Finance Bill

HL Deb 14 July 1992 vol 539 cc104-44

3.25 p.m.

The Earl of Caithness

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

Not surprisingly, there has been much discussion in recent weeks about the health of the economy, and in particular about whether the encouraging signs that followed the election are being translated into an upturn in activity. It is never easy to form an accurate picture of the current state of the economy from published statistics and surveys, let alone to predict exactly when a turning point in activity has been reached. Even so, recent economic indicators do provide more grounds for optimism than some commentators wish to acknowledge. Figures pu-blished earlier today showed, disappointingly, that manufacturing output fell in May. In the first quarter manufacturing output is now estimated to have been ½ per cent. higher than in the fourth quarter of last year, and despite May's fall was still higher in the latest three months than in the previous three.

There have also been tentative signs of revival on the high street, with retail sales increasing, albeit fairly modestly, in April and May. Estimates by the Society of Motor Manufacturers and Traders suggest that vehicle registrations in June were up on a year earlier for the third month running.

Unemployment continues to rise, as would be expected given its status as a lagging indicator of activity, but the average increase over the three months to May was the smallest since the three months to September 1990.

These more hopeful signs from the real economy have been reflected in survey evidence suggesting substantial increases in both business and consumer confidence. While consumer confidence may have fallen back a little as post-election euphoria has died away, it remains much stronger than was the case prior to the election. Indeed in the past two months the EC/Gallup measure has been at its highest level since the end of 1988. It was very encouraging to note that a survey published only last week by the Institute of Directors showed a further slight increase in confidence about the economy, following the sharp increase recorded in the wake of our election victory. Moreover, only yesterday we saw welcome signs of recovery from the CBI survey of financial services.

Talk of a post-election boom, to which the Government never subscribed, may well have been overdone; but there is every reason to think that recent prophesies of doom are equally exaggerated. The Government are certainly not complacent; the hardships caused by the recession are very well understood as is the desire for tangible evidence of recovery. But the evidence we have supports the Government's belief that recovery will become firmly established during the course of this year.

Lord Harmar-Nicholls

My Lords, my noble friend has twice referred to evidence. He has passed on opinions that people have expressed. What is the evidence that there is an increase of any kind in the general success of industry?

The Earl of Caithness

My Lords, I am sorry that my noble friend did not hear me when I was quoting evidence earlier in my speech. But if my noble friend cares to read the Official Report, I am sure he will see what I have said.

If the exact timing of an upturn in activity is still unclear, no such uncertainty surrounds the progress that has been made in bringing down inflation. From a rate of almost 11 per cent. when we joined the ERM in the autumn of 1990, headline RPI inflation has now fallen to below 4 per cent. lower than the headline rate of consumer price inflation in Germany or the EC as a whole. Further, our rate excluding housing costs is now below the latest EC average for the first time since 1986. Earnings growth and underlying producer-price inflation have both been at their lowest for over 20 years in recent months.

That improvement in our inflation performance has allowed the Government to reduce interest rates by 5 percentage points since the autumn of 1990, narrowing our interest rate differential with Germany to its lowest for over 10 years.

We have been able to do that, while, at the same time, satisfying our ERM commitments which, supported by a firm fiscal stance, now lie at the heart of our anti-inflation strategy. Indeed, those who argue that membership of the ERM has worsened the recession are wrong to assume that interest rates could have been reduced further had we not chosen to participate without detrimental consequences elsewhere. In particular, we would have had to have been willing to accept a substantial depreciation in the value of sterling. To do that would have been to abandon the fight against inflation, and the short-term boost to competitiveness would soon have been eroded by rising prices.

The devaluations of the 1960s and 1970s, far from providing any sustained boost to exports, were associated with the continuing decline in our share of world trade in manufactures. Devaluation offers at best a temporary easing of the symptoms of our economic ills, not a cure, and to repeat that recipe would have been nothing short of folly.

A number of commentators have recently suggested a devaluation of sterling within the ERM, arguing that that would allow a cut in interest rates. As my right honourable friend the Chancellor of the Exchequer pointed out in his speech last Friday, that is an option that simply does not exist at all. Now that we are in the ERM, the differential between our rates and those of other participants largely reflects the market's view on the likelihood of depreciation.

To argue that rates could fall after a devaluation, one has to believe that the markets would see one's devaluation as reducing the chances of a further one. It is far more likely that they would take the view that a government willing to take the easy way out once would probably do so again rather than take the more difficult course of following through the commitment to achieving permanently low inflation.

It is the defeat of inflation on a lasting basis that is our objective. All too often in the past we have seen inflation fall only to relax our guard and let inflationary pressures build up again.

The clear lesson of our post-war economic performance is that allowing significant inflationary pressure to develop before throwing on the brakes to squeeze it out of the system has led to more pain and less economic growth than could have been achieved had preventing such pressure developing in the first place been given greater priority.

The Government have learnt that lesson. We believe that the ERM is the best framework in which to tackle those problems. When we joined it we said that it was not a panacea; but through it not only are we determined to break the inflation psychology that has done so much harm in the past, but also make the UK a truly low inflation economy in the future. The transition is a difficult and painful one, but the prize is also great: a real increase in the sustainable growth of our economy over the medium term. Only by making that transition can we fully capitalise on the substantial supply-side reforms that have already helped transform our productivity performance.

That prize is within our grasp. If we lose our nerve and let this opportunity pass us by we shall not quickly get another one. Neither is it likely that our competitors in Europe will make a similar mistake, as they too have learnt the lesson of Germany's success.

Those who argue that we should give up the fight against inflation because the pain is too great should consider where such policies would take us. History shows that devaluation cannot bring us non-inflationary growth. If we were to resort to such a policy again, we would be increasingly isolated in having been unable to face up to the need to defeat inflation.

That is what underlies the Government's determination to remain within the system at the current parity.

Having set the scene of the present economic situation, I turn now to the Bill itself. In a normal year the Finance Bill would generally legislate for most, if not all, of the measures announced in the Chancellor of the Exchequer's Budget Statement. However, the short Finance Bill which was presented to us in March legislated for the main announcements in the Budget, including the 20 per cent. rate of income tax which applies to the first £2,000 of taxable income for everyone. For nearly 4 million people,20p is now their marginal rate. The cut follows the reductions from June 1979 in the basic rate from 33p to 25p and the measures that we have taken at the higher end to improve incentives.

The Bill that we have before us today completes the legislation founded on the Budget Statement. I hope that it will be helpful if I set out the main measures in it.

Perhaps I may start with the indirect tax measures. There are a number of provisions here which are needed to prepare for the introduction of the single market on 1st January 1993. These include Clauses 1 to 5, 8, 14 and 17 and Schedules 1, 2 and 3—nearly 70 pages of legislation. These are, in general, technical changes to excise duty and VAT and some related changes to the Customs and Excise Management Act 1979.

The Bill also proposes to get rid of a tax. Clause 6 abolishes the excise duty on matches and mechanical lighters as from 1st January 1993.

Clause 7 will exempt members' clubs and similar societies from the liability to bingo duty and also removes the burden requiring them to keep records. That measure will take effect from 3rd August this year.

Clause 10 will clarify Customs powers to search aircraft at small aerodromes and other landing sites. For the avoidance of doubt, an aircraft can be considered "airborne" if it is in flight and no part of it is touching the ground. An aircraft simply jacked up off the ground cannot be considered "airborne".

