§ 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: 386In 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—
§ 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 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.