fairly recently, in 1987. As Deputy Leader of the Labour Party, Mr. Hattersley is clearly someone of considerable importance. We should study carefully what he says. Present Labour policies are poised faithfully to implement that requirement. The 40 per cent. top tax rate is to be replaced by a rate of 50 per cent., to which will be added 9 per cent. because of the uncapping of the national insurance contribution. In a Written Answer on Wednesday of this week which noble Lords may have seen I saw some interesting figures. The Written Answer is in the form of a table which shows the top marginal rate of income tax ever since 1957–58. It shows the level in current prices at which the rate clicked in and the level in 1990–91 prices. What is striking is that the last occasion on which we had a 60 per cent. tax rate was 1987–88 when it clicked in at an income in today's prices of more than £56,000. I have not heard anything to suggest that the proposals of the Labour Party for a marginal rate of 59 per cent. will do other than click in at approximately the level of the present 40 per cent., which is £25,000 plus. I shall be interested to hear whether I am wrong on that.
When Mr. Healey was Chancellor of the Exchequer in 1978–79 and there was a top marginal rate of 98 per cent.—60 per cent. is a good deal lower than that—that applied at just under £65,000 at today's prices. Under the Conservative Government in which my noble friend Lord Barber was Chancellor of the Exchequer, rates were not very low. The top rate was 90 per cent., but it did not click in until, at today's prices, £111,000. That demonstrates what a large increase in taxation the proposal would represent. It would be a major difference from the present Government's policies as outlined and developed in successive Budgets.
The other policy of the Labour Party which I would regard as disastrous—I have a suspicion that some noble Lords opposite, even of the Labour Party, might not be wholly enamoured with it, although I expect a spirited defence of it from the noble Lord, Lord Peston—is the statutory minimum wage. In his book Mr. Hattersley gave the signpost to that too when he wrote:
386
"In order to introduce a statutory minimum wage it is necessary to determine pay by some other way than the crude operation of an imperfect market which is called free collective bargaining".
The trade unions have so far made it clear that that is unacceptable. Mr. Hammond, Mr. Laird and Mr. Jordan are three people who have done so. I believe the right way of helping poor people is not by pricing them out of a job but by income support and education and training to help them develop marketable skills.
Baroness Phillips: My Lords, we are, as I understand the agenda, discussing the Finance Bill prepared by a Conservative Government. I am not quite clear what relevance the noble Lord's speech has.
Lord Marlesford: My Lords, the Finance Bill is about economic management and taxation. There are various ways of tackling economic management and there are various forms of taxation. As the noble Lord, Lord Jenkins, said, it is a good occasion for a general economic debate. I am sorry that the noble Baroness feels sensitive that I should be raising these matters. I should have thought that she might be rather glad that I was giving them some prominence in taking extremely seriously some of the fundamentals of the alternative ways of managing the economy. I have said enough on that subject. I shall now move to the Government's economic policies.
One of the problems in this country—it is a problem specific to Britain—is that the people of Britain still expect to be compensated fully for inflation. It is an unfulfillable expectation. The last wage round was from that point of view disastrous. There are still had signs. It is extraordinary to me that the electricity workers—I declare an interest as a member of the Eastern Electricity Board—actually balloted for industrial action on an 8.9 per cent offer. They did not take industrial action even though they voted for it. They did so because 9.5 per cent. had been paid to workers in the gas industry. The ratcheting up of wages contributes to inflation.
Earnings in this country are undoubtedly rising too fast. The figure is 8.8 per cent. in the year to April and an annual rate of 8 per cent. over the past three months. In America the figure is only 3.6 per cent., in Germany it is 6 per cent. but accelerating—the three-month figure is 12 per cent.—and in Japan it actually fell by 3 per cent. in the past three months. It would be wrong for me to refer to increases in wages without also referring to increases in top salaries—
Noble Lords: Hear, hear!
Lord Marlesford: My Lords, I am glad that I am at least striking a chord in that respect. Some may feel that those increases are unjustifiable and some may feel that they are offensive. In some cases they are a matter of catching up. They do not of themselves, although they may by example, add significantly to industrial costs. When it comes to the salaries of top people in industry or in any other area I agree with what the American tycoon, J. Peter Grace, once said to a friend of mine who was applying for a job and asking for an enormous salary: "Sir, I have no

387
problem paying you that. You just have a problem earning it". That is the right approach. If people are paid high salaries those rates must be wholly conditional on performance. Safeguards should not be built into contracts to enable people who fail at those levels to have the security of continuing to be paid.
Mr. Nigel Lawson, to whom I believe this country owes much for developing, through successive Budgets, supply side economics and for having introduced the 40 per cent. top tax rate in 1988–89, from 'which we are now benefiting for the fourth year in succession, made the mistake, as I am sure even he would recognise, of allowing the money supply to get out of control. If ever there was a laboratory experiment which appears to have justified the whole monetarist approach, that was it.
It seems to me that there is now acceptance of that lesson by the Government. I am confident that there will be no dash for growth and no attempt to achieve a pre-election boom. However, I urge the Chancellor of the Exchequer to continue to show considerable caution. I believe that caution is probably the courageous, although not the electorally easy, course. So far he has shown that in his interest rate reductions.
The Labour Party frequently says that interest rates should be I per cent. below whatever they are, in contrast to the Liberal Democrat Party, which seems to me to have taken a very much more responsible attitude to interest rates. As we move towards lower interest rates, as I am sure we shall, I suggest that this should be done in even smaller steps. It has become quite normal to have reductions in interest rates of half a per cent. I favour frequent reductions of quarter of a per cent., or rather doubly frequent of a half per cent. That is the cautious way of doing it.
It is interesting that the gap between German and British interest rates has already narrowed dramatically. A year ago it was 2½ per cent. and now it is only 14 per cent. I believe that that shows that Britain is beginning to be seen as a low inflation country. That position has not yet been reached, but that is how it is beginning to look.
The Government had—one may call it the good fortune or good judgment—to join the ERM linked to a weak currency, or a currency which was to turn out to be weak. The decision of the Bundesbank last week not to raise interest rates has been extremely helpful. It was clearly an agonising decision because it took the Bundesbank an hour and a half longer than it normally takes to make these decisions. One could say that Germany has now taken into its own system the virus of inflation. It may well have to increase its interest rates in September.
However, as we have shown commendable caution in this country under the present Chancellor of the Exchequer, I think that we would be able to sustain, without increasing our own interest rates, even an increase in German interest rates. I believe that inflation will fall below 4 per cent. this year; indeed, it could be quite close to zero by this time next year. That is what I believe will bring a revival of confidence. It is only from that sort of confidence that we can expect a revival of the economy.
12.53 p.m.
Lord Hollick: My Lords, I am greatly honoured to have become a member of this House. Your Lordships' kindness and warm welcome have helped to make this, the occasion of my maiden speech, a little less daunting. I look forward to contributing briefly to this House's deliberations, particularly on those topics where I have some personal experience.
For nearly 20 years I have managed businesses in the financial services, media and market research sectors of the economy. In the two dozen countries in which my group operates the overall performance of the economy and the policy stance of each government towards business are key determinants of the success, or lack of success, of our business. Today's debate affords me the opportunity of taking stock of the performance of the UK economy. I propose to measure that performance with the same yardsticks we use to measure a company's performance. Did we achieve our targets? How did we fare against our competitors and is there anything we can learn from them? Which initiatives should we take to improve our performance? Are we sticking to our long-term strategic objectives?
By many of these measures the performance of UK plc throughout the past 20 years has been poor, apart from the oil fuelled and, dare I say, election fuelled economic boom in the mid-1980s. We are now clearly struggling in the relegation zone of the first division of world economies. For the past three years the UK has been bottom of the G7 league for growth, manufacturing investment and job creation. The OECD is predicting that we shall yet again be bottom of the league in 1992.
If UK plc were a quoted company it would probably be rated by stock analysts either as a sell or at best a hold pending restructuring. The City's teenage scribblers might even suggest a change of management, or, worse, promote a take-over by a predator with a better record of making assets perform. But these are controversial notions which do not belong in a maiden speech. The convention of non-controversial maiden speeches deprives me of the opportunity to deal with a number of contentious matters raised by the previous speaker in this debate.
I do not subscribe to the view that the disappointing performance of the British economy can be laid at the door of poor management or an idle workforce. Our best managers are a match for any of our competitors. Our people work hard and are proud to be associated with first-class products and services. Yet somehow we have failed to build and sustain a winning formula.
That brings me to the role of government in the economy. Every manager will tell you that the task of management is to provide the framework within which everyone in the company can achieve his best and the company overall can prosper. This, I believe, is also the role of government in the economy. A government has three main objectives: to provide, first, a stable macro-economic framework; secondly, a framework of effective supply side measures; and, thirdly, a tough regulatory regime to protect the consumer and to promote competition. The pursuit of

389
these clear objectives has all too often been subordinated to the great British enthusiasm for ideological experimentation—a dose of command economy followed by a period of free for all. There are welcome signs that this enthusiasm is on the wane. It must be replaced by the determined pursuit of key economic objectives which enjoy support right across the political spectrum. I am in favour of trying new policies and new measures to achieve these objectives. I am opposed to any backsliding or temporising on the objectives themselves.
The principal task for the managers of our economy is to provide the stability which our major competitors have long enjoyed through low inflation, low interest rates and stable exchange rates. The wild swings in these rates over the past 20 years have played havoc with the best laid plans of companies and households. They have also led international financial markets to accord a risk premium to the UK with the result that real interest rates are far higher than those of our competitors.
High real interest rates coupled with high inflation are major deterrents to investment and in my experience are an important contributor towards that well-known British disease of short-termism. If business has to pay through the nose for its financing and has to operate with volatile exchange rates and high inflation it must look for a much higher rate of return in the short term to offset the increased level of risk.
Membership of the exchange rate mechanism is a welcome step towards a better managed, more disciplined economy. But there is a danger that it will be portrayed as sufficient by itself to enable us to reach the promised land. Furthermore, the alleged strait-jacket of the ERM is being used as an alibi for a monetary policy which relies solely upon interest rates. It is vital that monetary policy is run using a wide range of instruments.
The problem with the interest rates only—or one-club—policy is that it is indiscriminate. When interest rates are raised to dampen consumer demand it leads to pain for consumers and businesses alike. The squeeze on businesses leads to unemployment and a severe cutback in capital investment and training expenditure. It makes no sense to rely upon a policy to reduce consumer demand when that policy has the all too predictable side effects of achieving a permanent reduction in manufacturing capacity and of forcing many new businesses into receivership.
In business when we are faced with a similar dilemma we are neither too timid to try out new initiatives nor too proud to pick up a good idea from a competitor. I commend the same approach to the Government. Germany and France have developed an array of successful measures to head off a credit boom and also to moderate the consequences of interest rate rises on the productive sector of the economy. Many of those measures are derided here on the grounds of ideological impurity or that they would be less than 100 per cent. effective. Which government policy is 100 per cent. effective? That response smacks of complacency. It would be better to implement a
390
measure which was only 70 per cent. successful if it enabled the country to avoid a sharp rise in unemployment and a rash of business failures.
There is also a need for fresh thinking if we are to improve the supply side of the economy. In the recent debate on the manufacturing industry your Lordships emphasised the importance of training. I wholeheartedly endorse that view. A well-trained, highly skilled population is one of the most valuable assets a country can possess. It is the role of government to ensure that training for both men and women continues after formal education. In France companies are required to spend 1.2 per cent. of their payroll on training. Any shortfall has to be paid to the government, who then distribute it to organisations prepared to assume an increased training responsibility. That sort of pro-active approach is necessary right across the supply side in the UK if we are to meet the challenge of the single European market. The Government have a clear duty to ensure that standards and investment levels are raised not only in training and education but in transport and the infrastructure generally. Boldness and confidence are needed to tackle the chronic supply side problems of the UK: boldness to try innovative measures—in financing, for instance, and the partnership between the public and private sector—and the confidence and open mindedness to pick up the best ideas from our neighbours.
Finally, I shall comment briefly on regulation and competition. The purpose of regulation is to protect consumer interests and to promote effective competition. Faint-hearted regulation, as the collapse of BCCI demonstrates, will fail to achieve either objective. The feeble regulation of our natural monopolies leads to inefficiency and over-pricing, with the consequent maximisation of profit and executive salaries, without any corresponding improvement in service. The failure to introduce effective competition into areas such as telecommunications denies the benefits of lower pricing and better services to millions of households and thousands of companies. Government should look to American and adopt tough anti-trust and competition policies.
The process of redressing many years of comparative decline will be slow and painful. The adjustment to the ERM over the next few years will impose considerable burdens on companies and citizens. That sacrifice will be for nothing if the Government of the day fail to stick to clearly defined, widely supported objectives and fail, either through lack of imagination or through sheer pig-headedness, to take advantage of measures successfully implemented elsewhere or of new ideas developed here.
1.3 p.m.
Lord Bruce of Donington: My Lords, it falls to me to congratulate my noble friend Lord Hollick on his maiden speech, which was delivered with a considerable cogency. It was constructive and fluent. Having had the experience over the past 15 years of listening to a number of admirable maiden speeches, I found that he flirted only mildly with the controversial. As is well known, my noble friend is a

391
chief executive of a large financial services conglomerate with branches in some 23 countries. He has wide experience in the financial field. I am sure that the House looks forward, as I do, to his contributing frequently to our debates. I also congratulate the noble Lord, Lord Renfrew of Kaimsthorn. I admired the force of his maiden speech and the constructive way in which he put forward his views on the Finance Bill. I fancy that after a time he will learn that the administration of VAT is vastly different from the administration of the Inland Revenue.
I listened with considerable interest to the speech of the noble Lord, Lord Marlesford. Having listened to his pleasantly delivered utterances, the kindest thing I can say —I believe that he was an adviser to some leading persons in the previous Administration under the leadership of the right honourable Lady the Member for Finchley—is that I now fully understand why that Government got into such a mess.
I shall deal now with the Minister's speech. The debates on the economy that we now have in the House—this applies also to another place—tend to become unreal. One side, the Government, or the other side, ourselves, quote various statistics. It is perhaps a little unfortunate that the statistics quoted by the Government are highly selective. We all know about the considerable distortions—I put it no higher than that at the moment although I could use a stronger word—or adjustments that have occurred in the figures for the unemployed over the past 10 years; but we now have a new statistic in relation to unemployment. It is now no longer permitted for the Government to point out that the unemployment figures are still increasing; they have now derived a statistic which shows that the rate of increase in unemployment is decreasing so that from their point of view the graph is going up. Similar observations apply to the various times that they use.
When trying to compare their performance with what happened previously, the Government are awed by the performance of other countries. They are always pleased to pick out two or three years which are the most favourable, albeit transient, aspect of a slight upward movement in their activities. They rarely refer to the base figures of 1979. In the statistics the Minister gave about outward investment, he was careful to go back to the trough which his party created in 1980 and to put the improvement above that. He avoided going back to 1979 when he found that the figures told a different story, as indeed they did in regard to manufacturing investment, which even now, after 12 years, has only just exceeded the investment levels in manufacturing of 1979.
They are figures, and the public possibly tends to become confused by them because there is always the well known term:
"Lies, damned lies and statistics".
But the position in the United Kingdom has now reached a stage where the Government's failure is manifest visually. Everyone knows that their policy has failed. In public transport we hear, for example, that a number of trains will have to be withdrawn because transport subsidies, which are commonplace in Germany and France, are being reduced
392
progressively. Our health service has declined, whereas crime, drug taking and homelessness have all increased. We have seen a new phenomenon in that we now see beggars on the streets. That is a new phenomenon for me and I have lived a fairly long life. Everyone in the country, apart from the Government, knows that we are in a recession and that the Government's policies have failed. The Government may waffle on about figures and produce graphs for limited periods of time, but they know that we are doing much worse than our competitors.
The trouble is that the words "recession" and "recovery" mean different things to the Government, the Opposition and, I venture to suggest, to some noble Lords on the Liberal Benches. For the Government a recession essentially means that the profits of industry, commerce and banking are declining. For the Government a recovery means that the profits of enterprises, banks and large conglomerates are beginning to rise again. We on these Benches have a totally different understanding of what constitutes a recession. We start off from the point of view of ordinary people. The Government should have been thinking about ordinary people for many years. For one-tenth of our population, amounting to 5 million souls—adults, children and old people there has been a recession throughout the past 10 years. There has been a continuing recession for them and there is no question of any relief. They have never known a recovery. Corrections have been made to the Government's published figures and it is now well known that the real incomes available to the poorest one-tenth of the population have declined since 1979.
The Government should take note of that. The Government should realise that from our point of view recovery means a recovery in the fortunes of ordinary people, some of whom are unemployed. Some of those people belong to the poorest one-tenth of the population. For those people a recovery means an increase in available employment and a decline in unemployment.
The Government say that they believe all these problems are due to inflation. No one can doubt the Government's sincerity when they say that. In recent years—this has not always been the case in my experience—the Government have blamed the inflation rate essentially on labour costs. But that will not wash. In the first place the wage rates in this country are some 58 per cent. of those paid in West Germany and some 70 per cent. of the wage rates that are paid in France. I am talking about hourly wage rates.
The Minister gives sanction to those comments. In one of the more erudite parts of his address today he boasted of the fact that foreign investment in this country was taking place on a large scale. Of course that is the case as labour costs are cheaper in this country. Therefore if the Minister tries to claim that increased labour costs are the main cause of inflation, I must say with the greatest respect—I have great admiration for the Minister—that he will be talking out of the back of his neck.
The Bank of England has other views on this matter. That was shown in one of its recent quarterly

393
reports. The report admitted the obvious—that is, that the real propellant behind inflation had been the grossly inflated consumer credit that was available in this country. The amount of consumer credit in this country has trebled since this Government have been in office. Inflation has also been caused largely by house owners taking out loans on the back of rising house prices and spending the money on ordinary consumer goods. House prices have also trebled since this Government came into office. In some cases the rise has been even greater than that. Those have been the principal propellants of inflation. There has been vastly extended credit, largely on the back of greatly increased property values.
I have referred to housing in particular because it occurs to me, as it may occur to many others, that in the United Kingdom housing is a key economic factor. I wish to endorse many of the remarks that my noble friend Lord Dean of Beswick has made on this subject, in which he specialises. The shortage of housing in the United Kingdom, aside from the distress that this situation causes, is one of the principal reasons for the continued rise in house prices. I am sure noble Lords will appreciate that that rise is due to the fact that demand is far greater than supply. The housing issue is therefore central to effecting a possible recovery in our fortunes.
The construction of a house is an assembly operation involving nearly 100 different trades. The need for housing is spread right across the country. Therefore a revival in house construction could be a sustained factor in our economic recovery. Moreover, if we employed some of the quarter of a million or more unemployed construction workers, that expenditure on housing would not be inflationary. It is not inflationary to produce goods and objects in return for wages. It is far less inflationary to do that than to pay unemployed people to produce nothing.
Over the past 10 years there has been a drastic decline in the supply of public and private housing in the United Kingdom. Now we are producing an average of 32,000 fewer houses per year than was the case in 1979. We are producing some 130,000 fewer houses per annum than was the case in 1975. Worst of all there has been a decline in the construction of houses for housing associations and local authorities. Over the past 10 years an average of some 43,500 such dwellings have been constructed per annum, as distinct from private dwellings, which have averaged 150,000 per annum. Those deficits must be made good.
The lack of housing adds to public expenditure in other fields. Apart from the human misery caused by the lack of housing, the position leads directly to declining health standards, which leads to a greater expenditure on health. It certainly leads to an increase in crime and more expenditure is required on maintaining law and order. Much more expenditure is also needed on social services.
Noble Lords are possibly unaware of the personal consequences of living in inadequate or dilapidated accommodation where one cannot entertain and where one cannot gain any degree of personal serenity
394
from the beauty or charm of one's own home. Those pleasures are denied to these people. The Government ought to take action, not only in the humane interests, to which they ought to be dedicated, of relieving the distress of people and adding to their personal happiness. They should do so for the deeper economic reasons that the commencement of an intensive public housing construction programme, based upon the needs of rented accommodation for a very large section of the population, would be the finest way of engineering the beginning of a recovery to which the people of Britain are now entitled after so many dismal years which for them have been no economic miracle.
1.20 p.m.
Lord Mackay of Ardbrecknish: My Lords, I am sure that the noble Lord, Lord Bruce of Donington, will forgive me if I do not follow up his argument. To do so would probably mean that I would breach the convention of non-controversiality. I should like to spend a few minutes drawing your Lordships' attention to a particularly important issue set out in Clause 1 of the Finance Bill, namely, the excise taxation of alcoholic beverages and, in particular, the taxation of Scotch whisky.
When I was considering a title to which to attach my name one of my sons suggested that I might pick the name of one of the grand-sounding distilleries in Scotland and in that way somehow gain access to an endless supply of its splendid product. I resisted the temptation, but I want to draw your Lordships' attention to the impact of excise duty on Scotch whisky.
Clause 1 quite simply and properly increases the rates of duty in line with inflation. I have no argument with that. My argument is with the basis on which we levy excise duty in this country. As I hope to show your Lordships in a few brief moments, the way we do so is highly discriminatory to our own home-produced product and highly favourable to the imported product produced by other countries and by people who work in other countries.
Your Lordships may ask why that is of importance. I shall explain why. The Scotch whisky industry is a very important industry in this country and to this country. In rural Scotland, and often remote Scotland, something like 16,000 people are directly employed by the industry. One can add to that the many people who are employed in what might be termed the downstream side. Three of the world's four largest drinks firms are owned in the United Kingdom. Part of the reason for that is the importance of the Scotch whisky industry.
My right honourable friend the Chancellor has his coffers filled every year by over £1 billion from the revenue which comes from Scotch whisky. Perhaps more importantly the exports of this country are helped hugely by the industry. Earlier this week my noble friend Lord Gisborough and my noble friend Lady Trumpington had an exchange on the balance of payments problems in the food and drinks industry. If the rest of the food and drinks industry in the United Kingdom did as well as the Scotch whisky industry we