Noble Lords

Oh!

The Earl of Caithness

My Lords, it is an important point which must he clarified.

Clause 16 will provide an agricultural flat rate scheme for farmers as an alternative to VAT registration. That should be a useful simplification and deregulatory measure for an important industry.

Clause 15 will rectify a problem with the VAT legislation on repayment supplement, which is paid by Customs when they are late in making a repayment to a trader. The new clause was made necessary by a recent decision in the courts. This particular change will not have retrospective effect.

I turn now to the direct tax measures in the Bill and there are a number of proposals in the section which will be of great interest to businesses.

Clause 21 sets the main rate of corporation tax. For this year the rate will remain unchanged at 33 per cent. That level remains the lowest in the European Community and in the G7. As a result of the reductions announced by my right honourable friend in 1991, business will benefit by around £1 billion a year. That allows more profits to be retained and thus more available for investment.

Clause 22 sets the small companies rate of corporation tax. It is not proposed to make any change this year. Small companies have benefited considerably from changes to their tax regime over the past few years. Since 1988, the profits limits have increased by 150 per cent. and the rate of taxation has been reduced from 42 per cent. in 1978 to 25 per cent. now.

There are also two changes to inheritance tax. The threshold for inheritance tax was increased on 6th April in line with the statutory indexation provisions to £147,000. But Clause 72 and Schedule 14 will increase the threshold by more than inflation to £150,000. That will be backdated to Budget day.

There is also a measure which will be of significant help to small family businesses. Clause 73 will ensure that most of those businesses can be passed onto the next generation free of inheritance tax thus removing the threat that this tax has posed to such firms in the past.

Clauses 41 to 43 and Clause 69 affect the film industry. They introduce two new reliefs for makers of qualifying films—broadly, films certified by the DTI as being UK or other EC films. The reliefs are designed to ease the cash flow difficulties often faced by producers by reducing the lag between expenditure being incurred and tax relief being available. The clauses in the Bill reflect consultation with industry representatives who have warmly welcomed the new reliefs. We hope they will help stimulate film-making in this country.

My right honourable friend also announced in the Budget Statement that the business expansion scheme would come to an end at the end of 1993. Clause 38 legislates for that.

The Bill contains provisions which implement the three direct tax measures adopted in July 1990 by the EC Council of Ministers.

Clause 59, together with Schedule 10, bring in the rent-a-room scheme promised in our election manifesto. This proposal was not in the Budget. It reflects the Government's commitment to a strong private rented sector which will increase the quantity and variety of low cost rented housing, thus giving more choice to tenants, making it easier for people to move jobs and helping to ease homelessness. The scheme is a simple one which will ensure that gross annual rents, not exceeding £3,250, from letting furnished rooms in one's own house will be exempt from income tax. That incentive to people to rent out spare rooms in their homes should make a significant contribution to the supply of furnished accommoda-tion, and it has been widely welcomed.

Another measure which was announced in the Budget is a provision which builds on the major reforms in 1990 and continues the Government's commitment to independent taxation. Clause 20 and Schedule 5 give married couples a new flexibility to allocate the married couple's allowance in a way which suits their own preferences and financial circumstances. Until now the married couple's allowance has always been allocated to the husband unless he had insufficient income to make use of it. Now a couple may, if they wish, agree to allocate it to the wife instead or to split it equally between them.

Charities too will benefit from this Bill. Clauses 27 and 28 reduce from £600 to £400 the minimum donation to charity qualifying for tax relief under the Gift Aid scheme and relaxes the rules for relief under charitable covenants.

The Bill also confirms in Clause 64 the rates of composite rate tax (the tax formerly charged on building societies, banks and other deposit takers on interest paid to their investors) for the years 1986–87 to 1989– 90; and in Clause 65 the widely held and long-standing interpretation of the law for taxing proprietary life assurance companies.

This is the Bill before us. It completes the legislation based on this year's Budget Statement, a Budget which continues the process of reform and reduction of taxes which has been the hallmark of 13 years of Conservative Governments, reforms which have encouraged enterprise and which have been an essential component of our policies to raise the sustainable rate of economic growth. I commend it to your Lordships.

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

3.42 p.m.

Lord Peston

My Lords, I thank the Minister for introducing the Finance Bill. Like him, I shall devote the major part of my speech to the state of the economy, as we normally do in your Lordships' House. I shall have a few things to say about the detail of the Finance Bill but rather less than normal because I am aware that we have other business which interests noble Lords other than the small coterie of people who are interested merely in the economy.

The great problem is where to start. The Government's motto seems to be always to look on the bright side, as a well known song goes. My experience as an economist is that a much better maxim is always to assume things are worse than they seem and then one might obtain one or two pleasant surprises. In a sense, that is what the noble Lord, Lord Harmar-Nicholls, was asking for when he intervened.

One of our difficulties is that we read in the newspapers that the Treasury has redone its forecasts and has new forecasts about output or inflation but we are not told what they are. The Independent newspaper wrote to the Treasury to ask for the latest Treasury views on those matters. The reply from the head of the Treasury was that they could not be made available because they were market sensitive; but that is to get the argument the wrong way round. They should be made available because they are market sensitive. Markets should not be misled and they should not have to guess what the Treasury believes is going on or is likely to go on. That is not merely the view of what might be called a Keynesian like myself; it is central to the view of the most anti-interventionist economists that the role of government is to ensure that markets operate on a correct, factual foundation.

I was disappointed by the Minister's inability to tell us what Treasury current thinking is, but I accept that he was merely repeating the doctrine that the Treasury itself has put out. That is an unfortunate state of affairs. On the other hand, we are aware that all the other forecasters believe that in 1992 things will turn out to be a great deal worse than many of us expected. As I have said previously in these debates, I do not criticise just the Government for that. I too, as it turned out, have been over-optimistic. I could not believe that in 1992 things would turn out as bad as they have turned out to be. My excuse is always that I am just me; the Treasury has a vast machine, a great deal of equipment and many people brighter than I am. But they seem to have got it even more wrong. What is more, they will not even admit that they have got it wrong.

We shall return to this issue in the Autumn. We will then have the Autumn Statement when we will know about these things, but several months later than the markets need. I ask the Minister to convey to his right honourable friend the Chancellor of the Exchequer that he has a duty to let us know what the Treasury thinking is and not to leave us at the mercy of other forecasters.

I shall turn now to what has to be one of the central topics—inflation. We are dealing with inflation caused by the Government's own policy errors. There was nothing built in. The inflation was caused by the Government. Nonetheless, having caused it, the Minister is right: inflation is below the peak to which it was driven. I have to point out that the cost in unemployment has been prodigious; and it has been prodigious for a second time within a decade. The cost is measured in hundreds of millions of working days lost. That is the effect of the kind of unemployment that we have. The Minister's noble friend was only the other day reminding us, as the Government do when they are in a desperate condition, of the working days lost through strikes in the 1970s, but they are measured in terms of an order of magnitude less; namely, in terms of tens of millions of working days lost a year. That is not satisfactory, I agree, but tens of millions a year is a great deal fewer than hundreds of millions a year. But that is the price we pay.

I must also point out, as I do occasionally, that even if the extra unemployment is the price that has to be paid for reducing inflation, there is a moral problem which all governments have to face up to: even if the cost has to be borne, is it right that that cost should be borne by the weakest and poorest sections of our community, the ones least likely to gain from the ending of inflation?