395
would have no problems with our balance of payments. In 1990 export earnings on whisky were £1.7 billion. It was our fifth largest export, and to the Japanese market it was the largest export.
I am sorry to have to go back an extra year to 1989 but that is the year for which I have all the figures. I should like to take the 1989 figures to show what happens to the terrific surplus which results from the export of Scotch whisky when the import of other alcoholic beverages into our country is taken into account. In 1989 the Scotch whisky industry exported £1,463 million worth of product. We imported £22 million of other spirits, £75 million of beer —which does not matter one way or the other—and a staggering £817 million of wine. The terrific export efforts of the Scotch whisky industry were halved simply by the import of wine, which is very favourably treated in terms of duty by our Chancellor of the Exchequer in comparison with whisky.
One of the problems with all the alcoholic beverages—and this is where I come to the basis of the subsections in Clause 1—is that the tax is based on a pretty arbitrary decision made some years ago and simply built upon. Logically tax on alcohol, I suggest, ought to be based on alcoholic content and therefore on the unit of alcohol—the centilitre. We are all Europeans now so I suppose we have to use centilitres. After the increases in Clause I of this Bill the duty per centilitre of alcohol on whisky will be 19p., on beer it will be 10.1p. and on wine it will be 10.6p. Your Lordships can see the considerable difference between the way in which we treat our own home product, Scotch whisky, and the way we treat imported wines. Indeed, the European Commission—which I do not usually pray in aid but I will in this regard—has said that Scotch:
"has to contend with a British taxation system in which imported alcoholic drinks like table wine are taxed at a lower rate than domestic products such as Scotch whisky".
Your Lordships may think, and this is part of the argument in favour of the way we tax alcohol, that there are social and health reasons for taxing whisky more severely. There can be none. The effect of a centilitre of alcohol is the same in whichever form one takes it. Indeed, the Royal College of Psychiatrists, in a report on the health impact of alcohol said that:
"It is the alcohol content which matters, rather than the unique qualities of a particular drink".
Another reason may be that drinking spirits is considered to be somehow more dangerous to the rest of the community. That is also quite wrong. The Minister for Roads and Traffic in 1989 pointed out that:
"90% of road accidents are caused by people drinking beer".
As for hooliganism, my Lords, you have all heard of lager louts, but there has never been any mention of whisky louts. Therefore, for perfectly logical reasons it seems that the way that we tax Scotch whisky is totally unfair and totally discriminatory.
Your Lordships may ask what I suggest. I suggest one o two solutions. My right honourable friend the Chancellor of the Exchequer could simply say, "I need my take from alcohol. I will therefore strike a median position, without the rate per centilitre, and get in the
396
money I need"; or he may simply decide to lift the tax on beer and wine to the same level as for Scotch whisky. There are good arguments for that. The first good argument for the Chancellor of the Exchequer, and perhaps the only good argument for a Chancellor of the Exchequer, is that he would obtain 17 per cent. more income. The second good argument is that the clever economists who run their machines tell us that imports of wine would promptly go down by something like £200 million, so we would improve our balance of payments as well.
It is not just discrimination in our home market which is the problem. The Scotch whisky industry faces discrimination abroad. Often the people abroad pray in aid our discrimination in our own market. Her Majesty's Government have had some considerable success in Japan in removing some of that discrimination. However, across the English Channel, in Europe—our home market in the new European Community—harmonisation is likely to enforce discrimination so that the discrimination which exists on the Continent of Europe will become set in concrete. In many countries in Europe there is a zero rate of tax for wine and a considerably higher rate for whisky and other spirits.
The Council Presidency has made some very damaging harmonisation proposals. I am delighted to say that my right honourable friend the Chancellor of the Exchequer has resisted them. Indeed, in his written statement on 25th June he said that he could not agree with his fellow Finance Ministers on a minimum rate for whisky when the minimum rate for wine was zero. The Commission is to report on the possible distortions in the drink market. I do not believe that there are possible distortions; there are obvious and definite distortions. Unless we start to tackle them in our own country where we have powers through our Finance Bill, we cannot expect to argue the case for our European partners. The Institute of Fiscal Studies said that a system that imposed duties in direct proportion to their alcohol content would be an improvement on the present regime. I hope that I can say, "And so say all of us".
1.30 p.m.
Lord Desai: My Lords, it is an extraordinarily pleasant duty to welcome our colleague, the noble Lord, Lord Mackay of Ardbrecknish. He has demonstrated discrimination in his choice of subject and a great ability not only to analyse it to our satisfaction but to recruit us to the cause of reform. It is a cause in which I heartily join him because, like him, I am partial to a glass of whisky now and then.
We also heard two other maiden speeches which I should like to mention briefly. I was delighted that the noble Lord, Lord Renfrew of Kaimsthorn, brought to our attention the immense importance of the visual arts. That is something that we often forget. Perhaps I may add one comment to his plea for the visual arts: the British cinema also needs strong support which it has lacked of late. My noble friend Lord Hollick also gave us a succinct, analytical speech about the role of the state in the economy. I wish that I could continue along those happy, non-controversial lines but, having

397
earned my licence after my maiden speech, I can go on to some more pleasant and controversial aspects in what I have to say.
There is much to be said, but let me first reaffirm, as the noble Lord, Lord Jenkins of Hillhead, said, that after 12 years we cannot put our hands on our hearts and say that any of the fundamental problems of the British economy have been solved. We still have no way of combining a reasonably high level of employment, a reasonable balance in the balance of payments and a moderate rate of inflation. That has been a problem for many years in the British economy. Perhaps the entire post-war period has been characterised by it and many solutions have been offered in that respect. However, somewhat like the blind man and the elephant, different governments on both sides of the House have concentrated on one aspect or another, identified it as the root of the problem, tried to tackle it and eventually found that that was not the whole answer.
Trade union reform—or trade union bashing as one might call it—was thought to be a solution to the problems of inflation. We were told by sages that monetarism—control of money supply—was such a painless device that, if we controlled money supply, we would indeed get inflation down without any increase in unemployment. We readily recall the posters stating, "Labour isn't working". It is still not working because 3 million people are unemployed. I say 3 million advisedly because, if we had not had so many changes in definition since 1979, perhaps the present figure of 2.3 million would tend much more realistically towards 3 million.
However, money supply was not properly controlled. We kept on changing targets and definitions and moving goal posts. Perhaps, on the principle of the monkey and the typewriter and Shakespeare, in the odd year the target was achieved. However, inflation was controlled not by control of money supply but by the creation of unemployment. As a fair-minded economist, I thought that for a while I would concede to the other side. Although I did not agree with their theories, I thought that perhaps I might be wrong and that now and then something did work in economics. By 1984–85 we had low inflation and high unemployment. Then what did we get? The inflation rate that was inherited in 1979 was doubled in 1980 and was not brought down. After that, it was doubled again.
The noble Lord, Lord Brabazon, said that everyone knows where the Government stand on inflation. I should love to know where they stand. It is like a roller-coaster. Sometimes it is up and sometimes it is down. Twice within the 12 years we have seen a doubling of the rate of inflation. The first could perhaps be blamed on the past, but the present recession cannot be blamed on anyone except the policies of the Government under various prime ministers and various chancellors of the exchequer. One might say that it was as a result of the quarrel between the monetarists and the non-monetarists or the reluctance to join the exchange rate mechanism when it would have been more suitable to join it.
398
Perhaps it was because of the insistence on monetary sovereignty. What we did with monetary sovereignty is a sad affair, but it must be said that the present recession has been caused by the mad dash for growth in the autumn of 1986, in 1987 and 1988—the mad dash for growth being a particular disease of Conservative chancellors of the exchequer. There was one in 1964, another in 1973 and yet another in the late 1980s. The mad dash for growth doubled the rate of inflation and we are now paying for it in quite drastic terms by a deep recession. If it is not described as a depression it is only because we no longer call them depressions in order not to frighten the children; but it is practically as deep a recession as the last one, which was the deepest on record in British economic history.
We have not found a way of controlling inflation without causing immense misery. It is said that inflation causes loss of jobs, but it appears to me that in the case of the British economy if you create jobs that causes inflation; so either way we have not found a true balance. That kind of boom-and-bust psychology in the British economy must be tacked properly. I look forward to a better management of the economy in the not too distant future when we can do something better.
The noble Lord, Lord Brabazon, was insistent on saying how much the Budget and the Government had done for business. It is not often that I quote business sources, that not being my natural inclination, but the chief economic adviser to the CBI, Professor Douglas McWilliams, was quoted in The Times recently as saying:
"Over the period from 1988 to 1992, the recession will cost the UK in terms of economic growth foregone about twice as much as it gained from 1985 to 1988 from excess growth. The price that has to be paid by British industry for problems in managing demand has been severe … this downswing has set the economy back by a number of years through its impact in damaging company finances and forcing firms to cut their fixed investment in plant and buildings".
The peculiarity about the British economy is that it must be guided tightly and narrowly along the steady path of about two-and-a-half to two-and-three-quarters times the present growth rate. If you accelerate slightly you soon pay in terms of inflation or balance of payments deficits. To cure that a sharp deceleration is needed—so sharp a deceleration that a short boom must be followed by a long recession. However, the character of the present recession is rather peculiar. In the midst of one of the deepest recessions we have a large balance of payments deficit.
We used to think that one way of curing a balance of payments deficit was to engineer a slight recession. But that is no longer the case because over the past 12 years our manufacturing industry has been decimated. I am not surprised that the Scotch whisky industry is doing so well and ranks so high in the list of exports. I am delighted about that. But I venture to believe that it is not unconnected with the fact that manufacturing industry, in terms of the level of output, has a position which is not much higher now than where it was left in 1975.
It used to be the boast of the present Government that productivity growth had gone through a miracle. Output was falling slightly less fast than employment

399
was falling. That was the first miracle. That is how productivity growth was. Then there was a brief spurt of productivity growth in the Lawson boom. We are still suffering from its effects. Today productivity growth is negative. After 12 years of a continuing economic miracle there is negative productivity growth. Indeed, it is a miracle! We have negative productivity growth, a balance of payments deficit in a recession and inflation which may be falling. If I may use the analogy which was used about unemployment, the rate of fall of inflation—at least, headline inflation —ha; slowed down to zero but the core rate of inflation on the Chancellor's preferred definition went up slightly.
Inflation in this economy is not cured. We are paying a high cost for it. I wish that the Budget had been more effective and more positive in tackling the problems of the economy.
1.41 p.m.
Lord Judd: My Lords, it is a great privilege to follow my noble friend Lord Desai, for whose work on economic affairs I formed a high regard at close quarters at the London School of Economics.
I believe that we have to see this Finance Bill in a world perspective. On the one hand, we have unparalleled opportunity to mobilise the world's energies and resources in a co-ordinated and constructive fashion on behalf of humanity. On the other hand, repeatedly we are starkly faced by immense humanitarian crises. The recent famines and disasters in Africa, the Gulf and Bangladesh have revealed the full horror of mass suffering. However, the less visual, ongoing suffering of hundreds of millions of people whose lives are constantly stunted by grinding poverty is an even greater scandal that we must no longer tolerate.
We have to recognise that the present economic and social approaches to alleviating world poverty are just not working. They are not working for the poor and they are not working for the world. Poverty is a direct threat to our own existence. As forests are desperately felled for timber exports, the world becomes poorer; as conflict escalates, terrorism and refugees threaten our own stability; as payments for goods are displaced by payments for debts, world trade suffers; as economies collapse, so does political stability; and as populations grow, so does the threat to diminishing environmental resources. The world's peace and stability are threatened by poverty.
Increasing aid is therefore important. But it is also vital to tackle the perverse flow of resources out of those countries which so seriously need them. The patient needs a blood transfusion—yes, undoubtedly—but we also need to stem the haemorrhaging which causes health, education and other vital services to be cut and production to fall as the supply of inputs and spare parts is disrupted and natural resources depleted in a short-sighted race to earn hard currency.
The G7 leaders have awesome power. This week they signalled their wish to use that power for the common good. Practical cementing of East-West reconciliation unquestionably creates great opportunities for humanity. The prospects are exciting. But
400
last month's world development report of the World Bank indicated that the G7, which consists of no more than just seven countries in the world, still commands 61 per cent. of the world's entire economic output. In other words, G7 is very much the world's economy. However, by contrast, G7 contains only 12 per cent. of the world's population. It is not the world's people. Yet decisions of the G7 affect the whole world.
We must guard against "one dollar, one vote" internationalism where decisions accord with the narrow economic motives of the economically powerful rather than being based on broad human considerations. Surely, the principles of good government and democratic accountability, which we increasingly emphasise as central to sustainable development in the third world and the East, apply equally to the world community as a whole.
The debt relief initiative proposed by the Prime Minister at this week's G7 meeting is welcome. It is encouraging that sufficient agreement was achieved to give grounds for hope that the "London terms" may be ratified by the autumn. The initiative establishes the important principle that debtors should pay no more to service their debts than they can afford without damaging their economic development and that all should see some prospect of returning to creditworthiness and eventual prosperity.
The Harare Commonwealth meeting in October will be an ideal opportunity to set out more detailed proposals for a co-ordinated, burden sharing strategy of debt reduction for all categories of debtors, based on the principles of affordability. Meanwhile, we should all welcome the G7 summit recognition that the conditions now exist for the United Nations to fulfil the promise and vision of its founders. The task is to turn that fine sentiment into hard reality. The challenge for the United Nations, as Perez de Cuellar put it, is to forge, from varied, sometimes contradictory economic, social and political conditions, a global environment of sustained development, social justice and peace.
The international community needs to develop an agenda for the new world order to address the huge challenges that face us: poverty, disease, the population explosion, conflict, drug trafficking, mass movement of peoples and pollution, to name but a few. But any new agenda will be pointless unless there is the political will to support it by making available substantial resources and ensuring that leaders of real calibre head up all parts of the United Nations system. Empowering and properly selecting the Secretary General will be critically important elements in that.
Above all, the United Nations needs legitimacy if it is to take on a more dynamic and purposeful role on behalf of humanity. That legitimacy will only be achieved if the United Nations acts above the narrow economic interests of its most powerful members in the interests of humanity as a whole. We have to look seriously at democratising the United Nations while at the same time questioning the legitimacy of some governments to speak on behalf of their people. Human and humanitarian rights must surely stand above traditional political priorities or sovereignty.

401
Immediately, we need action to establish quickly a deputy Secretary General and UN office for emergencies, as proposed at the G7 meeting. The 30 million people presently at risk of starvation in Africa can wait no longer. If this arrangement is to work, it is essential that the new deputy is based in New York on the 38th floor of the UN and with the direct backing of the Secretary General. That deputy must have real authority to make the best use of available resources by co-ordinating UN agencies and other donors. On no account should the deputy be part of the institutional glue which too frequently characterises international institutions.
A revitalised United Nations, with an increased role to prevent conflict and tackle humanitarian issues, is an important first step in establishing a new world order. However, as a European Community, we also have a duty to accept our global responsibilities. We must make sure that discussions on the single market and developing a common foreign and security policy consider the needs of the whole world and not simply those of the Twelve. We must ensure that 1992 is the year in which Europe joins the world positively shouldering its responsibilities rather than the year in which it finally turns in on itself in an orgy of selfish materialism.
We must never forget that what we have regarded as our foreign policy can only be part of the planet earth's domestic policy and, as citizens of the earth as well as the United Kingdom and Europe, we have a responsibility and a self-interest to get both right. In history, finance Bills will be of little significance unless we approach them within the context of a revitalised and sustainable world economy based on humanitarian responsibility and justice.
1.50 p.m.
Lord Houghton of Sowerby: My Lords, it gives me especial pleasure to congratulate my noble friend Lord Judd on a most remarkable and wide ranging maiden speech. I have known Frank Judd for a long time. He came into the House of Commons in 1966. He was a junior Minister at the Ministry of Defence and deputy Foreign Secretary in a Labour government between 1977 and 1979. How could any noble Lord who had been director of Oxfam since 1985 help but make such a speech in this Chamber? I am sure that if we had been discussing Northern Ireland today and the noble Lord were making his maiden speech he would make it on exactly the same subject. It had to be said and my noble friend said it, having a range of knowledge and experience that few of us possess.
My pleasure is added to because I am president of the all-party group of both Houses of Parliament on population and development. I founded that group years ago. I was chairman for a long time; it is now chaired by Sir Charles Morrison, a Member of Parliament in another place. Unless economic growth and expansion of resources can be made available to an increasing world population, it is obvious that a great disaster lies ahead. When one hears of the projected population increase of some of the African states with little hope of being able to expand the
402
necessary resources to feed and clothe them one wonders how the situation will end. I am sure that we shall wish to hear further from my noble friend. He is a powerful addition to those Members in this House who take a world view of the population problem, considering it probably the greatest menace to humanity at present.
I attend the debate today in the role of observer. After the exchanges between the noble Lord, Lord Cockfield, and Members on the Front Bench recently on holding a debate on the Finance Bill on a Friday morning and the interest that it aroused as to whether the timing could be better, I thought, "I shall turn up at the debate on the Finance Bill on Friday morning to see what we make of it". I have attended every such previous debate since I have been in this House.
To my great surprise and pleasure, we have heard four excellent maiden speeches. I had considered it the litmus test. I had thought, "We shall see what four maiden speakers make of their opportunity to speak on the Finance Bill." We have had a highly diverting experience. The range of expertise of the four maiden speakers has been remarkable. The selection boards on both sides of the House appear to be applying more positive policies of recruitment to your Lordships' House. One can identify further areas of expertise and experience in our debates. That is highly entertaining. They have been excellent speeches.
We have to decide the role of your Lordships' House on the Finance Bill. It has been a matter of discussion and some doubt for a long time. When I first came to this House in 1974, having spoken on every Finance Bill in the House of Commons for 25 years, I heard a Finance Bill passed formally through all its stages one Friday morning without a Member from the Opposition Front Bench even rising. I was horrified. I thought, "How extraordinary that the Finance Bill should be taken formally in your Lordships' House."
The noble Lord, Lord Harmar-Nicolls, and I decided to drag the Finance Bill out of obscurity in your Lordships' House and say something about it. Noble Lords have been obsessed with the limitations imposed on the powers of your Lordships' House for many years by the Parliament Act 1911. As noble Lords know full well, I am one of the few Members of your Lordships' House who remember that Act very well indeed. It was my first taste of political controversy when the veto was at last applied to your Lordships' licence to express an opinion as an unelected body on matters of finance and taxation.
However, we need not regard the Finance Bill as a no-go area in your Lordships' House. The Parliament Act may restrict our powers on legislation and amending legislation. We are reminded from time to time that the ancient privileges of the House of Commons are adequate reasons for rejecting generous amendments to the social security provision which result in considerable expenditure outside the range of national finance and taxation, although such amendments may not fall strictly within the Parliament Act 1911. But we are free to discuss some issues and I believe that we should do so.

403
The maiden speech of the noble Lord, Lord Renfrew of Kaimsthorn, was highly relevant to the Finance Bill. He came in at a canter and was soon at a gallop. It is clear that he had been riding his hobby horse for some time and knew exactly where it ought to go. I was only sorry that my noble friend Lady Scrota was not present and that her son, who is director of the Tate Gallery, was not listening to such a racy speech about the future of galleries and art.
Of course, whisky is highly relevant to the Finance Bill. All that is missing in parliamentary debates on whisky is a sight of the product that the Scotch whisky industry has spread throughout the world. One must be in the Cabinet to have whisky-sodas wheeled in on a butler's tray; they are never wheeled into your Lordships' House. There is not the slightest doubt that former chancellors of the exchequer should have been drowned in whisky for the harm that they caused the Scotch whisky industry. Sometimes they mixed their desires for more revenue with a sense of moral disapproval in levying crippling duties on the whisky industry.
The maiden speeches were evenly divided between those closely related to the Finance Bill and those which took the broader view. My noble friend Lord Rollick dealt with the economics while my noble friend Lord Judd dealt with the more global view of poverty and population problems. Do they represent the kind of division that we should have in our debate on the Bill?
I believe that those of us who are interested in the role of this House as regards the Finance Bill and whether it should be dealt with on a different and better day than Friday should meet to decide what we wish to do when dealing with the Bill in all its stages. Do we wish to discuss economics or speak more closely in relation to the Bill? The noble Lord, Lord Brabazon, began by giving a general review of the budgetary strategy and then turned to the more important details of the Bill. It is clear that some of the provisions of the Finance Bill should be attended to by your Lordships' House.
Although administration is a dull subject it can be most important in issues of taxation. Administration was overhauled and produced in a new and radical form in the Taxes Management Act 1970. That was not a money Bill but since then governments have included in finance Bills all the changes that they wanted to make in the Taxes Management Act 1970. Thereby they have virtually pushed the subject of administration behind closed doors. That does not relieve us of the responsibility and the duty of looking at any substantial changes in administration which might merit our attention.
When dealing with finance Bills we should also beware of the use of arbitrary powers over the citizen. All rights of entry and enforced entry into the homes of taxpayers held by the Inland Revenue and Customs and Excise should be the subject of considerable attention by this House.
I have said enough to introduce the question of what we wish to do about the Finance Bill. My conclusion is that there is sufficient in the Bill to bring the debate more closely to the Bill than to the wider
404
economic issues of the day. On the Third Reading of the Finance Bill in another place, Members survey the economy to ascertain what is happening as compared with the predictions made on Budget Day.
I hope that my comments have contributed towards your Lordships' thoughts about the use of our time. Have we reached agreements about Friday sittings to deal with the Bill or should we gather strength and harass the usual channels to deal with it on a different day? That is a matter of judgment and of difficulty at this point in the Session.
It has been a great pleasure to listen to the four maiden speakers and to assess the value of their contribution to our debates. Their speeches gave an insight into what they wished the theme of the debate to be and it has helped the rest of us to reach a conclusion. We need not worry about embarking on a task which might not be concluded before there is a change of government. Your Lordships' seats in this House will be unaffected by a general election and we shall return to deal with the problems that arise. One can be sure that the situation will remain the same whatever government are in office. It is most important to decide upon our role.
2.6 p.m.
Lord Murray of Epping Forest: My Lords, we have been informed, delighted and moved by an array of maiden speakers which can rarely have been equalled and never exceeded in any debate in this House. It has been an enormous pleasure to be present today and it will be an equally enormous pleasure to read in Hansard what was said.
We have heard a great deal about the sins of commission of the Government but I wish briefly to address a glaring omission from the Finance Bill. The Government have failed to include in the Bill any encouragement to shipowners to sail ships under the red ensign. I fear that that decision has triggered a new wave of flagging out.
The UK-owned and registered merchant fleet is now set to fall to fewer than 300 ships of 500 dead weight tonnes. Indeed, a year ago the UK was 16th in the world fleet, a little below Taiwan, a little above Malta—which has a little over 1 per cent. of the world tonnage—and one tenth of the Liberian fleet. The Government should not be surprised because they were warned in explicit terms by the noble Lord, Lord Sterling, in a previous debate, that if there was no new assistance for investment in new tonnage, the result would be flagging out. He spoke as president of the General Council of British Shipping.
I do not suggest for a moment that the UK should seek to copy Liberia or Panama, but those countries saw where their national interests lay and have taken action to secure them, as have our other major competitor states. Wherever one looks around the maritime world, one finds support measures such as tax-free reserves for future investment in new ships, special reduced rates of corporation tax for shipowners, investment subsidies for new ships and special depreciation allowances, as well as no income taxes for seafarers and support for training costs.

405
All that was recognised by the joint government/industry working party on British shipping and by the House of Lords European Communities Committee Report on European shipping.
Support of that nature is a fact of international shipping life. The Government may regret that and dream of a world in which those things do not happen, but happen they do. The case for further fiscal support for the British merchant fleet is twofold. In the short term, crudely, it is the survival of the British Fleet; in the longer term it will strengthen our negotiating ability to get other countries to modify their own support systems and come nearer to that ideal world which the Government would love us all to inhabit.
The case for fiscal action was well put before the Budget by the General Council for British Shipping and was supported by NUMAST officers. I declare an interest in that I have the honour to be a trustee of that body.
I welcome the change to the rules for UK seafarers in Clause 45, but it does not begin to address the central problem of the decline of our fleet. I welcome the change in itself, but I also welcome it because it completely undermines the Government's case for not going further in the direction of assistance for a British fleet.
A couple of months ago NUMAST thought it would be a nice gesture to present to the new Prime Minister a red ensign; that was duly done. In writing to thank us for that the Prime Minister said:
"it is Government policy to support low general rates of tax in preference to specific provisions for individual sectors".
If that is so, how can they possibly justify concessions to seafarers on income tax as they are doing in Clause 45?
There are two possible bases. It may be argued that because one is abroad, one is not receiving state benefits and therefore one should receive a tax rebate. However, that cannot be so because the Government explicitly refused to accept that argument for the reductions in the poll tax on behalf of seafarers. So that is ruled out.
The only other argument for making those exceptional concessions to seafarers is that it is in the national interest that we should stop the catastrophic decline in the number of seafarers which threatens our ability to man even the few ships which we have in peace or in conflict.
Like our competitors we must take a view on Britain's interests and act to give effect to that view. Therefore, the Government are absolutely right to make concessions to seafarers, but that logic applies to ships as well as to men.
I need not rehearse the economic, commercial and defence case for increasing the size of the fleet under the red ensign. I shall confine myself to one aspect only; namely, the increasing age of our fleet and the impact of that on competitiveness. The problem of competitiveness in British shipping, like many of our industries, is not high pay but low productivity. The major factor in that low productivity is not sweat and tears; it is out-of-date capital equipment.
406
The noble Lord, Lord Marlesford, referred to the 1974 Labour Government. It may be that the actions of trade unionists and of the TUC spoke louder than what he recalls as my perhaps flippant words. It is worth recalling that because wage restraint was accepted by trade unionists, we reduced inflation from 28 per cent., and going up, in the spring of 1975 to a little over 8 per cent. in the summer of 1978. That was no mean achievement and necessary in the circumstances.
The tragedy was, and indeed is, that it diverted us once again into putting all our eggs into the basket of wage restraint and placing undue emphasis on its role in trying to solve our economic problems. However, I strongly agree with my noble friend Lord Hollick that the emphasis must not be on wage restraint; it must be on training, the effective use of labour—which is a great deal more difficult than obtaining wage restraints—and on higher investment. That is common ground. The noble Lord nods and I agree with him. One of the reasons I favoured entering the ERM was that I believed that it would make it more difficult for us to escape via the bolthole of wage restraint and make us face the facts and do something on the supply side.
Returning to the topic of shipping, it is the fact that less than 25 per cent. of our fleet is under 10 years old. That means that we cannot take advantage of the technological advances which substantially reduce operating costs. A new bulk carrier incurs 25 per cent. lower operating costs than a bulk carrier 12 years old. That is the crux of the case for introducing fiscal measures to enhance investment in the shipping industry. It is not too late to do that, but it soon will be.
2.16 p.m.
Baroness Seear: My Lords, I must first apologise to the House that I was not in my place when the Minister opened the debate. Unfortunately, I had an earlier meeting to which I was committed before I knew the date of the debate. I am sorry that I missed the maiden speech of the noble Lord, Lord Renfrew, which I gather made a great impression on your Lordships. It was my loss that I was not able to be here.
I should like to congratulate the other maiden speakers, the noble Lord, Lord Hollick, whose special brand of expertise on the Labour Benches will be of great benefit to your Lordships' House; the noble Lord, Lord Mackay, whose support for Scottish whisky is a sentiment felt by Members on all Benches in your Lordships' House; and the noble Lord, Lord Judd, whose maiden speech I particularly welcome, and that for personal reasons. The mother of the noble Lord, Lord Judd, was for many years a colleague and friend of mine. I begin to feel I must be in the same category as the noble Lord, Lord Houghton, when I look at the noble Lord, Lord Judd. I cannot but think how much his mother would have enjoyed being in the Gallery today, though at some stage she may have had slight reservations about your Lordships' House as such.

407
Like the noble Lord, Lord Murray, I want to refer to what seem to be omissions from the Finance Bill. After all, it is supposed to deal with the major economic issues that confront the country, to which the Budget makes a contribution. Following upon the speech of the noble Lord, Lord Judd, I do not see in the Finance Bill any recognition of the huge changes that must take place in the trading position of the country, and therefore in the manufacturing and farming position, with all the consequences, economic and social, that flow from those changes.
I for one was extremely glad to see that the G7 reinforced the importance of a satisfactory conclusion to the Uruguay Round. If anything could have a worse effect on the problems to which the noble Lord, Lord Judd, referred, it would be the failure of the Uruguay Round. Undoubtedly, aid and the United Nations' policies are of great importance, but what matters more than anything else is that developing countries should have the opportunity to sell their goods. If the Uruguay Round fails, then that opportunity will be indefinitely delayed.
However, let us not forget that if the Uruguay Round succeeds and if we reaffirm our commitment to a world free trade system, even if we cannot get there in one leap, it means substantial changes in this country to the way in which considerable numbers of people earn their living. We need to have plans which shot Id be reflected in the Finance Bill as to how we are to make the adjustments necessary if we sincerely meal to open our markets to countries with low standards of living and low labour costs. Many in this country will be unable to compete with them on the manufacturing side. On the farming side, changes will have to come from the adjustment to the CAP which is at the heart of the problem as regards GATT. That meals more changes in the agricultural area and in the livelihood of farmers and farm workers than we have yet taken on board or have been prepared to meet.
If we really meant business about GATT, the Finance Bill would have reflected the fact that the plans are there and the resources are being made available to deal with the changes that will be necessary.
The second omission, not total, but far too evident, is any realisation of the central importance of unemployment, which has become more severe since the Budget in March. There is very little in the Finance Bill to suggest that the Government have plans for tackling the issue. We on these Benches would be the last to suggest that we simply spend our way out of unemployment. We are not proposing that. We are not suggesting that it should be done by easy increases in consumer expenditure. It is those easy increases which, more than anything else, have got us into the mess that we are in at the present time. I shall say more about that in a moment.
We need not have made things more difficult for employment and people running businesses by increasing VAT to 17.5 per cent. That is part of the expensive pay-off for the appalling mess caused by the poll tax—the money that was wasted and the economic disadvantages that ensued. If the Government had had the good sense to take the advice
408
offered from these Benches and had introduced a local income tax, we would never have got into this muddle. It would have been totally unnecessary to increase VAT from 15 to 17.5 per cent. That has not helped anyone in the sphere of unemployment.
It is perfectly possible for the Government to boost employment without prompting yet another consumer spending spree. They can put more money into investment. Other speakers have urged increases in investment, at least as regards the infrastructure. Money put into the infrastructure at the present time would help the construction industry which is in a woeful situation. If something is not done the construction industry will not be in a position to respond when the economy takes an upturn. That happens again and again.
Money put into the infrastructure, creating demand in the construction industry and leading to better employment in that industry, would have a considerable multiplier effect in many areas of the economy. It would affect not only the spending power of people employed in that industry; it would be reflected in the demand for the kinds of products which the construction industry has to use when carrying out a big investment programme. That is where the Government can safely put money which will have an effect upon unemployment and also a long-term beneficial economic effect.
There are other things that can be done to improve the position and help us to control inflation without boosting consumer expenditure. We on these Benches agree with the Government about the tremendous importance of controlling inflation. We do not wish to see interest rates as the sole instrument for dealing with it. There are other ways in which inflation can be tackled. There is a gesture in the Finance Bill towards encouraging increased savings. The Government could have gone a great deal further. We have a very low ratio of personal saving in this country and a very low ratio of investment by individuals. There was some encouragement in the Budget for saving through much better tax incentives. Some encouragement was also given in the Budget for 1990. That can be developed to a much greater extent. The very limited advances in the Finance Bill are disappointing.
I have said before and say again, though I know how controversial it is—the Finance Bill makes a slight gesture at dealing with the problem—that housing finance is in an appalling mess. All parties went along with the idea of mortgage interest relief. I am the first to realise what a political hot potato it is. But the revenue loses between £8 billion and £9 billion a year as a result of mortgage interest relief. My Lords, think what could be done in terms of investment and training if something was done about mortgage interest relief! It is good that the 40 per cent. allowance for the higher taxpayers has been reduced to the standard basic rate for interest relief. However, it is a very small beginning. Mortgage interest relief has boosted the price of houses and has put up the cost of living. At the present time, mortgage rates are undoubtedly inflationary in that wage claims are an element in increasing costs; inflation is much fuelled by the level of mortgage repayments that people have

409
to make. That is all part of the muddle that we have got into by the system that was introduced with wide approval, but which was undoubtedly a mistake.
I am not saying abandon mortgage relief overnight. That could not be the policy of any party. However, surely there is now widespread agreement, reinforced recently by the report of the Duke of Edinburgh's committee, that it is something which we must tackle. It could be dealt with on an all-party basis. There is enough agreement on all sides that this is distorting the housing market; that it is inflationary; that it has a bad effect on wage claims; and that it is quite contrary to the real economic advancement of this country. It would have to be done by stages, but I am sure it could be done on a basis of consensus. If an advance could be made in that direction, as the slight advance that has already started in the Finance Bill, it is to be welcomed. However, that is only a very small beginning. It is a matter to which we must give attention and give attention soon.
2.28 p.m.
Lord Peston: My Lords, in starting my contribution to today's debate, I must say something about Friday sittings. I may be in a minority, but I find Friday sittings quite acceptable. Friday has been a normal working day throughout my life. As I understand it, your Lordships tend to meet at this time of year on a Friday and I honestly do not see what the fuss is all about. If, as I hope, my noble friends and I are sitting on the Benches opposite a year from now—since the noble Lord, Lord Jenkins of Hillhead, referred to next year's debate—I would not find it an impossible state of affairs to deal with the Finance Bill again on a Friday.
Baroness Seear: My Lords, the trouble is there are not enough people to hear the noble Lord's words of wisdom.
Lord Peston: My Lords, I believe that that is a problem. However, I have to say that it is the free choice of noble Lords; they cannot simultaneously say that the Finance Bill is extremely important and that they wish to make major contributions to the debate, but it is not important enough for them to change their arrangements for a Friday. That is the only point I make. However, I take it that that is a minority view. I shall also refrain from commenting on the view of my honourable friends in another place that Friday is not a working day. I agree, however, with the noble Lord, Lord Jenkins of Hillhead, that if we are fortunate enough this time next year to have a Labour Government, there will be plenty of business to keep my honourable friends in another place fully occupied.
I should like to make some congratulatory remarks to the four maiden speakers. The noble Lord, Lord Renfrew of Kaimsthorn, was right to congratulate the Government on doing something about charitable donations. My only worry is whether we can afford to go further. As someone who has taken an interest in these matters, I believe that there is a tendency at least in part for tax concessions for businesses to lead to
410
some distortion of the arts market, in particular at the top end, the Van Gogh end. I say to the noble Lord that I do not believe that one more or one less Van Gogh in this country will make a great deal of difference to our artistic heritage. I am much more concerned with encouraging new and at the present moment struggling artists. I am sure that the noble Lord supports that sentiment.
I cannot say to the noble Lord, Lord Mackay of Ardbrecknish, how much I agree with him. My difficulty is again two-fold. I am not in a position to commit my party on matters of taxation. His main point concerned the level playing field. The difficulty for some of us is that, although we like whisky—in my case, especially single malts—we are also rather keen on imported wines. Where do we get the best outcome? I am not convinced that the best outcome would be a rise in the excise duty on all those admirable products. That is the danger. I look forward to other arguments from the noble Lord on that subject.
My noble friend Lord Hollick was right to emphasise the damage that the recession is doing to our economy at the moment and also the damage that it will do in the long run. He also said that he intends to intervene in your Lordships' proceedings—I think his word was "briefly". When we come to your Lordships' House all of us take that vow; but I regret to say that many of us—I certainly include myself—become infected by the virus of prolixity. I hope that my noble friend does not.
My noble friend Lord Judd was right to emphasise the world perspective. In the work that I have done on economics I have to say that development is not an area that I have written on or looked at very closely. Listening to him was a salutary experience. Given my own typically narrow perspective, I hope to hear him reminding me on more than one occasion in the future that there is a bigger world out there.
Where on the Finance Bill should one start? Perhaps the best place is the Chancellor of the Exchequer's Budget speech. In that speech, the Chancellor said:
"there are good reasons to expect that the recovery will begin around the middle of this year".—[Official Report, Commons. 19/3/91; col. 165.]
As I understand it, that forecast has now slipped. We are now promised the beginning of the recovery some time in the second half of the year. The Chancellor seems to mean by that—I ask the noble Lord, Lord Brabazon, to comment in due course—that real GDP will be higher in the fourth quarter of 1991 than it was in the third quarter, which is not much of an achievement.
The Chancellor of the Exchequer went on to say, at col. 166 of the Official Report, that,
"the prospect for the year ahead is for an end to the recession, growth of about 2 per cent. in the 12 months to the first half of 1992".
Most forecasters would now think that that was seriously exaggerated. Most forecasters would put that growth at about half the level the Chancellor suggested—1 per cent. or thereabouts. In addition, most forecasters are pessimistic not only about the timing of the recovery but also about its scale. For