The most fundamental point relates to whether and in what sense the inflation problem has been solved. Earlier government claims that sound monetary policy and the attack on the trade unions would solve the problem have been shown to be unfounded, because the moment the economy got going again inflation got going again. I have argued, and I continue to argue, that essentially what has solved the inflation problem, at least until now, has been the fact that the economy requires unemployment to be at no less than 2 million if we are to keep inflation under control. It requires also that the sustainable growth rate be kept pretty low.

When I first came to your Lordships' House I said that, if the solution to the problem was to create vast amounts of unemployment and hold back the economy, it was not one that I was willing to accept. The solution to the inflation problem lies in the ability to run the economy in a non-inflationary way, with full employment and at maximum growth. There is no evidence that that has occurred.

On existing government policy let me say a few supportive things which in due course I shall then undermine. If the sole aim of the policy is to reduce inflation, preferably to zero as the Prime Minister said—of course I disagree with that—then most of the Government's policies make sense. I have to say to noble Lords who criticise the Government that if zero inflation is the objective, then, as the noble Earl said, it is right that we stay in the ERM at the existing rate. It is right that interest rates should be kept high. If the Bundesbank raises them later this week, it is right that our rate should rise as well. The cutting of government expenditure is the correct policy. In those circumstan-ces it would be right also to raise taxes in order to reduce the public sector deficit more rapidly. However, I have heard nothing about that. It would be even more correct to move to the narrow bands of the ERM. If those are the objectives of the policy, then those points follow.

However, the important point to realise—which I do not believe that either the Chancellor of the Exchequer or the Prime Minister appreciates—is that if the sole aim of the policy is to reduce inflation to zero, then output and unemployment are out of control. They will go where they will. A move towards zero inflation, which is what the Prime Minister said he believed in, will mean that unemployment will rise well into the 3 million range and stay above even the 2 million range with which I said we would be permanently saddled. If we assume that the underlying or sustainable growth rate of the economy is about 21 per cent. per annum, the same as in the denigrated days of the 1960s, we must stay below that rate for some time to get inflation down. More to the point, it would be perilous to risk going above that rate.

The reason is obvious economics—a zero inflation target puts all the risks on the down side. Any untoward expansion of output, whenever it occurs, must immediately be scotched. Any tendency for the economy to move ahead rapidly has inflation dangers. More to the point, because businessmen are not stupid they will expect any rapid growth to be scotched. They will say,"The Government will reverse this on anti-inflation grounds."

Therefore, even though the business community, in its usual way, was misguided enough to support the Government during the election, the effect of a zero inflation policy must be anti-investment and anti-expansion. That does not mean that we should not have an inflation target. But it means that we should have other targets as well—high output targets and low unemployment targets. It means that if we stay within the ERM—unlike one or two of my noble friends and noble Lords on the other side, I wish us to stay within the ERM—that gives fiscal policy a stronger rather than a weaker role.

What then of policy? I was not certain which of the relevant metaphors to use about the Government. Are we observing masterly inactivity or seeing the Chancellor as a rabbit, transfixed by the headlights of an approaching crisis? That is an appalling metaphor, and I wish that I could withdraw it. Does the Chancellor know what he is doing? Or is he doing nothing because he does not know what to do? What could he do? With his views, he cannot raise government expenditure because the deficit is too high. He cannot cut taxes because the deficit is too high. He may be tempted—as the Economist argued the other day that he should be—into vigorously cutting government expenditure in the middle of a recession and raising taxes. The noble Earl said in answer to a Question earlier that because of the pound's weak position in the ERM the Government cannot cut interest rates. For all kinds of reasons—many of which I do not disagree with—we cannot devalue sterling. So we end up writing "no" to every policy instrument we have.

It would be easy for me to adopt the Laurel and Hardy approach and say: "What a fine mess you've got us into, Stan", and leave it at that. But I feel that one has a duty at least to try to suggest one or two possibilities. One question I wish to draw to your Lordships' attention is what keeps the economy going at all at the moment. After all, although we are in a fairly deep recession, we have not quite reached the great slump. What is keeping us going?

What prevents a deep depression is public expenditure. That keeps us higher than we would otherwise be. Some public expenditure is on goods and services, an expansion that the Government introduced before the election. That is the one growth factor in the economy. There is also the vast amount of money we spend on so-called transfer payments unemployment benefits and the like—which are spent on consumer goods. If we did not pay that public expenditure, consumption would collapse still further. Those are the so-called built in stabilisers.

It seems to me therefore that the Prime Minister is disingenuous when he says that we cannot use fiscal policy to stimulate the economy. It is only fiscal policy that is preventing a major catastrophe. The Government must appreciate that. What measures can we suggest? I believe that there is room on the investment side. We could be more helpful to investment in both the public and private sector.

One aspect of the public sector intrigues me. We dealt with it at Question Time. I do not criticise the Government for taking the view that when Canary Wharf looked a viable project, great profits could he made and asset values could be created. I do not criticise the Government for saying in that case,"We would like a private sector contribution to the construction of the Jubilee Line". It made perfectly good sense to me as a taxpayer that in that scenario the Government would ask for it, even though in the past our Underground lines were not built that way.

However, we do not have that scenario. What we have is the collapse of the project. In those circumstances, as the great Lord Keynes pointed out, the rules change. There are two sensible actions for the Government to take. One is to finance the Jubilee Line, which would be enormously helpful to the construction industry and to development in East London. If necessary, they could make a contingent claim on future expected asset values by saying,"If this works and the private sector makes a killing, we, the Treasury, will take some of it when it happens." I heard the noble Earl manfully try to give an answer on the Jubilee Line earlier. It seems to me that, given the circumstances, the Government have got the economics wrong. That is not because they were wrong originally: they have become wrong because circumstances have changed.

I go much further. Given the state of the construction industry, I suggest a great deal more public sector investment. I do not wish to rehearse the business of schools, hospitals and all that, but it could provide the biggest boost to the economy that I can think of. There is no large import content, so disasters on the foreign balance side are not as great as they might be.

I cannot continue without pulling the Government's leg on one other aspect of their anti-inflation stance—the venture into incomes policy. As an advocate of incomes policy for most of my academic life, I am not criticising the Government for it. I am just taken aback that they have gone into that field, albeit to control the remuneration of the upper echelons rather than those on average or below average pay.

The recommendations of the review panel have been set aside on what I can only describe as classical incomes policy grounds: to set a good example and to lower pay and inflation expectations. I must have written more briefing material for Ministers on that than on any other subject. I often wonder whether some of my work is recycled and then reaches the Prime Minister and reappears. Incidentally, on the subject of pay for the upper echelons, I did not read the other argument that public finances are in such a parlous state that we cannot afford to pay the rises. That might have been a more valid argument.

Perhaps the noble Earl will reply to these questions in due course. In the circumstances, what is the point of the review panel? Is it suggested that the panel got its sums wrong? I find that hard to believe. It has made the relevant comparisons with the private sector and has found out what is happening there. Private sector pay is out of control. Since the rule is that the public sector is supposed to keep in step, it follows that the review panel's recommendations were correct.

I also wish to point out to noble Lords that, as any first year student of economics could have told the Government, the new privatised monopolies would clearly use their monopoly power not simply to reward their shareholders but to reward themselves. What do the Government think happens in those circumstances? The notion that management has an altruistic view and says,"We have to pay the money out to shareholders" is ridiculous. What has occurred was predictable. Our judges—for whom my heart bleeds—our generals a fortiori, and our top civil servants, even more, are being underpaid.