411
those noble Lords interested in economic gobbledegook, the following quotation from a leading forecaster is worth noting:
"It is quite possible that the economy is already in the process of troughing without this necessarily being provable at present".
I can only say that the wilful conversion of nouns into verbs ought to be made a criminal offence in respect of which I, for one, would be inclined to favour a return to capital punishment. However, "troughing" seems to be what we are involved in at present.
Perhaps I may now say a few words on the cost of the Government's errors, a point to which my noble friend Lord Desai alluded. If the rate of increase in the gross domestic product falls below the underlying growth rate of the economy, the boom is ending. That is what happened in 1989. A period of excessive expansion occurred in 1985–88, the real danger year being 1987, which was the election winning year. Since 1989 the economy has grown below its underlying rate, and so far as I can see on the Government's policies, we shall not recover the lost ground earlier than the mid-1990s. On fairly cautious assumptions—and I emphasise the word "cautious"—the Government's profligacy in the mid-1980s has cost us about 5 per cent. or more of gross domestic product. In other words, at least £30 billion; that is, accumulating the process over the whole period.
It is also another paradox that the Government claimed when first elected in 1979 that they would bring economic stability. In fact they have produced precisely the opposite. They drove the economy into recession in 1980 and 1981; they then introduced some recovery; went on to build an unsustainable boom in 1987; and a second recession has now followed. But we are now promised that if they are elected again, they will behave themselves. I can only wonder. Perhaps, my Lords, you really can fool all of the people all of the time.
I should like to say a word on the subject of the exchange rate and devaluation. It is worth remarking that tie external value of sterling is now 14 per cent. lower than it was in 1979. There has been a 24 per cent. devaluation against the dollar and a 25 per cent. devaluation against the deutschmark. This has been a devaluing government. On that score they are in no position to point an accusing finger at anyone else.
The noble Lord, Lord Marlesford, dangled a number of flies in front of me. I cannot rise to all of them. However, he said one thing with which I disagree strongly. He referred to a "unbridgeable gulf". Wearing my professional economics hat, I must tell the noble Lord that that is something which I have rejected all of my life; indeed, I still do. We may disagree very profoundly. But I do not regard that as the same thing. I do understand the other arguments and why they are put forward. I do not regard the fact that I disagree with them as being an unbridgeable gulf. I refuse to accept it as such.
I should like to comment briefly on the subject of the minimum wage. The noble Lord ought to know that this is something which is not only favoured by my noble friends but is also something which I favour. The subject is a beloved topic of those who teach first year economics courses—the level to which most of
412
the Government's Ministers seem to aspire. The argument is as follows. We teach our students that if the minimum wage is set below market clearing levels, it will have no effect: but if it is set above, then the demand for workers will fall and some of them will become unemployed. That is what we teach our first-year students. But the trouble with the argument which we go on to teach our students in the second year is that the labour market is competitive; the labour market is a bargaining market in which, in the case of those at the lower end, all the force or strength is on the one side. The whole case for the minimum wage is simply to redress that imbalance.
If the Secretary of State for Employment would actually take his job seriously and not just indulge in the cheaper form of politics, he might, when he opposes the minimum wage, appreciate just what he is saying. What he is saying represents a much more savage indictment of the UK economy than I could ever mount. He is saying that management is so incompetent, employees so badly prepared for work and industry so inefficient that any insistence that a decent wage should be paid to workers would actually be a disaster for our country and would lead to unemployment. Of course a minimum wage means reductions in relativities. It has to mean that, by definition. I therefore accept that for our proposed minimum wage policy to work, compliance by fellow workers is required. The one group that can destroy a minimum wage policy is the rest of the labour force. I do not doubt that. I cannot say more than I hope that will not happen. It is a difficult policy and there is a mixed response to the proposal. I still look to those union leaders who support the minimum wage, including many who represent skilled workers, to be in the forefront of a campaign to make the policy work.
Lord Marlesford: My Lords, I thank the noble Lord for allowing me to intervene. I take his point that if workers accept the policy and do not insist on differentials being maintained, that would remove at least some of the arguments against it. To introduce it, given the statements of powerful, respectable and reputable union leaders, is taking a considerable risk. I should love to hear upon what basis the noble Lord feels that that risk is justifiable.
Lord Peston: My Lords, the risks can be exaggerated. Significant figures in the trade union movement have supported the policy. It is true, not just of this part of economic policy, but of all economic policy in so far as it has interested me, that it might not work. It is risky. I am honest enough to say that about all our policies. I only wish that noble Lords who take a different view and who have the experience to back it, would appreciate that other policies do not work. I believe that this is a matter of such importance that it is worth a try. I am sympathetic to the point made by the noble Lord, Lord Marlesford, which others have also made, that we should improve benefits. The next time my noble friend Lord Carter introduces amendments to a benefits Bill, I look forward to strong support, not merely by argument but by voting, from the noble Lord.
Lord Graham of Edmonton: You must be joking!
Lord Peston: My Lords, I never joke on economic matters. I must ask the Minister a question about the Budget deficit and the PSBR. The Budget Red Book stated that the PSBR would be £8 billion for 1991–92 rising to what looks like £12 billion in 1992–93. Many experts have suggested that the outturn will be larger —up to £12 billion in 1991–92, and £20 billion in 1992–93. Can the Minister comment on that point and bring us up to date on the latest Treasury forecast for the PSBR? I am delighted that in the Red Book the Government have now adjusted to the Keynesian view of balancing the Budget over the cycle; but on their own predictions in the Red Book the positive side of the equation will not occur until the second half of the decade, if then. As far as I recall, there are no positive figures in the forward look, and that is worrying.
My noble friend Lord Murray intervened on the shipping industry, and he was right to do so. I emphasise that I do not regard this as a party matter. There was an extremely important letter in The Times in February this year signed by distinguished Members of the other place from all parties. Although I am not a great believer in permanently subsidising economic activities, necessarily in long-term decline, in the private sector, I believe that what is happening to the shipping industry is especially worrying. I hope that the Government will reconsider that matter.
This has not been the best of weeks for the banks. We may be having a few words on BCCI in a moment, and so I shall refrain from saying anything about it, other than to read a sentence I wrote yesterday on the subject of an independent inquiry. I wrote:
"The Government should voluntarily introduce such an inquiry rather than be pushed into it".
I look forward to hearing the Statement in a few minutes to discover whether my words were prescient.
As regards another banking matter, I am less than convinced that the main commercial banks have been treating their customers' complaints seriously. This is partly a matter of how much they are charging for lending facilities, but it also concerns the high-handed way they seem to deal with bank charges and other failings on their part. The cases reported in the Sunday Times and other newspapers do not seem to me to be other than a fair reflection of what is going on. I should like to see some stronger action taken on that matter.
I now wish to make a few comments on the economic outlook. My fears on this subject can be expressed in two ways. First, on the connection between unemployment and inflation, the experience of this Government seems to be that something like 1.6 or 1.7 million unemployed members of the labour force—that is some 6 per cent.—is the least they dare have before inflation starts to rise. It seems that what is referred to as the natural rate of unemployment—I dislike that term—falls in that area. That is extremely worrying. I am not sure whether the noble Lord, Lord Jenkins of Hillhead, referred to my next point. However, it is curious that despite all the Government's liberalisation and dismantling of various restraints, if anything the labour market seems
414
to work in a more inflationary fashion now than it did when we last had a chance as it were. That is one measure of our problem.
The other measure of our problem—and my second fear—is the chronic nature of the balance of payments deficit. We ran a deficit when the economy was over-heating; but the real worry is that we are continuing to run a deficit with the economy in recession. The outcome this year will be below £10 billion, but I remember the days when £10 billion would have been an unthinkable figure under any circumstances. My worry is that post-1993, when the economy will really start to expand again, we shall move back into double digit deficits amounting to not less than 2 per cent. of national income.
We can borrow to cover the deficit for a while, but we cannot keep interest rates high to do that for too long. There is a major problem in financing deficits that way; namely, that chickens come home to roost, as the recent figures on invisibles show. In conclusion, whichever way one looks at the matter, the UK economy is in difficulties. In my earliest days in your Lordships' House in 1987 the problems were clear to me and to anyone else who spoke on this subject at that time, although they had not yet hit us. I remember —as the noble Lord, Lord Jenkins, does—the arrogance of the Government Front Bench and the confidence of Ministers that the alleged supply side revolution had overcome our difficulties. Those of us who warned of difficulties were wasting our time. Well, the difficulties are still there, and if anything they have become a good deal worse. In looking forward to the reply of the noble Lord, Lord Brabazon, I look forward in particular to hearing a word of apology on behalf of those who responded to our debates in earlier years.
2.48 p.m.
Lord Brabazon of Tara: My Lords, we have had a wide-ranging and interesting debate. We have covered not only what is contained in the Finance Bill, which has over 100 clauses, but also matters that are not covered by the Finance Bill and general economic matters. The noble Lord, Lord Jenkins of Hillhead, reopened the issue of whether this debate should have taken place on a Friday morning. The noble Lords, Lord Houghton and Lord Peston, also commented on that fact. I am inclined to agree with the remarks of the noble Lord, Lord Peston. As far as I am concerned, Friday morning is just another working day. However, Friday morning or not, we have had the benefit today of hearing four notable maiden speeches. That has certainly made this debate worthwhile.
My noble friend Lord Renfrew spoke from his great knowledge of the arts and our heritage. The noble Lord, Lord Hollick, spoke of his own experience of running a business. My noble friend Lord Mackay touched many of your Lordships when he expressed his support for the Scotch whisky industry. The noble Lord, Lord Judd, recounted his experiences of the problems of the third world countries and suggested what we should do to assist them.

415
The noble Lord, Lord Jenkins of Hillhead, referred to many issues but urged that the Government should concentrate on underlying economic problems. The policies of the past decade have focused on the supply side. The noble Lord specifically referred to training, as did the noble Baroness, Lady Seear, and I know that it is one of her main interests.
Baroness Seear: My Lords, I did not mention it today, although I meant to. I have mentioned training so often that perhaps the noble Lord thought that I had.
Lord Brabazon of Tara: My Lords, I am sure that I am not wrong. I made a note of it. When the noble Baroness reads her speech in Hansard I am sure she will see that the word "training" features at least once although perhaps not as much as usual when she speaks on that subject.
The Government's reforms have increased employers' commitment to training. The CBI's survey reported that 75 per cent. of employers are expecting to spend as much on training this year as last and 26 per cent. are planning to spend more. I hope that that will give some encouragement.
As regards investment, it is inevitable that it falls in recession. However, as I remarked in my speech, it will still be 47 per cent. higher by the end of the year than at the bottom of the last recession. That is proof of lasting improvement in investment performance.
My noble friend Lord Renfrew, in a notable maiden speech—and I hope that we hear much more, and frequently, from him —welcomed the relief from income and corporation tax for business gifts of equipment to schools and other educational establishments. He also mentioned the disincentive of the payment of VAT on works of art and other gifts to educational establishments. He asked that the Government give further consideration to tax relief and incentives on works of art. Clause 68 is specifically targeted at gifts of scientific and information technology equipment, which should assist the Government's policy of improving the teaching of science and technology.
Donations of goods by business to charities are usually subject to VAT. That is a requirement of EC law. However, as my noble friend rightly said, it is normally due only on the cost of the goods to business. In the case of the sculpture mentioned by my noble friend, that means that the cost of the sculptor's time in creating the sculpture is not taxed. VAT is charged on the cost to the business because a business which buys in goods or materials is able to reclaim VAT on its purchases. The goods are then held tax free. If the business gave the goods away without paying VAT they would be in a better position than an ordinary individual who bought goods and then gave them away.
As my noble friend kindly acknowledged, tax law is already generous to charities. Existing reliefs are worth £800 million a year to charities, including £150 million of VAT relief. That is a very substantial sum and, I believe, ample evidence of the Government's commitment in particular towards encouraging charitable donations.
416
My noble friend Lord Marlesford made some interesting comments on the Labour Party's tax and minimum wage policies. The House should be grateful to him for reminding us of some of those policies. They would mean increased tax or national insurance contributions for people earning more than £20,000. Those are not just the super rich. The noble Lord, Lord Peston, commented on the minimum wage and I do not propose to go into those arguments at this stage.
My noble friend Lord Marlesford also said that the United Kingdom was becoming a low inflation country, and that a policy of frequent, small cuts in interest rates should be adopted. I am grateful for my noble friend's recognition of the Government's achievement in respect of inflation. We should not jeopardise that achievement by imprudent interest rate cuts. The cuts so far have been consistent with our ERM commitment and the need to bear down on inflation. Future cuts must also meet those criteria, whether they be of one-half or one-quarter per cent.
The noble Lord, Lord Hollick, brought us the benefit of his experience of running successful businesses not only here but, as he explained, in many other countries of the world. He said that the United Kingdom had been bottom of the G7 growth league for the past three years. That is a point also raised by the noble Lord, Lord Jenkins of Hillhead. It was suggested that Germany and France were examples which we should follow.
Recent experience must be seen in the context of substantial improvement in the United Kingdom's relative performance in the 1980s as a whole. As regards Germany and France, the United Kingdom's GDP investment total, or business, in manufacturing productivity grew in the 1980s faster than in either of those two countries.
In a characteristically trenchant speech which we have all grown to enjoy—or at least which I have grown to enjoy—the noble Lord, Lord Bruce of Donington, accused the Government of proliferating spurious statistics. We must realise that comparisons with 1979—near the peak of the last cycle—can themselves be misleading. Any rise in unemployment is regrettable and any slowdown or easing in the upward trend must be welcome, though we should like to see a decrease in unemployment. That is the aim of our policies. I never said that high labour costs feed through to sustained higher inflation. As we see, they cause only unemployment.
The noble Lord went on to say that the past 10 years have been an on-going recession for the poorest in our community, but I should point out that the real take-home pay of a married man on average male earnings with two children has risen by almost 37 per cent. since 1978–79. The real take-home pay of the same family on the lowest decile of male earnings rose by 15.7 per cent. in the same period. I therefore submit that all sections of society are better off now than then.
I am sure that many noble Lords were sympathetic to what my noble friend Lord Mackay said from his knowledge of the Scotch whisky industry. I should point out to him that even after this year's Budget increase the real level of excise duty on spirits is some

417
27 per cent. lower than it was in 1979 when the Government took office. As a result, there has been a significant reduction in the ratio of excise duties between spirits and beer from around 2.8:1 to 1.7:1. The Government have also done much to help the Scotch whisky industry with its exports which now account for over 85 per cent. of total production.
On the question of unitary taxation, it is true to say that the duty structure is a product of historical development. Governments have set out to collect revenue on various drinks rather than on alcohol as such. No Government have ever accepted that relative alcoholic strength should be the sole factor for determining duty levels. The linking of duties on the basis of alcoholic strength would result in the loss of flexibility which allows the Chancellor to balance a wide range of fiscal, economic, social and other factors in setting duty rates. No other EC member state has decided to adopt unitary taxation.
My noble friend referred to the increase in the duty on spirits encouraging the importation of wine. Like other noble Lords, I enjoy a glass of wine as well as a glass of whisky. One should put the matter in perspective. There has been no singling out of any drinks for preferential or discriminatory treatment in the Budget. The ratio of duties on all drinks has remained the same. Let us not forget that, although small, the UK has its own energetic wine-producing sector.
As regards the EC proposals, the Government fully recognise the valuable contribution made to the economy by the Scotch whisky industry. There is no question about the Government's commitment to the industry's continued prosperity. The UK's success at ECOFIN on 24th June in arguing against the proposed minimum rate for spirits and in securing agreement that the Commission should study possible distortions in the market will give the industry the opportunity to provide material to illustrate the scale and degree of competition and the discrimination between the wine and spirit sectors in other member states. I hope that that will encourage my noble friend.
As I understood him, the noble Lord, Lord Desai, said that one of the reasons for the current recession was the dash to growth in the late 1980s. There was no dash for growth in the late 1980s. We have never denied that monetary policy was relaxed too much in the wake of the 1987 Stock Market crash. That contributed to excessive growth of demand but, as I explained in my opening speech, private sector financial deficits were the key to the downturn. Obviously I cannot analyse the CBI calculations to which the noble Lord referred but the CBI itself said that Britain is better placed now to meet the competitive challenges than it was 10 years ago. That is further evidence that gains of the 1980s were not wiped out by the current recession.
I very much enjoyed the maiden speech of the noble Lord, Lord Judd, with his knowledge of affairs in the third world and the less developed countries. I well remember having come across him when I was wearing another hat in the Foreign Office and when he was wearing another hat in his capacity of an Oxfam
418
official. I enjoyed our meetings then. He reminded the House that we cannot look at the Finance Bill or the United Kingdom economy in isolation. I shall certainly draw his wider remarks to the attention of my honourable and right honourable friends. The Government are committed to an open economy. We are determined—in large measure we have succeeded —to ensure that the single market is also an open market and not a protected fortress.
I admit that the noble Lord, Lord Murray of Epping Forest, did not surprise me when he concentrated on the issue of merchant shipping. The House will not be surprised to hear from me that to give further specific help to the industry would cut across the Government's broad tax strategy of critically examining all special reliefs and cutting down the number in order to increase the size of the tax base and help to bring down rates of income tax. That strategy has worked well and fairly over the years that we have been in office and has benefited all taxpayers, including seafarers.
However, we recognise that there are cases in which the special circumstances of those involved or the work that they do call for exceptional treatment. We have accepted that to an extent seafarers are such a case. That is why in 1988 we introduced special arrangements for seafarers which allow them to benefit more easily from the special tax relief for foreign earnings. That is why, as the noble Lord mentioned, Clause 45 of this year's Bill proposes to introduce more generous arrangements which will allow more seafarers with a wider range of working patterns to qualify for tax relief. Clause 45 would therefore substantially further enhance the position of seafarers compared with that of other employees who work either wholly or partly abroad for protracted periods.
My right honourable friend the Chancellor made clear in his Budget Statement that there is a limit to the extent to which we can or should bend the tax regime to meet the special needs of any particular industry. We recognise the defence contribution made in conflict by merchant shipping and we and our NATO partners keep the position under regular review. Currently we are engaged in an up-to-date study of our shipping requirements and the options for meeting them, but it is a complex subject and it is far from simple to decide on what are those requirements and how they can affordably be met. However, we are confident that taxation is not the right solution. We shall not hesitate to act in other ways, including spending if necessary, should such action be justified by defence requirements.
I turn now to the speech of the noble Baroness, Lady Seear. I very much agree with what she said about the importance of success in the GATT Uruguay Round and the reform of CAP. That is very much in line with the Statement on the outcome of the meeting of the G7 which my noble friend the Leader of the House repeated before this debate took place. I was glad that the noble Baroness welcomed the abolition of higher rate mortgage interest relief. I am sure that extra help for higher rate taxpayers to buy their own homes can be no longer justified. But the

419
Government remain committed to encouraging the spread of home ownership, and the remaining relief assisted 9.5 million homebuyers in 1990–91.
The noble Baroness also criticised the increase in VAT to 17½ per cent. The Chancellor decided that the impact of local expenditure on local taxpayers is still too great for any system of local taxation to bear and that the level of the community charge is still too high. In order to allow a reduction in the community charge while maintaining the standard of local services, an increase in central taxation is necessary. The Chancellor therefore decided to increase the rate of VAT by 2½ points to 17½ per cent. VAT is the most suitable instrument for any such increase as it is the most broad based of all the indirect taxes. As I have already said, it is a fair way to raise the necessary revenue because the people who spend most are those who pay most in tax.
Most essential items in the average household budget, such as food, domestic fuel and power, fares on public transport and young children's clothing and footwear, are zero rated and therefore will be completely unaffected by the change. Those items make up a higher share of spending by the less well off so they will pay proportionately less in additional VAT than those who are better off. A couple would need to spend about £13,000 a year on goods liable to VAT before they paid more in VAT than they gained through the reduction in the community charge. Increasing VAT is also consistent with the Government's long-term objective of shifting the burden of tax from income to spending.
The noble Lord, Lord Peston, asked me two specific questions. He asked whether I thought that GDP would be higher in the fourth quarter of this year than in the third. The noble Lord knows that my right honourable friend the Chancellor does not publish quarterly forecasts. A recovery in the second half of the year means that GDP will be higher in the second half than in the first half. That is as far as I can go on that point. The noble Lord also invited me to comment on an update to the PSBR forecast. The PSBR forecast is as stated by the Chancellor in the Budget Statement. A new forecast will be published as usual with the Autumn Statement. Therefore, the noble Lord will have to contain himself until then.
I am conscious that I have not been able to cover all the Points raised by noble Lords but I am coming to the end of the time allowed. I shall study with interest what has been said and if necessary write on specific points that I have not covered in my winding up speech.
To conclude, the Bill proposes to enact the measures announced in the Budget exactly four months ago. As the Chancellor predicted, since then inflation has fallen significantly and is set to fall further. The Chancellor has also been able to cut interest rates four times, by two percentage points in all. Interest rates have now been cut by four points since we joined the ERM in October last year. The fall in inflation and the cut in interest rates contains the seeds for recovery. The measures of this Bill provide
420
the help that business needs to enable it to make the most of the coming recovery. I commend the Bill to your Lordships. I beg to move.
On Question, Bill read a second time; Committee negatived.
Then Standing Order No. 44 having been suspended (pursuant to Resolution of 16th July), Bill read a third time, and passed.