As to privatised monopolies, I do not believe that the Conservatives achieved much of a bargain. I read that one of the water companies gave the Conservatives £50,000 as a political contribution before the election. The executives are paying themselves very much more than £50,000 each. Equally, on the question of advertising tobacco, I do not believe that the hoardings were really worth to the Conservative Government anything like the value to the tobacco companies of the failure to ban tobacco advertising.

On incomes policy, I conclude by declaring an interest. I hope that The Times was mistaken yesterday and that there will be no interference by the Government with academic pay. I was shocked to read that such consideration progressed from judges, generals and civil servants to academics, even though I have little interest myself in such matters.

Noble Lords will agree that I have spoken for far too long. However, I should like to make a few remarks on the details of the Bill. I wish that I had been given notice of the question: when is an aircraft in flight? I congratulate the noble Earl. It is the most interesting philosophical topic that I have heard in your Lordships' House for some time. I shall now consider the matter a great deal. I take the noble Earl's point: an aircraft which is jacked up cannot be in flight. However, the question,"When is an aircraft in flight?" is a difficult one.

There are problems on the charity aspects of the Finance Bill. The noble Lord, Lord Rix, will speak. He will no doubt cover the relevant points. I therefore shall not do so.

I always like to congratulate the Government. I am interested in the rent-a-room scheme. I am certainly interested in whether it will work. If it does, I believe that the Government have made a correct move. Equally, the Government are to he congratulated when they increase the excise duties on tobacco. I hope that that policy continues strongly.

My right honourable and honourable friends in another place raised a question which I hope will not embarrass your Lordships. I understand—the situa-tion does not apply to me—that if one is the owner of land or a work of art one can receive relief from inheritance tax under the so-called conditionally exempt transfer rule. That means that one allows public access to the land or to the art. I am told that people are glad to take the money but not to grant the access. Since the proposal is good, I hope that the Government will intensify their efforts.

I do not care to crow over the Government's problems. The noble Earl always reminds me that my side lost the election and his side won. When I consider the state of the economy, I say,"The best of luck to him". On the other hand, I would not have minded having a go at trying to get the economy right. The Government are doing nothing. I find it hard to believe that they will carry on doing nothing. The noble Earl said that the Government will not be deflected from their inactivity. I shall be interested to hear the Autumn Statement. We shall then have our next economics debate and will know whether we shall have had quite that much inactivity. I conclude by thanking the noble Earl.

Lord Monson

My Lords, before the noble Lord sits down, given his most interesting comments on the consequences of zero inflation, does he agree with the former treasurer of the Conservative Party—he is not in his place today—who pointed out in the Sunday Telegraph two days ago that a mild inflation of less than 6 per cent. is more compatible with the classless society to which the present Prime Minister aspires than is zero inflation?

Lord Peston

My Lords, I apologise to the noble Lord. I did not read the Sunday Telegraph two days ago, but that is my major disadvantage. It has always been my view that large-scale inflation is destructive of society. An economist has stated that it is akin to embezzlement because essentially one is eroding the value of money. That is a rather clever idea. However, it has also been my view that a moderate amount of inflation is conducive to economic growth. That is an original Keynesian view. The same economist pointed out that unemployment and the destruction of industrial capacity is akin to vandalism. One has one's choice of evils. The point that the noble Lord makes is that one has to achieve the right balance. I believe that the average European rate of inflation is the one at which we should aim rather than a zero rate.

4.5 p.m.

Baroness Seear

My Lords, I understand that in future we shall consider the estimates for expenditure and the Budget together. In other words, we shall consider simultaneously what we wish to spend our money on and how we shall raise the money. That seems such an eminently sensible idea that I find it difficult to understand why we have not done that for generations. In his private life, no one would plan his expenditure without regard to how he will attain the money, and vice versa. I therefore greatly welcome the Government's conversion to this sensible plan. I hope that the noble Earl will confirm that that will be the practice. Perhaps he will tell us when it will first he introduced.

If that were the position today, we should have a very different Finance Bill from that which is before us. Surely one has to consider the priorities on which we need to spend. What, in order of importance, are the jobs that we simply have to undertake? How shall we make the money in order to tackle them? That is the way sensible persons or businesses run their finances. If those were the questions, surely members on all the Benches of your Lordships' House would say that the matters to which we have to give high priority for spending must be competitiveness and wealth creation. I am quite sure that few Members of your Lordships' House will disagree that those are the important issues because on them depends all the other matters that we wish to undertake.

As well as wealth creation and competitiveness, one has to tackle the related but not identical problems of unemployment and poverty. If those are the jobs to be undertaken, the question then arises: how does one best raise and spend the money in order to meet those needs?

If we had faced the situation in that way I cannot believe that we would have had the Budget and Finance Bill that we have had. In introducing the 20 per cent. band and in their continuing determination to cut taxation the Government have considered that it is best to encourage consumer expenditure. That is what the cutting of taxation presumably is intended to achieve. I suppose it is assumed that if the Government put more money immediately into taxpayers' pockets they would start to spend it; and if they started to spend it that would have some effect on employment and therefore on poverty. But of course it is not working out like that, and nor should anyone have expected that it would. We are a heavily indebted country. It is now quite plain that those small amounts of additional money that have gone into taxpayers' pockets have not been spent. Therefore, the desired effects on employment and poverty are not being achieved. Indeed, to the extent that that additional money is being spent, it is sucking in exports, as everyone who has studied the past and looks with any intelligence to the future knew that it would. Such spending also makes the situation regarding the balance of payments worse. That is a further problem which I did not put at the top of the list, but it is one with which we have to deal.

The policy that has been adopted of releasing some money into taxpayers' pockets and the determination of the Government in reiterating, as they do, that they wish to reduce the tax band to 20 per cent. for everyone seems to be based on the assumption that that is the way in which to run the economy.

In so far as money was available for those cuts, and in so far as the Government might have had the courage even to raise taxes somewhat, that money should surely have gone into investment. Indeed, had the money gone into investment the benefit would have spilled over into improvements in employment and the reduction of poverty, which are the objectives which I am sure your Lordships agree we all share.

What form should those investments take? We have made proposals often before and the noble Lord, Lord Peston, referred to some of them. There should be investment in infrastructure and in the railways. I agree with the noble Lord, Lord Peston, that at present Canary Wharf is a candidate.

What would be the effect? It would provide a start. I refuse to call it a kick start. Why on earth do we have to give everything a kick as well as a start? That is one of the appalling cliché phrases which is trotted out on every suitable and unsuitable occasion. Investment would provide a start to recovery in the construction industry, which is in a woeful state. Not only are the small building businesses going bankrupt, as they always do in times of recession; one has only to open any newspaper to see that some of the household names in the construction industry are in serious difficulties. That is disastrous from the point of view of the economy. Investment by the Government in the construction industry and encouragement to the industry in other ways to invest and develop should surely be a top priority in government policy at the present time. Not only would that begin to ease the position in relation to unemployment, but it would also have the effect of increasing the competitiveness of the country, faced as we are by strong competition not only from countries within the European Community but also from countries outside the Community. There is growing competition from Asian countries which we shall have increasing difficulty in meeting.