BCCI: Inquiry
3.8 p.m.
Lord Brabazon of Tara: My Lords, with the leave of the House I shall now repeat a Statement on the Bank of Credit and Commerce International which is being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:
"With permission, Mr. Speaker, I should like to make a Statement about the Bank of Credit and Commerce International. My honourable friend the Economic Secretary informed this House on 8th July of the action taken by the Bank of England and the supervisory authorities in a number of other jurisdictions to secure control of the assets of the Bank of Credit and Commerce Group. Subsequently, last week in the course of the Finance Bill proceedings he answered points put to him by a number of honourable Members. The Governor of the Bank of England has met a number of MPs to explain the background and reasons for the action; and I met the honourable Member for Leicester, East and a group of other honourable Members yesterday to discuss the matter.
"The immediate priority following the closure has been to bring about as orderly a rundown of its operations as possible to help the many individuals and businesses which had accounts at the bank. I can assure the House that everything we can do to resolve their difficulties we are doing. In particular the Bank of England is putting an enormous effort into bringing the deposit protection scheme into action as soon as is humanly possible. The Deposit Protection Board will be writing to depositors immediately inviting them to make claims. Our latest estimate is that the UK branches at the bank had some 50,000 sterling accounts, although some customers may have had more than one account.
"The arrangements to make payments cannot commence until the winding-up order has been granted, but the bank has obtained an expedited hearing for the order which is to take place on Monday. Once the order has been granted the board will act as quickly as possible to meet valid claims.
"As my honourable friend explained, the provisional liquidator, the Bank of England, and the main high street banks have put in place arrangements to aid the banks in assessing applications by BCCI customers for alternative facilities. I am glad to hear that a number of the high street banks have set up special centres for

421
dealing with applications from such customers and I hope very much that they will be able to respond helpfully in these cases.
"The Bank of England and the liquidator have also kept in close touch with the majority shareholders in BCCI in order to seek their co-operation in securing an orderly rundown of the company and to minimise losses to depositors.
"Looking further ahead, the Government and the Bank will be considering carefully what lessons this case has for the system of banking supervision in this country and for the framework of international co-operation among banking supervisors.
"A number of questions have been raised both in the House and elsewhere about the events leading up to the authorities' action on July 5th. In particular, it has been suggested that the Bank ought to have taken action earlier to seek the closure of BCCI. Others have argued that the Bank acted prematurely and should have sought the co-operation of the shareholders in restructuring BCCI and putting it on a sound footing. There have also been questions about the Government's role in the affair, although, as the House knows, under the 1987 Banking Act the supervision of banks is unambiguously the duty of the Bank of England and not of the Government.
"My honourable friend in his earlier Statement set out the general grounds for the Bank of England's action and for its timing. However, in the light of widespread public concern the Governor and I have agreed that there should be an independent inquiry into the supervision under the Banking Acts of the Bank of Credit and Commerce International to establish the facts and to make such recommendations as arise from them.
"The report will be made public, subject to such restrictions as may be needed to avoid prejudicing any criminal proceedings and subject to the provisions of the Banking Act. I shall announce shortly the precise terms of reference of the inquiry and who will conduct it.
"The Government would like to make plain that the establishment of the inquiry is not to be taken as a criticism of the Bank of England. I have no reason to doubt that the Bank acted properly and promptly in the best interests of the depositors. Unfortunately it will never be possible to prevent fraud and deceit. Nonetheless, both I and the Governor believe that an independent assessment of the case is appropriate and I hope all those who have evidence bearing on the matter will co-operate with it fully."
My Lords, that concludes the Statement.
Lord Peston: My Lords, I thank the noble Lord for repeating the Statement made in another place. I congratulate him on making his third speech today. On my reckoning he has at least another three to make before our business is concluded. I am quite exhausted, although this is only my second speech.
I must say immediately that we are pleased that there will be an inquiry. I hope that we can agree that
422
first and foremost the mess must be cleared up, in particular because it affects small depositors. Therefore, I welcome the statement that the Bank of England will act expeditiously and that the other joint stock banks are trying to help. I hope that means that the Bank will act very quickly, because banking facilities should be available to small businessmen and to customers who will need funds during the coming week. I hope that something will happen in the coming week.
When we had the earlier statement on BCCI, apart from revealing my ignorance on insurance protection, I said that I felt that 100 per cent. protection for the small depositor made good economic sense to me. I am aware that it was the Treasury under a Labour Government which established the basis of the present law of lack of 100 per cent. protection. As an economist I do not see that that is a valid position. I should like to see 100 per cent. protection for small depositors. I hope that in due course the Government and/or the Bank of England will look at that matter.
I did not know at the time of the earlier Statement about local authority involvement in all this. I note that there is nothing in this Statement about that involvement. I ask the noble Lord whether we shall hear, before your Lordships rise next Thursday, anything about help to local authorities that have loaned money to this bank on a grand scale.
The central question is concerned with supervision. I ask the noble Lord to confirm that it is supervision as a result of fraud. This is not a banking collapse connected with incompetence or not having an optimal portfolio of assets. The noble Lord, Lord Harris, has focused on the fact that it seems to have been a fraudulent undertaking almost from start to finish.
Obviously some of that fraud is connected with the fact that banking must take place in an international framework with branches located in many different places. The Minister says that he cannot give us the remit of the inquiry. However, I ask him whether special attention will be paid to supervision in a fraudulent environment in setting out the remit for the inquiry.
I am glad to hear that the report will be independent and that, subject to one obvious proviso, it will be in public. Shall we have the terms of reference before next Thursday? My central question in connection with the remit is to ask what additional matters the inquiry will look at.
The Statement says:
"The Government would like to make plain that the establishment of the inquiry is not to be taken as a criticism of the Bank of England".
It does not say, but clearly means to say, that the establishment of the inquiry is not to be taken as a criticism of the Government. I am rather more open-minded on both those topics. Prima facie the inquiry would not take place if the situation involved no possible criticism of the Bank of England. There is no avoiding the possibility of criticism of the Government. I hope that the remit of the inquiry will not prevent it from looking into both of those matters.
The noble Lord is quite right that the Banking Act 1987 leaves supervision of banks as the unambiguous

423
duty of the Bank of England. However, unless I misunderstand the more general position of the Bank of England, the Government have a fair amount of responsibility for the Bank of England. Perhaps the Minister will confirm that that is still the case.
Those are difficult questions but I do not wish to end on a note of difficulty. I repeat our welcome for an inquiry. The Government are right to respond to outside pressures for an inquiry. I hope that we shall have the report in good time and certainly by the time we return in October.
Lord Harris of Greenwich: My Lords, I join the noble Lord, Lord Peston, in thanking the noble Lord, Lord Brabazon, for repeating the Chancellor's Statement. I shall reserve more detailed questions to the debate on the Unstarred Question in the name of the noble Lord, Lord Bruce of Donington.
Is the noble Lord aware that we all welcome the fact that there is to be an independent inquiry? Admittedly we are not told what are the terms of reference or who is to conduct the inquiry. The Statement contains the words:
"I have no reason to doubt that the Bank acted properly and promptly in the best interests of the depositors".
I should have thought that that was a matter for the inquiry to determine, not for the Chancellor to determine before the inquiry has been set up.
Is the Minister aware that we shall look with care at the person selected to conduct the inquiry? Many of us believe that it should be at least a High Court judge with substantial experience of fraud cases. I hope that, despite the fact that a final decision has apparently not been taken in that regard, the noble Lord will be able to give us an indication as to whether a judicial figure will be asked to conduct the inquiry.
Is the noble Lord aware also that we welcome the fact that the report will be made publicly available, subject to the qualifications entered? Perhaps I may ask whether any part of the inquiry is to take place in public.
Lord Brabazon of Tara: My Lords, I am grateful for the welcome given by the noble Lords, Lord Peston and Lord Harris of Greenwich, to the Statement which I repeated and to the setting up of an inquiry. I cannot go into more detail of either the terms of reference or the person who will lead the inquiry. I hope that those announcements will be made—every effort will be made to do so—before the House rises for the Recess.
At this stage I can give no indication of when the inquiry will report. That depends on what it finds itself looking into and what it uncovers. One cannot say how long that will take.
The noble Lord, Lord Peston, commented on the position of small businesses. I hope that the arrangements described in the Statement take place expeditiously. The noble Lord also commented on the possibility of 100 per cent. protection for small depositors. The principle that there should not be 100 per cent. compensation was established for very good reasons. Where that policy has operated—for instance, in the United States—it has not proved to be
424
a success. It encourages people to deposit money with less safe institutions by taking the risk away from where they deposit their money.
The noble Lord, Lord Peston, mentioned local authority deposits. I shall say something more in that regard in due course when I answer the Question of the noble Lord, Lord Bruce of Donington. I believe that covers the immediate questions asked by the two noble Lords.
3.23 p.m.
Lord Cockfield: My Lords, I too welcome the setting up of an independent inquiry. However there is an important lacuna in the Statement—there is no reference to the European dimension. Under the terms of the European Communities Act 1972, European law takes precedence over national law.
When I was at the Commission one of our main objectives was to create a Europe-wide banking system. That depends on mutual confidence among member states in the efficacy of their prudential supervision. Perhaps I may ask my noble friend whether the Government are satisfied that they have discharged their obligations under European law. I realise that the second Banking Co-ordination Directive adopted in 1989 does not necessarily come into force until the end of next year. Nevertheless, the United Kingdom Government always maintain that their standards of prudential supervision are greater than those required by the directive.
I invite my noble friend's attention specifically to Articles 13 and 17 of that directive. They go much further than any question of fraud. I hope that those matters will be fully considered by the inquiry.
Perhaps I may make one other comment. It is important because of a sentence which appears in the Statement. If at the end of the day anyone finds themselves in the dock of the European Court, it will in fact be the British Government and not anyone else. What is more, in recent months they have been pressing for sanctions to be introduced against people who breach European law. I fear that, in the light of this event, an undue number of people may be found who are prepared to support the initiative by our Government.
Lord Brabazon of Tara: My Lords, my noble friend makes a number of interesting points which I do not believe I am qualified to answer. I shall draw the attention of my right honourable friend to what he has said. I am sure that whoever conducts the inquiry will read with interest what has been said.
Lord Bruce of Donington: My Lords, the noble Lord will be aware that the Unstarred Question on the Order Paper that we are to debate a little later this afternoon originated in a proposed Private Notice Question which I submitted to the noble Lord the Leader of the House two or three days ago. He declined to accept it as such. That resulted in agreement through the usual channels for having the debate today. It is extremely gratifying that I did not have to walk seven times around the walls of Jericho in order to obtain a partial result. One time was evidently sufficient to shift a little.

425
I say "shift a little" because all the Statement has indicated is that the Government are prepared to institute an investigation and that the report will be made public. My Question relates to a public inquiry, not merely to an investigation. It seems that the argument for a complete public inquiry into the whole matter remains just as strong now as before the Statement was made. It is just as strong as when I originally sought leave in the earlier part of the week.
Lord Brabazon of Tara: My Lords, I am rather surprised at the noble Lord's remarks. The Question which he is to ask me later today—though I hope that by the time it comes to be answered many of the points will already have been dealt with—requests the institution of a public inquiry into the circumstances. I have just announced that an independent inquiry is to take place and that the report will be made public, subject to the obvious restrictions. I should have thought that the noble Lord had almost everything that he wanted.
Lord Morris: My Lords, I thank my noble friend for repeating the Statement made in another place. I too very much welcome the news that an independent inquiry is to be set up. I entirely agree with the noble Lord, Lord Harris of Greenwich. I believe that the more correct vehicle for this matter would be a judicial inquiry under the Tribunals and Inquiries Act. It is a small but very important point from the evidential aspect. I ask my noble friend to look into that.
The other point is a rider to what the noble Lord, Lord Harris of Greenwich, said. I find it slightly disturbing that Her Majesty's Government should, at this particular time and in the course of making the Statement, apparently prejudge the situation before they know all the facts by stating that setting up an inquiry per se is no condemnation of the Bank of England. I find that rather difficult to accept. However, I am sure that my noble friend will accept the point.
Lord Brabazon of Tara: My Lords, I listen to the points that my noble friend makes. If I am not much mistaken, the noble Lord, Lord Harris of Greenwich, was not so much criticising the type of inquiry, he was asking for a certain type of person to head it. That might be the answer to the point made by my noble friend.
Lord Harris of Greenwich: My Lords, I apologise for getting up again. I think the noble Lord misheard me. I did not suggest that this should be a particularly quick inquiry, because I would never advocate such a course of action. I asked whether the inquiry would meet in public for part of the time. That is a most important issue and I should be very grateful if the noble Lord could help us with an answer.
Lord Brabazon of Tara: My Lords, I am afraid I do not have an answer to that particular point at the moment; I hope to have one later.
Lord Marsh: My Lords, can the Minister go a little further and give some indication of the breadth of the inquiry? I have to declare an interest as chairman of a
426
financial services group with about £1.5 billion under management. This is not a question of fraud; it involves the general vulnerability of the public to a financial situation which they are totally incapable of dealing with. Does not the Minister think that it is necessary to look at a number of issues of this type that have arisen within the past two to three years and to take a much broader look at the whole picture?
Lord Brabazon of Tara: My Lords, the noble Lord makes an interesting point. I said in the Statement that I was not able to announce the precise terms of reference of the inquiry. I can go no further than that at the moment.
Lord Monk Bretton: My Lords, I also welcome the Statement and thank my noble friend for repeating it in this House. I was particularly glad that he mentioned the need for lessons to be learnt regarding the system of banking. I believe that to be so. I also welcome intention that there should be an independent inquiry.
I want to ask the Minister how we are to fit in another banking matter which has perhaps been rather eclipsed by the events of BCCI, and which concerns the closing of the British& Commonwealth Merchant Bank last July. There are certain lessons to be learnt from that which should not be forgotten.
By way of declaring an interest, I should perhaps say that I managed to get my own deposits out of the British& Commonwealth Merchant Bank before the blow fell. I withdrew them approximately four months before. I am not an expert regarding these matters, but nevertheless it is perhaps worthy to record that I did achieve it without too much difficulty. However, I know of others who were not so lucky or so far-sighted. The bank closed with £300 million on deposit.
The British& Commonwealth Merchant Bank was put into administration at the behest of the Bank of England and the SIB, so I am informed, in the interest of depositors. I am also told that unlike BCCI, it was solvent then and is still. I would ask that we do not lose sight of this particular matter during the inquiries into the banking system.
Lord Brabazon of Tara: My Lords, my noble friend makes a number of interesting points, not all of which are connected with the Statement that I have made today, but no doubt they will be taken into account by the inquiry.
Lord Hollick: My Lords, the Statement describes the regulators' behaviour as "prompt". That is not a word that comes to mind. I believe it has been known, or widely suspected, for some 10 years that this bank has harboured criminal activities. The bank has long been suspected of indulging in fraud; it has been successfully prosecuted in the United States for being associated with drug transactions, and we now learn that in October 1990 Price Waterhouse told the regulators that there was evidence of systematic financial malpractice. Why did it take so long for the authorities to act?
Lord Brabazon of Tara: My Lords, I covered that ground in the recent Statement. There is little further I can add to that. The Bank acted as soon as it felt it had sufficient evidence under the Banking Act to do what it had to do.

Building Societies Act 1986 (Modifications) Order 1991
3.36 p.m.
Lord Brabazon of Tara Lord Brabazon of Tara rose to move, That the draft order laid before the House on 1st July be approved [24th Report from the Joint Committee].
The noble Lord said: My Lords, the purpose of this order is to amend relevant provisions of the Building Societies Act 1986 to reflect certain changes in company law. It has always been the intention to keep company law and building society law in line as far as possible and Section 104 of the Building Societies Act enables necessary modifications to the Act to be made by order.
These modifications are required as part of the process of implementing the EC Bank Accounts Directive, whose provisions also apply to building societies. The changes to company law were made by the Companies Act 1989 and the Companies (Northern Ireland) Order 1990.
There are two changes. First, the order repeals the statutory exemptions from including the accounts of subsidiary undertakings of a building society in the society's group accounts. But the group accounts of a society will have to cover all its subsidiary undertakings. Secondly, the order redefines subsidiaries as subsidiary undertakings in the terms laid down for b gilding society accounts. The changes will come into effect on 1st January 1993.
These are necessary technical changes and I commend the order to the House.
Moved, That the draft order laid before the House on 1st July be approved [24th Report from the Joint Committee].—(Lord Brabazon of Tara.)
Lord Peston: My Lords, I thank the noble Lord for introducing the order in a way that was totally cogent and fully persuasive. On behalf of the Opposition perhaps I may say how much we support it.
On Question, Motion agreed to.

Breeding of Dogs Bill
3.37 p.m.
Lord Houghton of Sowerby: My Lords, I beg to move that the Bill be now read a second time. This is a short Bill dealing with a small but important matter. It comes from another place where it was introduced by my right honourable friend Alan Williams, Member of Parliament for Swansea, West, after a good deal of preparation and investigation. It is heavily backed by all parties in the House of Commons and, I understand, has the support of the Government. Its purpose is to enable entry to be made by local authority representatives to discover whether unlawful dog breeding is going on.
428
Dog breeding premises are covered by the Breeding of Dogs Act 1973. If there are two or more breeding bitches, the Act applies and a licence may he granted where the conditions of rearing puppies are satisfactory and all the conditions of health and welfare are observed. If there is only one breeding bitch, a licence is not required under the 1973 Act. A considerable amount of evasion of the obligations under the 1973 Act is taking place. The sponsor of the Bill has gone to a good deal of trouble to have research carried out on the discoveries made. Disclosures which have come about caused a good deal of unease and distress. The Bill simply enables, on a magistrates' warrant, an authorised officer of a local authority to enter and to see whether there is any breach of the 1973 Act or other Acts relating to the welfare of animals. I emphasise, however, that the Bill specifically excludes from that order premises used as a private residence. There is therefore no entry to the private home but there is entry to what may be believed to be business premises.
Puppy farming has been the subject of widespread public discovery and upset. Pet shops have their problems in connection with that. If noble Lords see fit to give the Bill a Second Reading and no dissent is forthcoming, it may well make rapid progress through the House. It is a unanimous Bill. Noble Lords know of my inherent dislike of authorising fresh, forcible entry into premises. In such a matter, where there can be so much scandal, suffering and hardship, I believe it is fully justified that entry should be made under the law to discover whether the 1973 Act is being observed.
I warmly recommend the Bill to your Lordships. It comes at the end of a troubled week for me on the subject of dogs. I gave my word that I would introduce the Bill to this House. I do not retract from that in the slightest degree, notwithstanding much that I said on another Bill which has been before this House.
Moved, That the Bill be now read a second time. —(Lord Houghton of Sowerby.)
3.41 p.m.
The Viscount of Falkland: My Lords, I echo the remarks made by the noble Lord, Lord Houghton of Sowerby. We on these Benches give the Bill an absolute welcome. It is not very complicated and it does not go very far. However, so far as it goes, it improves the situation as regards the quite deplorable conditions involved in the breeding of puppies in some areas, especially those where there has been a decrease in normal farming activities and where people have been encouraged to breed puppies in order to supplement their income. The ordinary, and even the unlicensed, breeder would have no objection under normal circumstances to an inspector coming in and looking at his premises. But, of course, there are those who would wish to keep their activities as far away from scrutiny as possible because, quite frankly, they treat the dogs in their care in a deplorable fashion.
As the noble Lord, Lord Houghton of Sowerby, said, the Bill does not provide for right of entry to the home or the dwelling. I suppose that that that could he viewed as a weakness in the legislation because it is

429
perfectly possible to keep a number of bitches in deplorable conditions in a farmhouse or whatever. But it does improve the situation.
As I said, the Bill is entirely welcome. It goes a small way towards proving the quite extraordinary situation as regards dogs in this country. The Government steadfastly object to the introduction of a dog registration scheme. But I think that it would be much easier to deal with these matters, including the question of breeding conditions, if we had such a scheme. No one knows how many dogs there are in the country or how many people are breeding them. Further, no one knows how many people who say that they are just family owners of dogs are in fact selling their dogs as a business or as a part time way of earning extra money. The whole thing if very unclear. The Bill before us is at least a move in the right direction. We welcome it.
3.42 p.m.
Lord Graham of Edmonton: My Lords, we on these Benches are most grateful to my noble friend Lord Houghton of Sowerby who has taken on yet another duty of a similar nature. He has done so simply, and has given a clear and cogent exposition of the arguments. I cannot believe there is anyone who does not understand the purpose of the Bill.
The promoter of the Bill in another place, Alan Williams, has been known to me for many years. I congratulate him for the persistence that he has shown and for the detective work which was undoubtedly involved in order to produce the evidence. Those of us who have read about such matters, or who have seen reports of such conditions on television, find it absolutely nauseating and horrendous.
This simple measure, taken on a day when we have discussed a Finance Bill, the G7 conference and the affairs of BCCI, may seem somewhat incongruous in the circumstances. However, I can assure the Minister that thousands of people throughout the country will be grateful to the Government if they enable the Bill to make its way speedily through Parliament and on to the statute book. I hope that the Minister has taken note of the fact that there is no opposition to the Bill in the House today. There has been warm commendation for it.
The usual channels are in their place, listening carefully. With the Minister's support, I hope that we will be able to put the Bill on the statute book sooner rather than later. I am sure that the Minister and his advisers will have noticed the significance of Christmas. If the Bill can become law soon it may do something to alleviate the dreadful suffering of many dogs. I warmly congratulate my noble friend and my right honourable and honourable friends in another place. I hope that the Minister will say the right thing.
3.45 p.m.
Earl Howe: My Lords, I congratulate the noble Lord, Lord Houghton of Sowerby, on introducing yet another Bill on animal welfare into this House. He has done so, if I may say so, in his own compelling and
430
inimitable style. There are considerable advantages in the Private Member's procedures for this kind of measure, which has wide, indeed, unanimous support.
I pay tribute also to the patience and skill of the right honourable Member for Swansea, West, Mr. Alan Williams, who negotiated so patiently with the Home Office for such a long time to secure government support for this measure. He was instrumental in bringing the abuses of so-called "puppy farms" to the attention of Parliament, so it is no surprise that he was the sponsor of the Bill in another place. He was supported by a distinguished list of right honourable and honourable Members.
It is my pleasure to present the Government's view on the Bill. There has been no earlier opportunity to do so owing to the speed with which it passed through its various stages in another place.
The Bill addresses directly a weakness in the legislation to regulate dog-breeding establishments. The Government are aware of the strength of public feeling concerning the ill-treatment of animals generally and it is fair to say that for some time the Home Office has received a steady flow of letters from people who are worried about the conditions in which dogs are kept in so-called puppy farms.
There has been a wave of revulsion at conditions, many of them horrific, which have been well-publicised in the media. Dogs have been found in generally filthy surroundings, starving, unkempt, uncared for, in various states of disease and injury, or even dead. Bitches are used as breeding machines, producing, it is said, sometimes two litters every year, until their usefulness to the breeder is over and they are cold-bloodedly killed or left to die. The Government abhor such cruelty and made it clear in another place that they would support measures to strengthen the existing legislation, provided that they resulted in effective and enforceable law. I have to tell the noble Viscount, Lord Falkland, that I do not believe that the introduction of a dog registration scheme would do anything to solve the abuses that I have described.
I am pleased to be able to say that the Government fully support the Bill. We recognise that the current legislation is deficient in allowing local authorities to inspect only licensed premises when unlicensed premises can represent the worst conditions likely to be found. We recognise, too, the fundamental principle concerning licensing which is involved: that any licensing system has to be fair and effectively enforced, otherwise it falls into disrepute.
There is certainly something wrong with any system which allows widespread avoidance. In that respect, the power of entry proposed in the Bill would be a major help for local authorities in enforcing the licensing of dog breeders. The Bill has been long awaited. The noble Lord, Lord Graham, asked that the remaining stages of the Bill be taken as soon as possible. The Government are happy to accede to that request. Through the usual channels, I understand that time will be made available next week for that to happen.
The general recognition of the necessity for the Bill is reflected in the unanimity with which it was received

431
in another place. I hope that your Lordships will also allow the Bill a swift passage so that it can take its place on the statute book at the earliest opportunity.
3.49 p.m.
Lord Houghton of Sowerby: My Lords, I am grateful to the noble Earl for giving such a full explanation of the Bill. I thank him for the Government's support. I also thank other noble Lords who have supported the Bill. I ask your Lordships to give the Bill a Second Reading.
On Question, Bill read a second time, and committed to a Committee of the Whole House.