The second area of investment, which we on these Benches have advocated repeatedly, is education and training. The Government believe that they are doing a great deal on that front. They have not even begun to face the real problems of the undertrained labour force of this country. Perhaps I may once again throw out a suggestion based on my own experience of training and education.

Many years ago in the company in which I worked we had a system of taking on two school leavers for each job. They spent half of each day on education and training and the other half on production. If we adopted such a system we would solve the problem of unemployment among the 16 to 18 year-olds at a stroke, to use an overworked phrase. Everyone says that the key is the 16 to 18 age group. There is a great deal in that. Very many of them are doing nothing at all and they are not being given any money for doing it. Therefore, not only are they not learning the skills which they need if we are to compete but they are creating the inevitable social problems which are bound to arise when 16 to 18 year-olds have no money and nothing to do.

Will the Government think again about that very simple and obvious proposal—two for each job at the age of 16 to 18? That would have to be accompanied by lower rates of pay for that age group, but if they are receiving decent education and training for half of the time that is not unreasonable. Now that they have had a taste of having no money at all they might even think it a good deal. It is a simple answer to the problem affecting that small group, but one which is well worth pursuing. Administratively that is far simpler than one-day or two-day release schemes which from the employer's point of view are a great nuisance. Two-for-one schemes are not a nuisance and are easy to operate.

That is perhaps a digression but it is another example of the better ways in which the money which is available could be used in preference to a reduction in taxation in order to provide the investment that we need in both the infrastructure and the human infrastructure of this country. Of course it is not only a question of the 16 to 18 age group. There are plenty of other groups, particularly older returning women—but I shall not digress on that point—and there is a great deal of scope for improving the skills of the labour force so that we can meet competition. However, that has not been the Government's way.

In relation to the problems of unemployment and poverty there are other matters which could well have been attended to but which have not been. The Government are great supporters of small businesses. We are all great supporters of small businesses these days. However, what the Government have done for small businesses does not take them very far. There are a number of other steps which could have been taken. I shall not list them all, but I should like to draw the attention of the House to one which has not been mentioned recently.

We have so often said in your Lordships' House that the distinction which is made between national insurance and taxation is totally phoney. There is no insurance left in national insurance. They are two systems of taxation. Why on earth cannot we put those two systems of taxation together? That would simplify life for small businesses—and also for large businesses. However, the administration is more difficult for small businesses which have to handle the time-consuming procedures themselves. I understand that it would also save the Government no less than £1.2 billion a year on the administration of the national insurance scheme. It is a waste of money and it is a waste of small businesses' time and therefore of their money.

If we want to deal with the problem of poverty why do we not undertake that other amalgamation which has been discussed so often and about which nothing is ever done—bringing together taxation and benefits? If taxation and benefits were handled together the many people in the lower income groups and in the poverty sector who do not draw the benefits to which they are entitled would automatically receive them.

Finally, also on the subject of relieving poverty there is the whole question of child care, which has not been dealt with in the Finance Bill. Child care is an issue with many aspects, including the benefit to the youngsters. It is also of the greatest importance to women who for one reason or another need jobs and to hold down those jobs, but who find it extremely difficult to do so because of the non-availability of child care or because of its heavy costs. Real concessions on child care and genuine measures to ensure that child care is regarded as an expense of working would ease the position of many low income families and in particular of one-parent families. That is a measure which we hoped that the Government would be able to produce, but it is sadly lacking in the Finance Bill.

4.18 p.m.

Lord Boyd-Carpenter

My Lords, I can agree very much with what the noble Baroness said at the beginning of her very interesting speech. She then suggested that it was much more fruitful to discuss public expenditure together with the means of raising the revenue. As I understand it, that is the intention of the new scheme which is to come into operation next year when in December we shall discuss both what would now be regarded as the Budget and Finance Bill on the one hand and the public expenditure White Paper on the other.

I very much agree, because it must be the case with a country as it is with us as individuals that one has always to weigh, on the one hand, the value of the expenditure which one proposes to undertake against, on the other hand, the cost of undertaking it and the means of raising the revenue for that purpose. Therefore, I was very glad that the noble Baroness began with that remark. I think that she will acknowledge that it is one which the Government appear to accept in view of the changes in the system which it has already been announced they propose to introduce from December next year.

Nonetheless, the Finance Bill is an immensely important measure. I disagreed with the noble Lord, Lord Peston, when he said that only a small coterie of Members of your Lordships' House would be interested. I do not believe that that is true. The Finance Bill is of major importance to the whole running of our economy. It is of major importance to innumerable public activities and it is a Bill which it is light that your Lordships' House should discuss. My only regret is that we are discussing it now, at virtually the end of the sittings. Although I am sure that we shall have a very good debate on Second Reading, as I understand it we shall not have any debate on the Committee and remaining stages. That is a pity because many of us have ideas which it is right that we should contribute. Certainly in my experience as a former Treasury Minister I have found in detailed discussions of a Finance Bill the most helpful suggestions either from noble Lords or honourable Members who have experience in these matters.

Perhaps I may retail a slightly amusing story in that context. On the occasion of my last speech in the other place, which happened to be 20 years ago on the Second Reading of the Finance Bill, I pointed out that the proposals in the Bill as it stood provided that inheritance tax (or death duties as it was then called) should apply at £15,000 in bequests to individuals, including one's wife (because there was no exemption as there is now for a wife); whereas for a charity the limit should he £30,000. I ventured to point out that that meant that if you were leaving money you could safely leave more to a cats' home than you could to your wife. That seemed to me wrong. However, it may amuse your Lordships to know that that observation of mine, which was reported, duly produced a letter from the Clapham branch of the RSPCA, which wrote to me to say that the Government were absolutely light; widows were perfectly well provided for and the poor cats needed the money. Fortunately, the Government of the day were not so persuaded. I am happy to recall that in the Committee stage of that Bill both provisions, for charity and for a kinsman or relative, were put at the same figure of £30,000.

But that is a small and perhaps slightly flippant example of the reality; namely, that it is extremely useful to the Government—I hope that my noble friend the Minister will agree—to have the contributions which can be made in discussion. I am only sorry that we have only this one debate on the Bill this afternoon in this House.

One is faced with a dilemma. One can give one's views on the general working of the economy and agree that the Government are right to go for zero inflation or, as some noble Lords have suggested, that it might be wiser to go for a little inflation, with the consequent easing of restrictions on employment and so on. One can consider all those general policy issues. At the same time one has to cover the whole field of taxation, with all its frequent bearing on those problems.

With regard to the latter point, I am glad to see that in modest degree the Government are still pursuing their avowed intention to reduce taxation and in particular to reduce direct taxation. There is a comparatively modest adjustment on the first £2,000 after £20,000 a year but that has been supported by government Statements that in future years it is intended to extend it further. Those of us who are interested in these matters will naturally be very anxious to see that that is done.

There is little doubt that at the moment direct taxation is still very high. Forty per cent. is a very substantial rate indeed. It bites on earnings or income of over £20,000 or so a year, which is a very serious discouragement to initiative and an encouragement to those who can earn high incomes to go abroad to earn such money to places where they are not subject to those difficulties.

In that connection, I am sorry to see that there is no action being taken in respect of the so-called—it is so-called—national insurance contribution. The noble Baroness referred very properly to it in her speech. It is a fact that the so-called national insurance contribution on higher earnings is a serious addition to the level of direct taxation. It means that on a considerable body of higher earnings the effective rate of deduction for tax purposes and so-called national insurance is 59 per cent. and not 40 per cent. That is a very serious imposition upon individuals. The provision is also completely misnamed as a national insurance contribution. It does not bite at all on the amount of pension or other benefits received by the person who so contributes. It is simply a tax.

In the days (now a good many years of) when I was responsible for administering national insurance, the national insurance contribution had a direct relation-ship to the benefits: to pension, unemployment benefit, sickness benefit or whatever. But it is now the case, certainly in respect of higher earnings, that it has no such relationship at all. It is a misnomer to call it a national insurance contribution. It seems to provide cover for a high rate of personal tax which is extremely difficult to justify. I hope that when my noble friend comes to reply, though obviously nothing can be done this year, he will indicate that the Government are aware of that point and of the difficulties and are seriously trying to tackle them.

My view is that the levy should cease to be treated as a national insurance contribution, that tax should be imposed at whatever is thought to be the appropriate rate and that the national insurance scheme should not be involved in this matter. It is certainly a misnomer to call it a national insurance contribution and may even mislead some people.

With regard to inheritance tax (or death duties as it used to be called) I was very glad to see a provision included in respect of business assets. That will be a great help to certain small businesses. Where the assets of the business are vested in the individual and the individual dies, it is a very serious matter when inheritance tax is applied to the proceeds. But I should like to see further developments on inheritance tax. In particular, the Government say that they wish to encourage people to own their own home. But it is inconsistent to provide that when a man and his wife die (the wife is exempt for the time being of course), inheritance tax is imposed on the property which they had acquired. That means that the proper desire of a man (or woman) to hold a home for himself and his family and to endow a family home to continue is frustrated. With the rates of inheritance tax any property of any particular value would involve a very considerable liability.

Perhaps I may say to my noble friend the Minister that the provision will not necessarily cost the Government a great deal. If ancient family houses and world famous houses throughout the country are exempt from inheritance tax, then one is at least making sure that it is unlikely that there will be a demand for government help to maintain those lovely houses. If they can be inherited without either tax or subsidy, it is surely a much more wholesome provision. In the case of humbler homes it surely meets the Government's professed ideal that we should encourage people to own their own homes. I hope again that this is a matter that may be considered before the next Finance Bill. It is one that certainly I should like to see most vigorously pursued.

I should like to add a word about VAT. I think it is a most inflationary tax, not least because it is imposed not only on sales of articles but on sales of services: it involves a charge in many cases on services. It is also now, thanks to the changes made in order to finance the local taxation system, at 17.5 per cent. a very high rate of tax. Additionally, it is imposed, I think rather oppressively, on various goods and services not only on their own cost but on their own cost as inflated by other taxation, and then the calculation for VAT includes that extra element. Perhaps I may illustrate this in the case of a car. If you buy a car it is sold for a certain price. A car tax is imposed and then VAT is imposed on the cost of the car as inflated by the tax that has already been paid on it. This seems to me a very oppressive provision.

I was responsible years ago for the administration of the old purchase tax and I must say to your Lordships that I remain utterly convinced that that was a much better system than VAT. It fell very little on necessities and not at all on services, but it was imposed at a very high rate on luxuries. If my recollection serves, the rate of tax on jewellery was as high as 66.33 per cent., whereas on necessities—children's clothes, for example—it was not applied at all. It was a flexible, subtle tax, which had little, if any, effect on inflation and was infinitely superior to the clumsy and heavy-handed provisions of VAT. I know that with our European connections it is difficult to free ourselves from VAT but we ought to consider at least lowering the rate.

Then there is the tax on tobacco. That tax has been increased, but I suggest that it ought to be increased even further. I have had some experience of this. During my two stints at the Treasury I was always an advocate of pushing up the rate of tobacco tax. We were always advised by Customs and Excise that the figure which we had in mind was so high that it would discourage sales and that we would lose revenue as a result. We disregarded that advice on the three occasions in which I was involved, and on each of those three occasions for a fortnight Customs and Excise was right but when we got into the third week the craving for tobacco was such that the consumption and revenue went up and one was able to turn to Customs and Excise and say, as I am afraid I sometimes did,"I told you so".

There is a very special case for the taxation of tobacco. The evidence that smoking is dangerous to health is overwhelming and, if people desire, and so passionately desire, to smoke that they are prepared to take the risk and greatly to increase, on the average, their liability to illness and therefore contribute to the cost of the National Health Service, it seems to me only reasonable that they should pay additionally towards the cost of the service which they are inflating by the action they are taking. I hope therefore that the Government will be quite resolute in increasing the tax and will not allow themselves to be discouraged—because I believe that Customs and Excise never changes and it is probably giving the Government the same advice today as it gave to us.

There are many other aspects of this Bill and obviously one is tempted to make an unduly prolonged speech. I would conclude by saying only this: I believe that, despite certain minor aspects which I would like to see amended, this is in our present economic situation a sensible measure. I believe that, combined with the Government's resolute refusal—which I very much welcome—to pay high increases to highly paid officials and also with their determination to fight inflation, it will help to bring this country through what is undoubtedly a difficult phase. I do not envy Treasury Ministers at the moment. I think they are going to have a hard and battering time, but I believe they are right and that when the history of this time comes to be written we and our country will have a great feeling of gratitude to them.

4.35 p.m.

Lord Barnett

My Lords, I hope I may be forgiven if, as I am not speaking in the next debate, I welcome my noble friend Lord Healey who is to make his maiden speech. This may not be in order, but we have sat together through long days and nights and I feel obliged just to say hallo.

Traditionally in these debates we ignore the Finance Bill and have an economic debate. Unlike the noble Lord, Lord Boyd-Carpenter, I agree with that. I think it is absolutely right at any time, and particularly this year, because no Budget is more irrelevant to the current economic situation than the Budget which underlies this Finance Bill. I was looking at the Budget speech. It is very interesting. In the other place on 9th March 1992 at col.747 the Chancellor told us: Most independent forecasters agree that 1992 will see the resumption of economic growth. The recovery is expected to start slowly, but to gather pace. I expect growth in the year to the second half of 1992 to be almost 2 per cent. The same forecasters certainly would not be saying that today, as my noble friend Lord Peston said. I doubt whether anybody inside the Treasury is saying it either.

The noble Earl, Lord Caithness, said—it must have been written into his speech by somebody else—that he detected signs of recovery. I can only tell him that this very week I have spoken to a number of industrialists with whose companies I am connected.

One of them, whose name I shall not mention, told me specifically that there had been a phone call that morning from a major retail company stating,"We are not cancelling the order but we would be obliged if you did not deliver it. If you do, of course we will accept it, but we must warn you that we will not do a lot more business with you in the future". It was as brutal as that. That indicates to me specifically—I have other evidence as well but I shall not bore your Lordships with it—that there are absolutely no signs of recovery in the economy on the ground, whatever may be detected in an odd statistic.

The noble Earl also told us, as indeed the Chancellor did, about small businesses and how they are cutting taxes. I must say to him that many small businesses which have gone bust since would have been delighted to have paid any kind of tax because most of them are not making any profit at all. The Chancellor told us then that small businesses are the life blood of a modern economy. I agree with him: they are. But over the past year, and even since March, they have not been doing particularly well.