BCCI: Closure
3.50 p.m.
Lord Bruce of Donington Lord Bruce of Donington rose to ask Her Majesty's Government whether they will institute a public inquiry into the circumstances leading up to the closure of the Bank of Credit and Commerce International.
The noble Lord said: My Lords, it would be churlish of me if I failed to welcome the announcement that has been made by the Minister this afternoon in connection with the setting up of an investigation—the report of which is to be made public at a later stage—into the events leading up to the closure of BCCI. Two points arise from that announcement. First, my original request was for a public inquiry but the noble Lord felt unable to clarify that matter for the noble Lord, Lord Harris of Greenwich.
Secondly, when I listened to the Statement this afternoon I pondered whether it would be necessary to ask this Question. However, I was struck by the fact —other noble Lords mentioned this—that the Government had to some extent tended to prejudge the issue. Therefore the investigation, in whatever form it may take, should take account of a number of factors that were not specifically touched upon in the Statement.
We are discussing one of the biggest financial scandals that has taken place this century, if not before. The amount of money that is ultimately involved is not yet known. However, it is said to be between £1 billion and £2 billion. At the moment, however, no one has been prepared to give an estimate. What is certain is that the collapse of the bank has had a calamitous effect on customers, depositors and—this should not be forgiven—on the staff. The customers and depositors include a wide variety of people. They include large depositors, small shopkeepers and charities. I believe special regard should be paid to the position of charities who are involved in this matter. Local authorities have also been involved.
The announcement of the closure of the bank had widespread effects in Hong Kong where the authorities have been trying to contain a run on the banks. It has also had widespread effects in Peru, in the West Indies and in Pakistan. The effects of the closure have been considerable. However much one
432
may deplore this situation and however much one can do to remedy it, confidence in the banking and financial system has been quite severely shaken. Cargoes are trapped overseas as, abruptly, the letters of credit that sustained them became valueless. I am informed that thousands of tonnes of food are rotting as a consequence of this situation.
The question to which any inquiry should address itself is this: Could preventive action have been taken earlier? That is the nub of the matter. We have heard this afternoon from my noble friend Lord Hollick, who has experience in this field, that there has been gossip in the City for some years. Gossip means very little, but banks are notoriously sensitive to gossip and the banking community in the City of London meets socially very often. It meets informally and can soon begin to smell when there is anything wrong.
The point was put even better by the Financial Times on the 17th of this month, which said—and attention should be paid to this:
"There is one aspect of the closure of Bank of Credit and Commerce International (BCCI) that strikes both expert and layman as downright odd. Everyone in financial circles has known for several years that BCCI was shaky. Yet the Bank of England, which is known to have been concerned over a long period, failed to act until late in the day. The impression, as with the Bank's earlier performance over Harrods Bank. is one of dilatory response in the face of overwhelming evidence of the need to act. How far is the Bank of England at fault? And what, if anything, should be done to tighten up the system?".
It is my submission to the House that attention could have been paid to the matter at an earlier stage and that that aspect in particular needs thorough investigation. It is, after all, one of the circumstances leading up to the closure that has occurred which should be taken into account.
There is also evidence—I use the word "evidence" in quotation marks because I, like so many other noble Lords, rely on reports which appear in the quality press as distinct from the tabloids—that there have been qualified reports by the auditors and discussions between the Bank and the auditors of BCCI ever since 1989. We learnt yesterday, and it was confirmed this morning, that as early as 13 months ago a warning was delivered to the Government by BCCI's former internal auditor. That was in June 1990. He wrote a letter to the Treasury, which forwarded it on to the Department of Employment, which forwarded it to the Department of Trade and Industry. There, mysteriously, it was lost. That is rather extraordinary and some inquiry should be made into the matter.
Moreover, there are reports—with what truth I do not know —in the quality press that American investigators complained that in connection with matters relating to BCCI they received a brush-off from the Bank of England when they made approaches to the Bank in 1989.
I now come to the attitude of the Government in regard to these matters. Their attitude is an important consideration for any investigation to bear in mind. In another place, in reply to a question by my right honourable friend the Leader of the Opposition on this point, on 16th July Mr. MacGregor, speaking for

433
the right honourable gentleman the Prime Minister who at that time was presiding over the G7 conference, said:
"The point is that the Bank must act according to the Banking Act 1987. Actions under that Act are subject to appeal and the Bank must therefore have evidence that would stand up in court before it does anything"—
I underline the words "before it does anything"—
"It cannot act on rumours; it must have good evidence before acting. In this case, it acted as soon as it had such evidence".
That is not so, as reference to the Banking Act will confirm. It is not true that the Bank can take no action. It is true that, in connection with the revocation of a bank authorisation or difficulties in connection with the granting of an authorisation or misconduct by people claiming erroneously that they are bankers, there is an appeal against such decisions under Section 27 of the Banking Act. However, those considerations do not apply to Section 41, which states:
"If it appears to the Bank desirable to do so in the interests of the depositors or potential depositors of an authorised institution the Bank may appoint one or more competent persons to investigate and report to the Bank on … the nature, conduct or state of the institution's business or any particular aspect of it or … the ownership or control of the institution".
It provides that there should be written notice of that, but there is no appeal provided for at all. Once the Bank decides to do that under Section 41, that is that. It can be done.
I believe, although I am not certain, that later in the proceedings the Bank did institute such an investigation under Section 41. The question is whether it was too late. The words used in the Act are:
"If it appears to the Bank".
It does not state, "If the Bank has evidence that".
On the assumption that the legal construction of that may be a little difficult, perhaps I may pass on to Section 42 of the Banking Act 1987, which states:
"Where the Bank has reasonable grounds for suspecting that a person is guilty of contravening Section 3 or 35 above the Bank or any duly authorised officer, servant or agent of the Bank may by notice in writing require that or any other person",
to provide information, documents and so on. For purposes of clarification, when it refers back to Section 35, which is conditional for the application of Section 42, it should be noted that Section 35 deals with:
"Any person who … makes a statement, promise or forecast which he knows to be misleading, false or deceptive, or dishonestly conceals any material facts; or … recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive".
Since, so we are informed, part of the auditors' anxiety in regard to BCCI, which they communicated to the bank, obviously rested on statements that had been made to them or information that had been given to them from within the bank itself, it would seem clear that, even on suspicion, Section 42 could have been applied.
It may well be that, had it been applied in a timely fashion, much of that trouble could have been avoided. It may well be that, if the Bank had suspicions in 1988–89, it could have invoked either or both of those sections. It could then have considered the position with the owners of the bank, who could
434
possibly have insisted on changes in personnel, could have assented to schemes of reconstruction financed by the owners in Abu Dhabi and could have done a whole range of things which might—I say "might—have avoided the ultimate closure of the bank which has resulted in such distress. Indeed, a hint of that is given by the advertisement put in today's Times and other newspapers by the Abu Dhabi Government, indicating that negotiations had been taking place with the Governor of the Bank of England concerning possible reconstruction and refinancing.
It is a matter of whether in all the circumstances action could have been taken earlier. From the "evidence" provided by the quality press it appears at least probable—I put it no higher—that action could have been taken earlier had there been a prompt response and more particularly if the letter from the BCCI's internal auditor had not mysteriously been lost some 13 months ago under peculiar circumstances in one or other of the Ministries.
There may be those who say that, notwithstanding that and the losses sustained by local authorities, individuals, customers, staff, charities and so on, the doctrine of caveat emptor (let the buyer look to himself) still applies. I do not have much sympathy with that view. Anybody who knew that the bank was an authorised bank and believed that it thereby carried the imprimatur of the Bank of England was entitled to presume that there would be reasonable security for any transactions undertaken.
This is a difficult situation. I do not place myself behind any of the allegations that have been made against the Bank of England. I merely articulate the doubts that have arisen. The Bank of England is the nation's bank. Although technically it belongs to the government of the day, it is still our bank and we should not willingly injure its reputation. The Bank of England is at the apex of financial institutions of this country. However, we should look askance at the Government's role in the matter on the basis that they may have prejudged the issues.
In those circumstances, although we are grateful to the noble Lord for his announcement that there will be an investigation, we want to be quite sure and indeed insist that such an investigation should be done in public (save for those parts which obviously require a degree of security) and that it should fully cover all the matters which I ventured to raise before your Lordships this afternoon.
In the event, the people of the country require to be reassured. Other bankers require to be reassured. Moreover, in the final result, if it be proved that somebody or some concern has been culpably negligent in these matters, those who have suffered losses ought to be in a position to obtain redress.
4.8 p.m.
Lord Morris: My Lords, I believe that the House must be grateful to the noble Lord, Lord Bruce of Donington, for having tabled this Unstarred Question. Its timeliness was most dramatically demonstrated earlier this afternoon when the Government made a Statement on this subject. It is important for this debate to take place not least in so

435
far as it can assist an inquiry. Moreover, I consider that this incident is the most serious banking matter for 125 years. Those noble Lords who are mathematically inclined will already have worked out the numbers to give the year 1866. I refer of course to the case of Overend v. Gurney. Among other effects, the impact of that banking crash gave rise to the formation of the modern joint stock bank. I suspect that such an event may happen again. In my humble opinion, there is certainly need for a very careful look at the regulatory procedure in the City of London.
Some background is important in understanding the case. As noble Lords are aware, there have been two recent banking Acts; namely, in 1979 and 1987. The first one followed the fringe bank crisis of 1973 and 1974. As noble Lords will recall the Bank of England kept a list of authorised banks —the top category was measured by capital adequacy and reserves—and licensed deposit takers. The lowest category, including the smallest institutions, was down to as small a figure as a capitalisation of £50,000.
At that time BCCI argued that on the grounds of size alone it was eligible to become an authorised bank. That is a matter of public record. The Bank refused to grant a full licence and made its reasons clearly known at the time. There were three very good reasons. First, the parent company, the Luxembourg hank, did not meet the criteria. Secondly, the parent was not prepared to guarantee the United Kingdom subsidiary. Thirdly, the chairman, Mr. Abedi, was not a banker. In other words, he was not a fit and proper person; and still is not. The Bank of England through the discount office, let it be known that BCCI would never be fully authorised until or unless it furnished full accounts for all its branches and subsidiaries worldwide.
The second banking Act in 1987 was preceded by a lengthy run-up period when the Bank of England's prudential supervisors visited every single licensed deposit-taking organisation and delisted those that were too small or did not fit the criteria of the day. Those, that could not fully meet all or any of the Bank's criteria were given ample time to wind down their deposit taking—that is, their banking activities —before the new Act became law.
The fundamental question to which I believe the inquiry has to find the answer is this. Given what the Bank of England already knew or suspected—that is the Clauses 41 and 42 point to which the noble Lord, Lord Bruce of Donington, referred—about BCCI not least with regard to fraud and the laundering of drugs money in the USA, Panama, Colombia, Nigeria, Pakistan and other places, and the invisibility of the Cayman operation, the Bank had ample grounds under the 1987 Act to refuse to grant BCCI a banking licence by virtue of that Act. The central question that the tribunal inquiry must ask is this. Why and when was there a change of heart by the Bank of England?
When BCCI opened its London branch, I think in about 1971, Bank of America owned 25 per cent. of the shares in the Luxembourg holding company and its subsidiaries including the Cayman Islands subsidiary. The other major shareholders were a man
436
called Ghaith Pharaon who was a controlling shareholder in a company called Financial General Bankshares USA; Kamal Adham, also a major shareholder in Edward Bates, which failed in 1974, and Abedi himself. Sheikh Zayed at that time had only a small shareholding. I think that it was less than 10 per cent.
BCCI was licensed in the United Arab Emirates by the UAE Currency Board. At that time Ronald Scott was managing director. He was seconded from the International Monetary Fund. Before that he was with the Bank of England.
In 1976–77 there was a very serious banking crisis in the United Arab Emirates. Several banks collapsed or had to be rescued. It was found that there had been a misapplication of funds on a gargantuan scale. According to data published at the time, 14 billion dollars had failed to show up in the UAE reserves, including unauthorised lending to the United Arab Emirates Currency Board. That alone amounted to 4 billion dollars. The source of that information is a matter of public record. I refer my noble friend to the International Currency Review of September 1977, vol. 9, No. 4.
At that time the Bank of England sent its then deputy governor, Kit McMahon, and a team to Abu Dhabi and Dubai to resolve the problem. Peter Edgely, who had previously been in Nigeria, was seconded to the team. Sheikh Zayed and a consortium of UEA-based international banks—that is the British Bank of the Middle East, Standard Chartered Bank, Citibank and others—formed a lifeboat. BCCI Emirates, which had more than 20 branches in the UAE, was saved. Sheikh Zayed increased his equity stake in BCCI as part of the rescue package initiated by the Bank of England and the UAE Bankers' Association.
In 1979 the Arab Monetary Fund was located in the same building in Abu Dhabi as the BCCI Emirates head office. Ghaith Pharaon's involvement with BCCI in the USA had been known to the bank since 1972 and possibly since 1970–75 when he gained control of the Bank of Commonwealth in Detroit and later the National Bank of Georgia.
In 1982 various bankers from Tennessee went to the Bank of England to discuss BCCI's 37 per cent. stake in Valley Fidelity Bank of Knoxville, Tennessee. They were told that there was no possibility that BCCI would ever become an authorised bank in the UK. The phrase used by the Bank of England was "over our dead body". Why was there such a change of heart?
These matters are of critical importance in the public interest. I sincerely hope that the inquiry will investigate them not least to resolve how they can be better controlled. I do not expect my noble friend to answer my questions today but I should be grateful if he would write to me. I should like to know more details about the nature of the international co-operation. For instance, if BCCI Luxembourg has a surplus of assets, will it be possible to utilise them to assist depositors in BCCI London?
In the course of repeating the Statement, my noble friend assured the House that everything that the