Let me make it quite clear, particularly to my noble friend Lord Peston, that I do not blame the forecasters for getting it wrong. In a way it is within what one might call "the margin of error", as the pollsters have said in recent times. It is very easy to get forecasts wrong. So I do not blame the forecasters: I blame the policy. We are bound to ask ourselves whether there is any way in which we could do better. I have said before in your Lordships' House that there are no miracles and there are no easy ways out of the difficulty that we are in; but do we have simply to accept the Government's solution and say,"Well, there is no other way of doing it"?

We must then ask: what is the Government's solution? We have been told that the Chancellor and the Prime Minister are aiming at zero inflation or as near to that as possible. We are also told that we shall maintain interest rates as high as is necessary to reduce inflation, and at the same time we shall reduce the borrowing requirement by cutting public expenditure. I shall be interested to see how that is done in 1993– 94 given the situation in 1992– 93.

I had some experience of cutting public expen-diture, some of which was the fault of my noble friend, Lord Healey. We both thought that we should do that. In current circumstances I am bound to say that making major cuts in public expenditure, even if that were right—and it almost certainly is not right—will not achieve a great deal in terms of reducing what is likely to he a huge increase in the borrowing requirement.

If the Chancellor were to accept the advice of the noble Lord, Lord Boyd-Carpenter, and cut income tax still further, I must ask the noble Earl to give a specific answer to the following question. If the Government are to reduce the borrowing requirement in 1993– 94, even if they can cut the odd billion off public expenditure, will they increase taxation in order to do so? If so, where will they increase taxation? Will they. as I suspect, put VAT on present zero-rated items such as children's clothing, food and so forth and blame the European Community? If that is what the Government have in mind they should be honest with us. I see the Minister smiling so perhaps he will tell us today.

The trouble with the Government's "solution" is that it does nothing for unemployment. Indeed, it will make unemployment worse because the figure will rise to 3 million; probably nearer to 4 million when calculated using the old method. What is worse is that unemployment will stay at that level for some considerable time. The Government's solution will do little or nothing for economic growth. If the Treasury forecasters and outside forecasters are telling the truth, my guess is that we shall have zero or possibly negative growth this year and little growth next year and the year after. Industrial performance and investment will not be improved in such circumstances. In addition, public expenditure in vital infrastructure areas will not be able to be found, as my noble friend Lord Peston said. In other words, we shall be in the vicious circle of lower growth, lower revenue, higher unemployment, cuts in public expenditure and higher taxes.

It may be that that is the only solution to the problem. If it is, I could not live with it. I believe that it is an impossible solution and I do not regard it as a price worth paying. At least it is worth trying alternatives. I fear that I shall now part company with my noble friend Lord Peston. It is fair to ask what the alternatives are. I would cut interest rates but I do not pretend that that would be the easy way out. That is not a total answer; although as the noble Earl said at Question Time the result would not be that the pound would appreciate. The plain fact is that the pound would depreciate, and I accept that.

I have long been in favour of joining the exchange rate mechanism—I said that in my maiden speech in 1983—and I am not in favour of coming out. But being a member of the ERM should not mean total inflexibility and total rigidity to a fixed exchange rate. That is the mistake that is being made in current circumstances and there is no reason for it. The Government are supposed to be in favour of market forces. If that is the case let them apply to the pound and let the pound find its own level. That is particularly so having entered the ERM at too high a rate of 2.95 deutschmarks to the pound and when our industrial performance since has made the situation worse.

I am bound to say that I never expected to find myself in agreement with Professor Walters and his friends. In a letter to The Times today—perhaps that, too, is a paper which my noble friend Lord Peston does not read—they stated: The pound is badly overvalued, especially against the dollar, and devaluation talk is inevitable; while the appalling prospects for government borrowing suggest strong future pressures to print money excessively in the long term. The worse and longer the slump the worse these problems will become". They went on to state: The pound would perforce fall, and rightly so: it should never have been pegged to an unrealistic level, as in some ersatz incomes policy, in the service of counter-inflation". I see my noble friend Lord Peston smiling. He might even agree with some of those comments but I doubt it.

I accept that my solution and I do not pretend that it is a total solution would mean a higher rate of inflation. In order to achieve a fair balance in managing an economy I, too, would accept a slightly higher rate of inflation than the objective of zero. That objective is a nonsense and is absolutely silly. Given the depth of the current recession neither lower interest rates nor a lower pound would necessarily mean a massive increase in the rate of inflation to that which we have known in the past.

I may be told that my proposal will create its own vicious circle, that the more the pound falls the more one needs to increase interest rates. I do not believe for one moment that that is true. When it is seen that we shall not increase interest rates others in the ERM will also see that there is no alternative but to realign. They will have to do so provided that we make our position as crystal clear as the Chancellor and the Prime Minister are doing today. However, I can understand that from what they have been saying they may have to go. That would not worry me too much. What is more important is that we should have a better economic policy than that which we have now.

I accept that my proposal may be no more of a solution than the Government's. But it is worth at least trying rather than allowing the current situation to continue as it would for some years. More and more people would be left unemployed with no hope. Young people would have no opportunities because expenditure on education and training would not be increased. We are already seeing evidence of the cuts. Given the relatively poor industrial performance of this country in recent years it may be impossible to make major changes. However, I would rather give that a try than continue on the present path.

4.48 p.m.

Lord Rix

My Lords, in view of the fiscal erudition which has been displayed in the House today, in particular by the noble Baroness, Lady Seear, with her noteless speech, the almost noteless speech of the noble Lord, Lord Boyd-Carpenter, and the nearly noteless speech of the noble Lord, Lord Barnett—from the rear he reminded me strongly of my old friend Barry Cryer, who would certainly have got more laughs this afternoon—I rise in trepidation to speak on one simple aspect of the Finance Bill. There is considerable perturbation among the parents of people belonging to MENCAP as regards the changes proposed to the disabled passenger scheme under Clause 12 of the Finance Bill. The changes can in no way be described as technical.

About 20,000 people under the age of five or over the age of 65 who are virtually unable to walk and who receive the higher or middle disability living allowance care component will have their right to exemption from vehicle excise duty as a passenger removed. It is already the case that children under five and adults who are over 65 cannot claim mobility allowance. The removal of the right to VED exemption is another burden for that particular group of people.

The Government argue that children with disabilities have no more mobility needs than other children of the same age. However, children with profound intellectual and multiple disabilities have needs far greater than any able-bodied children. MENCAP carried out a survey of over 2,000 families with children with that level of disability. Parents were asked about problems with travel, and 88 per cent. said that the nature of their child's disability made travel by bus or train very difficult, if not impossible. Only 5 per cent. said that they could use public transport and 79 per cent. said that they had to use a private car.

Children who cannot stand by themselves by the age of two or three are of course unusual. As all parents who have tried to travel on public transport will know, getting any child on or off a bus is difficult. If your child has no independent mobility it is almost impossible. Behavioural problems are also common, with children having no sense of danger as regards public roads or being so difficult that they cannot be taken on public transport.

Disability incurs great extra cost. Many families with a multiply disabled child rely on vehicle excise duty exemption status in order to manage their finances. Not only do families find that their disabled child under the age of five is not entitled to the mobility component of the disability living allowance; it will now also be the case that the car, which is so necessary to the family, will not attract exemption from VED. I hope that the Government will meet organisations representing the disabled to discuss that matter further and that the noble Earl, Lord Caithness, will convey our wishes to the proper quarter.

4.52 p.m.