437
Government can do will be done to assist in particular the small depositors. I sincerely hope that the Government will consider carefully the possibility of keeping the dogs at bay; in other words, that the threats of penalty for the late payment of VAT and other taxation will be considered as an indirect means of assisting small businesses which have been harmed by this banking crisis.
The House should be grateful to the noble Lord, Lord Bruce of Donington, for raising the issue. Again, I thank him for doing so.
4.19 p.m.
Lord Benson: My Lords, when a crisis of this kind afflicts this country it is the practice of the public and the press to make violent criticisms of everyone on the horizon. I have no wish to criticise anyone in relation to this matter because I do not know the facts. For that reason and because none of the public knows the facts an inquiry is necessary.
The inquiry is necessary for another reason; that is, to allay the anxieties of the public as to the future because the public will wish to be assured that, within the limits of human frailty, machinery is in existence which will prevent a similar situation arising again.
The best that I can do in this afternoon's debate is to indicate some of the areas in which inquiry and information for the public is specifically needed. Whenever a large group, whether industrial or banking, gets into a difficulty or is believed to be unstable the first essential action is that the red alert button should be pressed. As far as I know, that procedure already exists. However it is important that we know when that red alert button was pushed in relation to BCCI. I suspect that it was some years ago because it has been common knowledge in the City of London for a long time that BCCI was a high risk organisation.
Apart from the date on which the red alert button was first pushed, there is a subsidiary point of great importance. In the case of an international bank with widespread interests worldwide it is of crucial importance that it should be possible to find out the overall worldwide position of that undertaking. In this country we can always find out what is happening here, but it is the overall position which is of particular importance.
That is not as easy as it sounds. It is now so easy to move money around worldwide almost at the drop of a hat and in a couple of hours that if the board of directors is minded to do so, it can conceal with great ease the real situation of an international company. We should like to know what machinery exists to enable the full facts worldwide to be obtained when this sort of situation arises.
The third point is that once the red alert button has been pushed somebody must be appointed to grip the situation. By "gripping the situation" I mean that it should be watched very closely. It should be watched perhaps quarterly—and possibly more often. Sometimes a situation should be watched weekly or even daily. Somebody must watch the position in
438
order to be able to guide it, suggest that it be brought to an end or to carefully nurse it into a better state of health.
The Bank of England's reputation and practice in that respect has been very good. In the last recession, between 1975 and 1981, a great many industrial groups were on red alert but by careful husbandry, and with the help of the clearing banks and the advice of the Bank of England, the vast majority were nursed back to good health and are now prosperous.
The difficulty in a case like this is what was the location of the person who should have been gripping the situation, where was he designated and where did he conduct his business? As far as I can make out in this case the BCCI was domiciled in Luxembourg. The owners seem to be in the Middle East. I do not know from where the board of directors operated or where was the main seat of management. However, whoever was appointed to grip the situation should have been sitting very close to the administrative directorate in order to watch the daily position and know where and at what time he should either pull the plug or gently lead the company forward to better things.
The fourth point is that the moment the red alert button is pushed it is crucial to look at the management. That is the first step which should be taken. Who is managing the company? What is their competence? What is their record? What is their integrity? Are they capable of carrying the company forward or must changes be made? In the normal way of things, that practice works very well. Changes are unobtrusively made. Changes are forced upon companies which are not doing well but in the case of an international bank it is of particular importance to inquire into the management. The public are entitled to know what inquiries were made and what were the results of those inquiries.
The last point to which I wish to draw attention is that the public are entitled to know precisely why the company collapsed. It may have been due to improvident lending. If so, normally speaking once the red alert button has been pushed it may be possible to improve the situation by instituting more cautious policies; gradually taking the company out of its worst situation and leading it on to better things. If that is the case then we should be so informed.
What has disturbed me more than anything is what I read in the morning papers, which may or may not be correct. I read that massive fraud was suspected quite a long time ago. The moment massive collusive fraud is suspected it is easy to discover whether or not that suspicion has a basis in truth. That can be done very quickly. If it is found to be accurate, the normal practice is to bring the company to an end immediately. Fraud never goes away and it never diminishes; it multiplies month by month. Therefore it is important to stop the company trading immediately. Once that cancer is in the top management, nothing can save it.
The Government have already decided to appoint an inquiry and we must be grateful for that; but we need a full expos? of the reasons and an assurance for the future.
4.26 p.m.
Lord Desai: My Lords, I join the noble Lord, Lord Morris, in thanking my noble friend Lord Bruce of Donington for initiating this debate by way of an Unstarred Question. Since the Statement was made in the House on Monday 8th July I have attended a number of meetings along with the noble Baroness, Lady Flather. BCCI is thought to be an Asian bank, we are thought to be Asian Peers and we were therefore asked to attend those meetings, which I gladly did.
Before I come on to what I wish to say I shall cover some of the points which the noble Baroness, Lady Flather, asked me to convey to the House and with which I concur. She cannot be present this evening. Many Asian merchant depositors have been caught by this affair. When I speak to them they say—I have no way of confirming what I hear—that they were happy with BCCI no matter what was going on at the top. They were happy because, given the nature of banking, they had little access to other banks. Sometimes they could secure loans only on personal recognition, family ties or other informal arrangements. They could obtain loans only from BCCI.
I comment on that only because it would seem that the rest of the clearing bank system is somehow failing to fill that market gap. I put it no higher than that. Due to that fact a number of local economies in some of our cities—Birmingham, Leicester and Bradford, for instance—are facing considerable difficulties caused by the multiplying factors of the non-availability of credit as a result of the BCCI affair. When it comes to saving depositors, if local authorities are to be bailed out for what they have lost, I hone that similar considerations will be given to other depositors as well. I shall return to that later.
I turn now to my more general remarks. I agree with: he noble Lord, Lord Morris, that this crisis, whether or not it is the largest in terms of money and in terms of what it tells us about the banking system, is perhaps as important as the crash of 1866, although very different. The problem is that for a long time we have thought of banking systems and regulations strictly in national terms.
Although London contains many foreign banks —offshore banks—we have been able to think of those banks as belonging to some other jurisdiction with which one could co-operate. Lately, through the 1980s and lot simply as regards this bank, due to deregulation and the financial revolution, we have a number of banks of no fixed abode. I put it no more strongly than that. They are multinational banks which have offices in one place and boards of directors in others and they carry on business. Perhaps the time has come once again to examine whether our techniques of regulation and our legislation are adequate to the task. If it is maintained that the Bank of England has done its duty and behaved promptly and correctly, given that this situation has arisen, the law should be changed. Alternatively, perhaps we lack the means of getting information in sufficient time, which is very important. Regulating banks in a
440
deregulated environment and in an international context may need measures which are different, better and quicker than we have now.
This banking crisis has European aspects, as the noble Lord, Lord Cockfield, pointed out. There are also international aspects as we are all aware. It may be that we have to look not only for European legislation but at the much wider consequences of the collapse.
One matter worries me. I am worried about what we have been told. We do not know the facts. We need to be told about the many efforts that were already afoot concerning restructuring the bank, given all the knowledge that the Bank of England had. If it is true that restructuring efforts were in progress and on the point of completion on the day the Bank of England ordered the shutdown, or even the day before, one wonders whether different parts of the Bank were acting on different information without co-ordination. It may be that one part of the Bank was looking into the fraud aspect and another into the question of restructuring. I do not know. I wish to know the facts. I hope that the inquiry will go into these aspects because they involve very important questions for the future of banking in this country.
I now turn to the question of relief. When the Statement was made, I asked the Government to think of some quicker interim relief measures that could be arranged. I recognise that there are legal obstacles to providing complete relief under the deposit protection fund. However, I still believe that something should have been done last week, or perhaps early this week, pending a legal settlement. Some way should have been found to give relief. If on Monday, as the newspapers report, an adjournment is obtained, deposit relief protection will be further delayed and people will be put to further trouble because the Bank will not be able to proceed on legal lines as before. We should think about that. Pending legal clearance, can we provide some form of immediate relief to people whose businesses are stymied by the non-availability of money? Perhaps this matter can be treated in the same way as we treat bad debts for VAT relief. It is the same kind of thing. It is similar to a bad debt if deposits cannot be taken out.
There is one other aspect which the inquiry should look into. It is a technical matter and I am speaking only because of a reasonable doubt. I refer to the auditors. Did they do their job properly? Are the auditors in the City at large doing their jobs properly? I do not know because I am not an auditor. But it seems to me that, if it is the duty of an auditor to raise questions, far too long a time had passed in that respect, from what we hear, before the whistle was blown. The whistle was blown not by the auditors but, as we gather, by someone who resigned from a highly responsible position in the bank. That raises considerable questions about auditing and the functions that it performs.
4.34 p.m.
Lord Monk Bretton: My Lords, I was not entirely sure whether the noble Lord, Lord Bruce of Donington, was going to proceed with his Unstarred

441
Question despite my noble friend's statement. I am not sure that it is now as necessary as it was. Nevertheless, I should like to welcome his having put the question down because it gives me the chance to say a little more about the lessons from the BCCI collapse that I believe could be learnt from the closing of the British& Commonwealth Merchant Bank. That is something that I trust the Minister will bear in mind.
The trauma of BCCI will be a much more widespread matter. One must remember the consequences for small businesses and bank employees, many of them Asians. It is a very unfortunate story and I am sure that the sympathies of noble Lords on all sides of the House are with those people. It is important to do everything possible to mitigate the problems where possible. While on the subject of mitigating problems, I hope that the problems of the depositors in the British& Commonwealth Merchant Bank will not be entirely forgotten.
We have not had much serious banking trouble in this country since the important banking Act of 1842. Since then we have built a very strong banking system, of which we should be proud and of which a number of other countries are envious. We want to keep it that way. It is therefore quite probable that when our fire brigade comes out it does not come out very often —it may not work as well as we should like. Therefore we have to watch that fire brigade very carefully.
I return briefly to the question of the British& Commonwealth Merchant Bank, which closed during the summer of 1990. There were £300 million of deposits frozen at that time, and some of the bigger deposits were those of charities. There were three funds connected with Salisbury Cathedral which totalled £800,000. The Band of Hope, which is a temperance movement, also had £1.2 million deposited with the bank. One year later the £15,000 allowances had been paid off by the Depositors' Protection Board. The rest remains frozen. A payment of 40 per cent. of the rest is expected around September, but I believe it may well be later than this.
I understand that the liquidators spent many months trying to sell the bank as a going concern but have now decided—probably due to the difficulties of the present economic climate—to wind up the affairs of the bank. Therefore it looks as though depositors will have to wait another two or three years before receiving the rest of their money. Under these circumstances I wonder whether anything better could have happened. I am therefore very glad that there is to be an inquiry. I wonder whether our regulatory system is getting things right and whether the rules need further revision. They are supposed to provide some protection for depositors. In the case of the British& Commonwealth Merchant Bank, I cannot help feeling that the liquidators have been working on behalf of the creditors of the main holding company, British& Commonwealth, of which the bank was only a subsidiary. They have not worked in at all the same way for the depositors in the bank. What has happened to the depositors in this liquidation is an important matter. Is it the wish of Parliament that
442
they should come that far down the list? That question needs to be carefully considered. I wonder how the depositors will rank in the winding up of BCCI—dare I hope somewhat better?
4.41 p.m.
Lord Harris of Greenwich: My Lords, I join other noble Lords in paying tribute to the noble Lord, Lord Bruce of Donington, for putting this issue on the Order Paper. It is not for me to speculate on whether the Chancellor of the Exchequer would have made a Statement at two-thirty this afternoon had it not been for this Unstarred Question. It is possible that it would have been made, but one suspects also that it is more likely that it would not have been made. For that alone the noble Lord, Lord Bruce, is to be congratulated.
As the noble Lord, Lord Bruce, said, we are discussing one of the most substantial banking scandals any of us has witnessed in this country. Thousands of people have had their lives destroyed as a result. Many small businesses are going bankrupt. Many public authorities and charities in this country are experiencing the most severe difficulties. I do not propose to discuss the issue of bankruptcies or the position of local authorities. My concern today, as it has been in the past, is the position of the Bank of England and the Treasury. When I mention the Treasury I am interested not only in its supervisory relationship with the Bank of England but in its direct responsibility for Her Majesty's Customs and Excise, a matter to which I shall come in a few moments.
As some noble Lords will recall, I initiated a debate on this issue on 23rd April last year. I did that following the conviction of subsidiaries of BCCI in the United States Federal Court in Tampa, Florida, when fines larger than any ever exacted on banks in the United States were imposed. In that debate, the Minister, the noble Lord, Lord Henley, who had had to pick up the brief at very short notice because of the absence of his noble friend Lord Caithness, sought to minimise the significance of what had happened in Florida. So, surprisingly, did the noble Lord, Lord Bruce, who, commenting on press reports on the proceedings at Tampa, said:
"I have been in Parliament long enough to know that just as trial by television is dangerous, so is trial by the press". —[Official Report, 23/4/90; col. 412.]
The very reverse is true. If the press had followed up these matters with even greater vigour, it is possible that some of those who have now been ruined would not have been ruined. It is instructive to note that two local authorities decided, as a result of the publicity of the case in Tampa, to get their money out of BCCI. It is unusual in this House to pay tribute to the London Borough of Lambeth, but it did in fact take its money out of BCCI, as did the London Borough of Tower Hamlets.
I turn now to what the noble Lord, Lord Henley, said. I repeat that I am not making any direct references to him in a critical sense as he was acting as counsel for the Treasury. He said:
"It should also be borne in mind that there are substantial differences between the United States law of vicarious corporate liability and the English law of corporate liability.

443
In the United States, if an employee commits a crime in the course of his employment while exercising the authority, real or apparent, vested in him by a corporation and the criminal act was done, at least in part, to the benefit of the corporation, however small that benefit might be, the corporation is also guilty of the offence".
There then followed an especially interesting sentence. He added:
"It is not a defence for the corporation that the employee acted outside the policies of the corporation". [Official Report, 23/4/90; col. 420.]
But, as we know from events which have taken place since that time, many of these employees were not acting outside the policies of the corporation. It is quite clear that a number of significant figures in BCCI were using the bank to launder huge sums of money derived from the operations of drug dealers in Colombia, Panama, the United States and elsewhere. Indeed, we know that members of the management in London were urging employees of BCCI in Panama City to redouble their efforts in seeking out cocaine dealers in order to secure their accounts for BCCI.
It was implied in the Minister's Statement in the other place on Monday, which the noble Lord, Lord Bradazon of Tara, repeated in this House, that the money laundering charges were one thing and the present fraud allegations something wholly different. It seems to me quite extraordinary that the Treasury should use such an argument. I realise that the Treasury is not normally involved in criminal justice issues; but those who are involved in them know perfectly well that where you have large-scale money laundering you also have false accounting and fraud. In fact, the situation is quite clear; since the case in Tampa last year, every person who had knowledge of money laundering had no doubts whatever about what was happening. I believe that that should be stated very clearly.
During the last debate on the matter, the noble Lord, Lord Henley, said that it was for the Bank of England and not the Treasury to determine whether the bank's directors, controllers and managers were fit and proper persons under the terms of the Banking Act and whether they were conducting their business in a prudent manner with integrity and skill. We now know the answers to those questions. Unhappily, the Bank of England did not, until just three weeks ago.
The question before us, and the question to be decided by the inquiry which has just been announced, is why the Bank failed to take action earlier. We are told that it was only recently when it received the Price Waterhouse report that it secured prima facie evidence of widespread fraud in a number of jurisdictions stretching back over a number of years. I must say that I find that explanation impossible to accept. The hard evidence of the money laundering operations in the United States was available not just when the case came to trial in Tampa but also when the indictments were handed down and when the investigations took place two years before.
I believe that the Bank of England had every opportunity to secure the necessary information. Apart from anything else —this is the point I should like to put specifically to the noble Lord, Lord Brabazon of Tara—it could, through the Treasury, have obtained information from Customs and Excise
444
which was directly involved in the investigations surrounding the Tampa case. That was stated in the other place by the then Chancellor of the Exchequer, Mr. Major, who said that representatives of the Customs and Excise had been directly involved in those investigations. During the investigations, undercover Customs agents, posing as money launderers, were told at a meeting in London, which was taped, that there was an inner circle of highly placed officials inside the bank who could be trusted to launder the proceeds of cocaine sales.
Let me put this directly to the Minister: did the Bank of England ever ask for the detailed information which it knew was in the possession of Her Majesty's Customs and Excise? I repeat: many of those incidents occurred in 1988 or even earlier. I come now to the events of 1989. Mr. Robert Morgenthau, probably the leading attorney in the state of New York and a former United States Attorney, gave evidence to the Consumer and Regulatory Affairs Sub-Committee of the Banking Committee of the United States Senate on 23rd May this year. He said:
"In the summer of 1989, over the 4th July weekend, several members of my staff attended an international conference on money laundering in Cambridge, England. They learnt that BCCI had an international reputation for capital flight. tax fraud and money laundering that far exceeded the conduct charged in the Florida indictment".
Let me put this to the Minister. Given the character of those in Cambridge discussing the issues—many representatives of regulatory agencies and others—can it be seriously maintained that the Bank of England was unaware of the evidence that then existed to which Mr. Morgenthau drew the attention of the sub-committee of the United States Senate?
We then come to the events of last year. First, we had the case in Tampa, Florida, to which I have referred; then we had the receipt by Mr. Howard, the Secretary of State for Employment, of a letter from BCCI employees, including one of their internal auditors—a point mentioned by the noble Lord, Lord Bruce of Donington—alleging embezzlement and corruption within the bank. Those are serious allegations. What happened?
We hear that a letter went from Mr. Wedgwood Benn to the Treasury. Someone in the Minister's correspondence section of the Treasury then sent the letter to Mr. Howard. Mr. Howard is the one Minister who clearly saw the letter—there is no evidence that any other Minister saw it—because he signed the letter which went to his colleague, Mr. Ridley, at the Department of Trade and Industry. I do not propose to go into that series of farcical episodes, which is a cross between John Cleese and Inspector Clouseau, but it is not a matter of mirth. Many people have been grievously damaged as a result of what was clearly negligence by someone.
Then there is the question of the auditor's report, received by the Bank last October which we heard about for the first time only on Tuesday of this week. The Bank of England says that the report contains details of what it describes as "inappropriate transactions" and which a senior partner in the Washington law firm of Patten, Bloggs & Bow,

445
representing the Abu Dhabi Government, says contained specific warnings of suspected massive fraud. The lawyer concerned said:
"My immediate reaction was that we are dealing with the biggest fraud in history".
Yet still the Bank of England did not act. We are entitled to ask why that was so. I agree with the noble Lord, Lord Bruce of Donington, that the Bank of England may have some powerful evidence to provide. I hope very much that if such evidence exists, the Bank will give it to the inquiry. However, there is the other matter concerning Mr. Morgenthau. The Minister will recall that I raised this in the House on 8th July. Mr. Morgenthau made the complaint that he had asked for co-operation from the Bank of England but had not received it. On 8th July the noble Lord, Lord Brabazon, said at col. 1243 of Hansard:
"I understand that the Manhattan district attorney is now happy with the co-operation that he is receiving from the Bank of England, and therefore I believe that the noble Lord is wrong about that".
When Mr. Morgenthau spoke to the subcommittee of the United States Senate he was asked by Senator Dixon:
"To what extent do you believe that current bank confidentiality laws impede the effective prosecution of these financial crimes?"
Mr. Morgenthau replied:
"They seriously impede it because you have laws, particularly where you have a bank which has headquarters in the Caymans and Luxembourg and has its main offices in England, and when you try to get these records they invoke the secrecy law of all those jurisdictions. The main audit of BCCI was done by Price Waterhouse UK. They are not permitted under English law to disclose—at least they say that —the results of that audit without authorisation from the Bank of England. The Bank of England so far—we have met them both here and over there—have not given that permission".
To avoid any misunderstanding Mr. Morgenthau repeated his complaints concerning the Bank of England on two separate occasions during his testimony to the sub-committee of the United States Senate. It is certainly true—I believe the noble Lord, Lord Brabazon, has said this—that the situation changed. Indeed it did. Yesterday Mr. Morgenthau added the following to what he had told the Senate sub-committee. He stated:
"For the past month the Bank of England have been co-operative. Before that it was not".
That is the case the Government have to answer on behalf of the Bank of England. I still find it astonishing that co-operation was withheld. I hope the Minister will give an explanation.
If it is correct—as it clearly is—that the Bank withheld co-operation from Mr. Morgenthau who was conducting a detailed investigation into the affairs of BCCI, why was it right for the Bank to withhold co-operation for a substantial time, as Mr. Morgenthau said, and then suddenly change its position in the past three or four weeks? I should be immensely grateful if the noble Lord, Lord Brabazon, could help us on that matter.
I have spoken critically on this occasion of the Bank of England as, in my view, there is a significant prima facie case against it. But, as I said on the previous occasion, I believe it essential—I agree with
446
the noble Lord, Lord Bruce of Donington that the Bank's reputation for competence is maintained if London is to maintain its position as one of the world's leading financial centres. I believe all of us recognise that fact. That is why, if mistakes—possibly grave ones—have been made, it would be far better to own up to them now rather than to allow further, and possibly even more damaging, disclosures to come to light in the next few months.
I have indicated—as I believe is the case with all my noble friends—that I welcome the announcement by the noble Lord, Lord Brabazon, that there is to be an inquiry. But I must say that, first, we shall expect the terms of reference of the inquiry to include the behaviour of Ministers and officials in government departments. In my opinion there is no question of having an inquiry that is solely directed at the conduct of officials of the Bank of England.
The second point is that whoever conducts that inquiry must be given access to evidence from HM Customs and Excise about the Tampa case and related evidence associated with the case.
My last point is this. I remain deeply uneasy about the sentence in the Statement, which I quoted after the Minister had repeated the Chancellor's Statement earlier this afternoon, that,
"I have no reason to doubt that the Bank acted properly and promptly in the best interests of the depositors".
That may be wholly true but it is astonishing to announce the setting up of an inquiry and to make a judgment of that kind before anyone has inquired into the facts. It puts the person who is to conduct the inquiry in an exceptionally difficult position, because if he reaches a different conclusion, he will have to take on the Chancellor of the Exchequer in so doing.
That is why I return to the point which I put to the noble Lord, Lord Brabazon of Tara, and which was repeated by others. It is essential that someone wholly independent should conduct the inquiry. In my view it should be a senior member of the judiciary, and he should, whenever possible, take evidence in public.
5 p.m.
Baroness Blackstone: My Lords, I, too, am most grateful to my noble friend Lord Bruce of Donington for putting down this Question. I now have reason to be even more grateful since pressure from the Opposition for a public inquiry has clearly forced the Government to act, as other noble Lords have already said. I was only sorry that the only time that could be found for the matter to be debated was as the last business on a Friday since the issues surrounding the collapse of BCCI raise the most serious questions about the competence of the Government to handle the regulation of the banking sector.
I am sure that many more Members of your Lordships' House would have wished to have taken part in this debate had it been held at a more convenient time. However, at the same time I am glad that we are debating the matter today since yesterday was marked by yet more revelations of the crass handling of this serious fraud and today we have had a major Statement from the Government on the matter. Although some of what we might have wished

447
to say has been overtaken by the Government Statement, which like other noble Lords I welcome, at the same time there are a number of important questions on which we need more information.
Before commenting on the events of today and yesterday perhaps I may go back a little in time. When the Government announced in a Statement 10 days ago that BCCI was to be shut down they attempted, very unconvincingly, to cover up the Bank of England's negligence in failing to investigate the activities of BCCI much earlier. Moreover, Ministers appeared either singularly ill-informed about the crucial question of when the Bank of England first became suspicious and had grounds to set in train an investigation or they were aware of when that was but were not willing to say. I mention that because I specifically asked the noble Earl, Lord Caithness, after he made the earlier Statement, when the Bank of England first became suspicious. He said that he did not know.
The inquiry will want to examine some of the history of this affair. This is the bank known in some quarters as the Bank of Crooks and Criminals International. This is the bank which last paid a dividend to its shareholders in 1980. This is the bank which refused to allow the Bank of America to inspect its books in certain countries, forcing the Bank of America to divest itself of its shareholding. This is the bank which repeatedly, throughout the 1980s, was sustaining large losses and covering them from deposits. This is the bank whose staff were arrested and charged with laundering 82 million dollars of drugs money in Florida in 1988 and later convicted for that offence. This is the bank which in 1989 had losses of nearly 500 million dollars and bad debt provisions of 600 million dollars. This is the bank which, in a confidential report for a large UK-based finance house, raised the possibility that it was laundering money that had been raised for Palestinian terrorists.
This is the bank about which the US authorities were so concerned that they decided to close branches in New York and California after finding strong evidence that it had secretly gained control of Washington's largest bank 10 years earlier and had been using that bank for its own purposes since then. This is the bank which was lying to its investors in telling them that they were covered by the investors' compensation scheme when the fact that IMRO did not grant a licence but only interim authorisation meant that they were not covered—a fact which emerged as long ago as April 1990.
Clearly, there was some anxiety on the part of the Bank of England as early as May 1987 when, along with the central banks of Luxembourg, Spain and Switzerland, it formed a college of regulators specifically to discuss BCCI's affairs. The noble Lord, Lord Morris, wanted to know more about that. My question is, why did not that group start an investigation after the arrest for drug laundering in 1988? A similar question was put by the noble Lord, Lord Harris of Greenwich. Why, moreover, did United States customs officials meet with nothing but
448
obstruction from United Kingdom authorities in their efforts to trace drug money transactions through BCCI?
I now turn to the events of 1990. In March, the auditors, Price Waterhouse, reported to the Bank of England that BCCI was in serious financial trouble. It found major gaps in the accounts. raising the possibility of misuse of funds. It found a large number of questionable loans outstanding, mainly to wealthy Arabs, with no evidence of repayment. It found lax internal controls. In May, amazingly in the light of this, Price Waterhouse signed BCCI's accounts as true and fair. In spite of a footnote about the Abu Dhabi Government's undertaking to BCCI to maintain the group's capital base while,
"reorganising and restructuring necessary for its continued development is undertaken".
Yet it failed to issue a formal qualification of the accounts.
The next question is, why did the Bank of England agree to that restructuring by the Abu Dhabi Government? Was it not either lax or naive, or both, to assume that the Government would be able to sort out that mess? Clearly, subsequent events suggest that it was a serious error of judgment by the Bank of England.
As my noble friend Lord Bruce of Donington said, the failure to act becomes even more difficult to comprehend in the light of the revelations about letters which went to the Treasury, the Department of Employment and, apparently, the Department of Trade and Industry in June of last year. Why, when Tony Benn forwarded a letter to the Treasury from BCCI staff urging the authorities to investigate "all the dubious activities" of BCCI, referring to the catastrophe that would befall shareholders, investors and employees, if nothing was done?
We are now told that Treasury Ministers did not know about that letter. Ministers are responsible for the work of their departments. If they fail to convey the need for officials to inform them about potential banking catastrophes, they must carry the can. The Prime Minister was the Chancellor of the Exchequer at the time. He must ultimately be responsible. Why, when the letter was forwarded to the Bank of England, did it fail to instigate the necessary investigations which would certainly have uncovered the fraud earlier?
The second letter, to which other noble Lords referred, from a senior internal auditor at BCCI was even more explicit, referring to incompetence being
"surpassed only by the widespread corruption and nepotism within the organisation".
Because it was also concerned with staff redundancies, the letter was apparently sent to the Department of Employment. Why did the Secretary of State send it to the DTI—the wrong department? Does he or his officials not know that this was a Treasury matter? Why and how did the DTI lose the letter? The Government must answer those questions and answer them now rather than wait for the outcome of the inquiry.
It simply will not do, in the light of these letters, to say that there was no evidence of fraud under Section 41 of the Banking Act. Perhaps there was no hard

449
evidence at that point, but in the light of everything known already about the bank and the further information from inside BCCI surely —as the noble Lord, Lord Benson, implied—alarm bells should have been ringing in the Treasury and the Bank of England and an immediate investigation should have been instigated.
The noble Lord, Lord Harris of Greenwich, drew our attention to the auditors' report. The report from Price Waterhouse to BCCI directors in October last year uncovered evidence of insider loans and non-performing loans, running to hundreds of millions of pounds, as well as prima facie evidence of fraudulent documentation. In December, a Lloyd's agency filed a civil racketeering suit against BCCI, alleging a long list of illegal acts including smuggling, arms dealing and customs violations. Yet apparently it took until January this year for the Bank of England to invite Price Waterhouse to act under Section 41 of the Banking Act and investigate malpractice. It was too little too late but I hope that the inquiry will uncover more about the strange delay.
There are now serious questions about the capacity of the regulatory system to deal with banking fraud. As the noble Lord, Lord Benson, said, public confidence must be restored. It has already been suggested that many depositors will now remove their money from the smaller banks and that could lead to serious problems, if not a crisis, for those organisations.
As I said at the beginning of my speech, I welcome the fact that the Government have belatedly accepted that it was wholly inadequate to shelter behind an internal Treasury inquiry to see what lessons could be drawn. It is not just a matter of fraud. It is a question of the supervision of unsound banking practice. That is what the inquiry must consider. It must examine not just what the Government and the Bank of England knew but what they should have tried to find out and when.
Perhaps I may suggest the other main areas that the Labour Party considers that the inquiry should examine. Let me also tell the House what we believe should be the terms of reference, since we have not yet heard them from the Government. I shall list some questions that should be answered immediately by Ministers. Beginning with the terms of reference, the true facts of the case ought to be established, including the role of Ministers, the dates and contents of auditors' reports and other information to which the Bank either had access or might have been expected to have secured access. Secondly, the inquiry should assess what steps should be taken to ensure so far as possible that there is no repetition of the persistent, unsound banking and the fraud revealed in this case.
I now turn to the areas of inquiry that should be covered. The inquiry should consider whether current regulatory procedures concerning both sound banking practice and fraud provide adequate protection for the consumer; whether there should be an independent supervisory body for the banking industry; whether banks should have a statutory responsibility themselves to insure customers' deposits and protect their
450
customers in that way; and whether this country should propose amendments to the European Community's first banking directive to establish more effective supervision within the single market. I believe that the noble Lord, Lord Cockfield—he is not in his seat —referred to that. Finally, it must consider the role played by BCCI's auditors in the light of their responsibility to present a true and fair view of the company's accounts and what changes should be made.
I turn to the questions that I hope the Minister will be willing to answer today. Will Ministers co-operate fully with the inquiry? Will the role of Ministers be a subject of the inquiry? Why have Ministers so far refused to tell us what they know and when they knew it? Since IMRO refused BCCI a licence on 28th April 1990 because it was not a fit and proper organisation, why did the Government not act? Did they not know about that refusal? If they did not know about it, why not? Finally, will the Government assure us that there will be an interim report which can clear up quickly matters of fact including the facts as to the role played by Ministers, including the Prime Minister when he was Chancellor of the Exchequer? Since the answers to those questions are crucial to re-establishing public confidence, I shall be grateful if the Minister will address them.
In conclusion, while buck-passing has taken place between the various government departments and the Bank of England, with letters being lost, the unfortunate depositors in BCCI have lost their money. Does the Minister agree that it was wrong of the Prime Minister to lay the blame on local authorities for being imprudent? Would it not have been better to await the results of a proper inquiry? I wait with interest to hear what the Minister will say.
It is a sorry saga. While there may always be greed which leads to illegal and irregular activities by financial institutions, it is the Government's job to do all they can to prevent that happening and to take urgent action to check it when it occurs. The Government on this occasion have singularly failed to act with the speed required or with the serious concern merited by a growing body of evidence of incompetence and malpractice. In failing to do so, they have jeopardised confidence in the system of regulating banks—a confidence that must be restored by getting to the bottom of this scandal.
5.17 p.m.
Lord Brabazon of Tara: My Lords, a number of noble Lords have raised a variety of very serious matters in the course of the debate. I shall attempt to address as many of them as I can. If I cannot do so, I shall, where appropriate, write to noble Lords.
I shall begin if I may with the issue which I believe has to be the priority in the short term; namely, the extremely difficult circumstances that many individuals and businesses now face as a result of the action that was taken by the Bank of England and other international supervisory authorities on 5th July. A number of noble Lords have referred to those, in particular the noble Lord, Lord Desai, in relation to the Asian community.

451
None of those involved in the decision to take that action was under any illusions about its consequences. Thousands of customers, and others who had dealings with the bank, have faced confusion and uncertainty, and no one can make any promises about when those uncertainties will be removed. But I can assure the House that everything we can do to speed up the resolution of those difficulties, we are doing.
First, the Bank of England is putting a massive effort into getting the deposit protection scheme into action as soon as is humanly possible. As I said in my earlier Statement, I understand the Deposit Protection Board will be writing to depositors immediately inviting them to claim. Our latest estimate is that the UK branches at the bank have some 50,000 sterling accounts, but some customers may have more than one such account. The board will not legally be able to make any payments until after the winding up order has been granted, but the Bank has obtained an expecited hearing for this order, which is to take place on Monday. Thereafter, it and the liquidators will be putting a huge effort into verifying individuals' entitlements as soon as this can be done.
The noble Lord, Lord Desai, asked whether anything could be done in the interim. Unfortunately, there is nothing that can be done under the deposit protection scheme unless and until there is a winding-up order. That is the law under the Banking Act. We can only hope that the order goes ahead on Monday because it is in the interests of the small depositors.
The simple cases should not take more than a matter of weeks to resolve, although more complicated cases (for example, where customers have multiple accounts with the bank or are borrowers as well as depositors) may take a little longer. Nonetheless, the House, can be assured that the Bank of England is committed to carrying through this operation as speedily as it can and Treasury Ministers will be keeping in very close touch with the progress in processing claims.
I also entirely sympathise with the difficulties faced by small businesses which banked with BCCI, whose problems a number of noble Lords drew my attention to. As I reported earlier, the liquidators have been co-operating with the Bank of England and the main high street banks in putting in place arrangements to aid the banks in assessing applications by small businesses for alternative facilities. I emphasise that this is of course a commercial matter for the banks. But I am glad to hear that a number of the high street banks have set up special centres for dealing with applications from former BCCI customers and I hope very much that they will be able to respond sympathetically to these cases.
In addition of course, as I said last week, Touche Ross, the liquidator, has offered to provide free advice to any small businesses affected for a period of six weeks. I hope that that will be of some consolation to noble Lords because we all wish to see such people helped as much as possible.
My noble friend Lord Morris asked about Customs and Excise and the Inland Revenue. I am sure that
452
they will take into account these circumstances if tax payments are delayed because funds are frozen in BCCI accounts.
I turn to the situation of local authorities, which was referred to by the noble Lord, Lord Bruce of Donington, and by the noble Baroness, Lady Blackstone. One can sympathise with the predicament of local authorities and other players in the wholesale markets which have placed substantial sums of the order of millions of pounds with BCCI. However, the Government do not accept at all the suggestion that in any way these local authorities were actively encouraged by the Government to believe that the deposits were guaranteed. Much has been made of the Bank of England's list of authorised institutions and some have suggested that the presence of BCCI on it amounts to some kind of guarantee. That is of course not true, and that was explained to representatives of the local authorities at a meeting in the Treasury on 10th May. I understand that sections of the minutes of that meeting are being publicly quoted and have been quoted in newspapers. Perhaps I may in turn pick out some telling sentences:
"The Bank said that it was important to regard the list of authorised institutions as just that: a list of institutions authorised to take deposits at the date of the list".
Further on the minutes state:
"The list did not say anything about the relative creditworthiness of the institutions or that they could not fail. That was an assessment the local authorities and other depositors had to make".
The fact is that this is a sophisticated market in which those concerned took professional advice because they were running professional risks.
What all these, undoubtedly very hard, cases reveal only too clearly is the drastic consequences which follow when a bank of this kind is put into liquidation. This is an important counter-argument to the claims that the Bank of England should have acted sooner on the basis of suspicion, rumour or hearsay. The Bank of England has draconian powers which we have seen exercised decisively and effectively in recent weeks. But given the consequences of those actions, Parliament rightly insisted that the Bank of England's decisions should be subject to appeal, thus requiring it to satisfy itself before acting that it had sufficient evidence to support the use of its statutory powers.
In the case of this bank, there has certainly been a steady flow of rumour and suspicion in the press and the City during the past few years, as mentioned by the noble Lord, Lord Benson; and the Bank of England takes account of rumours that are expressed about authorised institutions, whatever their source, and looks into them if it believes that they merit investigation. The noble Lord, Lord Harris, today recalled anxieties which he expressed in a previous debate initiated by him in this House. I repeat now, retrospectively, the assurances that were given by the Government at the time; namely, that the anxieties raised by noble Lords were passed on by the Treasury to the Bank so that it could look into whether they called for further investigation.
As was explained to noble Lords at the time, the actions the Bank takes as a supervisor in respect of authorised institutions frequently cannot be explained

453
publicly, but I think it is obvious now that the Bank of England and its supervisory colleagues worldwide were actively engaged in a great deal of work behind the scenes and that they were looking into this bank very closely and taking steps to secure the interests of depositors. Elements of what has been done are publicly known; for example, it is no secret that the regulatory authorities actively encouraged the group's decision to appoint only one auditor for the whole group. Equally, the Bank of England was in the lead in encouraging the formation of an international college of supervisors to enable a better overview of its worldwide operations. Without these developments, the sophisticated fraud of the kind it emerged we are dealing with here would have been much harder to detect.
I hope noble Lords will appreciate that I cannot comment on the precise details of the evidence the Bank received this year as a result of Price Waterhouse's investigations since there may well be criminal prosecutions in the future and it would not be right to say anything that could prejudice them. No doubt all this ground will be covered thoroughly in the inquiry I have just announced. However, some details of the case have been revealed by the governor, and I repeat them here.
The reason that the Bank commissioned a special report under its Banking Act powers earlier this year was that it had been informed of substantial unrecorded deposits by an employee of the bank. The investigation which Price Waterhouse subsequently undertook provided evidence of those allegations and revealed in addition a variety of deceptive practices apparently used to conceal undisclosed losses on operations and loans granted with no expectation of repayment. The overall picture was of a widespread fraud going back over a period of years and in a number of jurisdictions.
Noble Lords have raised today a number of incidents or episodes in the past, some of which were discussed in this House in our earlier debates and some of which have been raised in the press in the wake of the action taken on 5th July. It has been suggested that one or other of these should have offered the clue to the fraud that has now been discovered and that the Bank was tardy in acting.
A number of noble Lords have mentioned specifically press rumours that previous audit reports in the spring or autumn of 1990 already offered sufficient evidence of this fraud. Naturally, neither I nor Treasury Ministers have seen those audit reports, and nor would we expect to. However, the Bank of England has given the Treasury an explicit assurance that, although previous audit reports showed evidence of poor banking standards and losses (which were tackled by injections of capital from the shareholders and management changes) those reports provided no evidence on which the Bank could act in respect of the widespread fraud subsequently uncovered in the Section 41 report. The only possible connection between the reports and the action now taken by the Bank is that it was the change in management
454
prompted by earlier audit reports which ultimately led to the supervisor's decision to close down the bank on 5th July.
Lord Bruce of Donington: My Lords, is the noble Lord aware that during the past five minutes he has been giving evidence on behalf of the Bank?
Lord Brabazon of Tara: My Lords, I am trying to respond to the noble Lord's Question by giving as much detail as will be helpful to the House. If he wishes to leave all those matters to the inquiry, I am happy to sit down and finish the debate now. I shall continue.
Noble Lords have recalled anxieties they expressed at the time about the involvement of BCCI employees in money laundering activities in the United States. The noble Lord, Lord Harris of Greenwich, was very interested in that matter. He asked whether it affected the suitability of BCCI for continuing authorisation in the UK. The Treasury passed on those anxieties to the Bank of England at the time, as noble Lords are aware, and they were investigated. But I understand that the Bank of England had already intensified its supervision and monitoring of BCCI in the light of the convictions. The fraud now discovered in BCCI is not connected with the earlier convictions in the United States. I am advised that those prosecutions related to the activities of particular individuals and were not sufficient grounds for action under the UK Banking Act. Fraud by an employee is not of itself a reason to close down a bank. In BCCI we are speaking of widespread and massive fraud getting to the heart of the business. Beyond those specific words and assurances, I hope that noble Lords will appreciate I am not in a position to speculate about the details of the fraud now discovered.
A number of noble Lords, notably the noble Lords, Lord Bruce of Donington and Lord Harris of Greenwich, and the noble Baroness, Lady Blackstone, raised the now famous Ambrose letter. The then Chancellor did not see the Ambrose correspondence. It was passed to the Department of Employment because that is to where the letter was addressed and it dealt mainly with employment matters. The correspondence also drew attention to losses made by BCCI. Those had already been published in audited accounts. The letter contained unsubstantiated allegations about corruption similar to those that had already been made. The Bank of England received a similar letter shortly after the Ambrose correspondence was replied to, to which reference has also been made. That was passed to Price Waterhouse. The Treasury heard a number of similar allegations and rumours over the period in the House and from other sources. Those allegations were passed on to the Bank of England.
I accept that the handling of the letter was unsatisfactory. But the Bank of England already had that information and therefore it made no difference in practice. The figures in the letter were published figures and the accusations of corruption were unsubstantiated.
The noble Lord, Lord Benson, made an extremely interesting speech and some perceptive comments.

455
They showed the deep knowledge of the subject possessed by the noble Lord, and I am sure that the Bank and the Treasury will want to consider all the matters that he raised, even though they may not be covered by the inquiry—though I hope they will be.
My noble friend Lord Monk Bretton mentioned the British& Commonwealth Bank, which is in administration. I understand that the bulk of the bank's deposit protection payments have been made. The B&C was an example where a solvent bank was brought down by problems elsewhere in the group. That case illustrated problems with supervising groups of a different type to the BCCI which the regulators are considering.
The noble Lord, Lord Harris, drew attention to the possible involvement of Customs and Excise. I assure the noble Lord that the Bank of England has direct contact with Customs and there are exchanges of information both after the Tampa convictions and at other times. The noble Lord referred to the Bank of England's co-operation with Mr. Morgenthau and the New York State authorities. The noble Lord made a good point when he asked how it was that the Bank had riot been able to provide information earlier. I can say that the Bank considered that there were legal difficulties in handing over information and that confirms the earlier comments. The Bank subsequently found a basis upon which they could co-operate—in other words, a specific gateway in the security provisions that were applicable—and have been co-operating since. I hope that that clarifies that point.
Finally, before concluding, the noble Baroness, Lady Blackstone, asked for an assurance that Ministers would co-operate with the inquiry. I am happy to give that assurance though under the Banking Act Ministers have no direct role in banking supervision. For the moment, there are a number of pressing priorities, notably for the liquidator, the Bank and the Deposit Protection Board to pursue the task of sorting out the affairs of those who have banking facilities and outstanding transactions with BCCI. Equally, the Serious Fraud Office have investigations to pursue, and I am sure that no one would wish to prejudice any possible prosecutions. That is not to say that the implications of what has happened will not be fully considered.
456
The Treasury will discuss with the Bank the full implications of the case and the lessons to be learnt. As noble Lords are aware this afternoon, I repeated the announcement regarding an independent inquiry. In addition, the Treasury and Civil Service Select Committee in another place called for the Governor of the Bank of England to see them next week, which will provide an additional opportunity for these matters to be taken up and for the Governor to report publicly on the latest developments.
I hope that noble Lords will feel that the matters raised this afternoon will be fully and properly investigated. As I said earlier, if I have not been able to answer any precise questions, I shall write where that is appropriate.
Baroness Blackstone: My Lords, before the noble Lord sits down, perhaps I may say how grateful I am to him for reassuring the House that there will be full ministerial co-operation with the inquiry. I am also glad that he admitted that the handling of letters sent to the Treasury and other government departments had been unsatisfactory. However, I find it difficult to accept that there would have been no difference in practice if Treasury Ministers, including the present Prime Minister, had taken proper notice of the letters, since all the allegations about corruption look as though they have some basis in fact.
Will the Minister answer my other questions? Specifically, will the role of Ministers be covered by the inquiry? After the IMRO decision not to grant a licence to BCCI, can he tell me why the Bank of England then failed to act and whether the Government knew about the position concerning IMRO at that time?
Lord Brabazon of Tara: My Lords, I cannot answer the last question about IMRO. As I said earlier, there may be certain things about which I shall have to write to the noble Baroness, and that is one of them. As regards ministerial co-operation, I have already said that Ministers will co-operate fully with the inquiry. If that means ministerial involvement, then that will be one of the matters. That is far as I can go on that.
House adjourned at twenty-four minutes before six o'clock.