Lord Bruce of Donington

My Lords, I trust that the noble Lord, Lord Rix, will forgive me if I do not follow his particular contribution in the same field to which he so eloquently contributed. I should like to return to the theme started by the noble Earl, Lord Caithness, on the state of the economy.

I greatly sympathise with the noble Earl. He has a most agreeable way of putting his point of view to the House, apart from an occasional sally into party politics in order to prove where his instinctive allegiances lie. He addressed us in most persuasive terms this afternoon. However, it is not good for the noble Earl to clutch at straws, although one cannot blame him for doing so. For him to suggest from the Government Front Bench anything other than that there are signs of hope within the economy would be a dereliction of duty. But in point of fact, as everybody knows, the country is still in the middle of an abysmal recession.

We must try to contribute to the deep thinking which we must all do in order to find the best way out of the recession. I must say immediately that if there are changing circumstances, as there are from day to day within our own economy, and indeed in the world economy, it is extremely silly to put oneself into a complete straitjacket—that is, to tie one's hands almost completely in any action that the Government may take. As I have said many times before in this House, I regard the entry into the exchange rate mechanism at the parity of 2.95 deutschmarks as a great mistake. I believe that to endeavour to maintain our membership of the exchange rate mechanism under those conditions is a great mistake indeed.

The Government have a point, and as an old believer in the mixed economy, I am bound to agree that market forces are the most efficient way of distributing goods and services throughout the communities in which they are produced and to other parts of the world. However, it is equally clear that, although market forces may be the best way to ensure the most efficient distribution, in practice they produce the wildest distortions in the incomes and fortunes of various classes of people in various professions and in various countries.

Therefore, in order that society as a whole may maintain its cohesion, governments must correct and interfere with free market forces. The normal way in which that is done is for the individual country or nation, within which its rule runs and where it has its own system of laws and integrated systems of administration and taxation, to endeavour to influence the market forces within its own country and to take what redistributive taxation measures are necessary to make transfer payments, and occasionally to subsidise, in order ameliorate the consequences of the driving force of market forces. Therefore, I can understand, within one's own country—and I have been party to it—interfering or helping to mould the way in which market forces operate. That is understandable.

However, at present it passes my comprehension that we should submit to an impersonal external discipline over which we have no control whatever; namely, the exchange rate mechanism. I speak on slightly tender grounds in this regard because I am well aware that prior to October 1990 my party recommended that the then government, under the noble Baroness, Lady Thatcher, should enter the exchange rate mechanism. The Government obliged some three days later by announcing at their party conference that they would do so. My own party leadership of that time must look after itself. I disapproved then of that being done, and I still disapprove. In current world conditions, and current systems of production in force in this country and elsewhere, our currency is grossly overvalued both in terms of dollars and deutschmarks. The world knows it; the Government know it; and it would he difficult to argue otherwise.

What are the consequences of that? Surely they must be that it is more difficult for British manufactures and services to be exported. That must be the case. In certain aspects we may achieve records; but that is a tribute possibly to the excellence of our variety, the distinctiveness of our products and the reputation of our workforce rather than the price at which products are competitively placed. However, it is much more difficult to achieve satisfactory export totals. It certainly means that imports into the United Kingdom are heavily subsidised.

I speak within the experience of many Members of your Lordships' House when I say that over the past two years, when one has tried to purchase British consumer durables in British shops—I have been to many large stores—one has been faced with the response that delivery could take place between 10 weeks and three months. However, if I was prepared to purchase a foreign item, delivery would be straightaway. The subsidised price at which goods have been purchased by importers and stores in this country permits them to hold large stocks.

We have been burdened with a double disability. First, our manufacturing and service industries have to compete against imports which are in effect offered at a subsidised price. Not only must they do that, but also they must face the fact that there is little way out of that situation. The result is that even now if we let exchange rates float and import prices rise, the commodity prices in the shops will rise. British industry has been so decimated by the deflationary programme being carried out that it would be unable to compete even with the increased import prices that would eventuate.

What are we to do? Are we to tolerate a modicum of inflation? By "modicum" I mean between 2 per cent. and 3 per cent. Or are we to insist upon a zero rate and the continued deflation that that involves? Past experience gives us some clue to the answer. In 1925 the country was on the gold standard and the rate of the pound against the dollar was 4.86. In 1929 and 1930 this country experienced a considerable depression following the depression in the United States. What did we do? In 1931 we went off the gold standard. Amazingly, production increased Ad unemployment went down. From 1932 until 1952 the Bank rate stood at 2 per cent.—that is,20 years. That was despite the intervention of World War II.

At the end of World War II, the pound against the dollar stood at 4.43. Eventually, in 1949, after a supreme economic effort, we were forced to devalue. We were forced to do so by the inflationary pressures exerted not by vastly increased wages but first by the extent of the damage that we had suffered during the war and which we had to repair; and, secondly, by the massive redeployment in this country of a labour force coming out of the armed forces. In spite of demobilising 2 million people immediately following the war, we achieved an unemployment rate within 18 months of under 3 per cent.

That continued well into the 1950s and into the 1960s. In the meantime, the exchange rate was floated. We brought it down in 1949 to 2.80 dollars, as will be remembered. The result was that once again we had a period of sustained growth. We did not experience any significant inflation—by that I mean the kind of inflation that immediately followed the quadrupling of the oil prices in the late 1970s and the "Barber boom or bust" of 1972 which shoved up the rate of inflation to 26.5 per cent.

Thereafter, inflation continued to go down. Under the Labour administration, until 1979 it had gone down to 10.3 per cent. That was not a bad achievement, bearing; r1 mind the great pressures generated by the quadrupling of oil prices as well as by the "Barber boom". It was accentuated further, following accession into the European Community, by our having to pay artificially high food prices owing to the application of the common agricultural policy. That resulted also in price increases. Indeed, as the noble Earl will be aware, the Treasury announced only a short while ago that even today the average family of four has to pay around £18 a week extra for food as a result of the application of the common agricultural policy.

The next bout of real inflation was when the Tory Government of 1979 came into office. They immediately and deliberately raised inflation by nearly doubling VAT and by imposing price increases on the electricity and other power industries. Under the Tory Government inflation rose to slightly over 20 per cent. In the depression that followed it continued to come down, following the Government's monetarist policies aimed at deliberately deflating the economy at the cost of increased unemployment.

The argument that lowering the exchange rate necessarily becomes inflationary is immediately knocked on the head by the somewhat unnoticed fact that in January 1985 the dollar stood at 1.05 dollars to the pound. Indeed, for half-an-hour in January it went down to 99 cents. Strictly speaking, that should have caused an immediate inflation or an inflation within a reasonable period. It did nothing of the kind. There was a slight blip in the following year and it continued between 3 per cent. and 4 per cent. per annum thereafter. Indeed, it would probably have continued if there had not been a repetition under Chancellor Lawson of exactly the same kind of tactics followed by Mr. Barber (as he then was) in 1972, which again increased the rate of inflation.

The purpose of reciting some of that history is to suggest that the following of a flexible exchange rate policy and allowing the pound to find its own level is not necessarily synonymous with inflation going out of control. That is not necessary at all. Indeed, for considerable periods of our history, as I have shown, from 1925 to 1931 onwards the most fruitful period occurred in terms of increased national output at a medium rate per annum. It is the extraordinary circumstances—the Korean war, the quadrupling of the oil prices, the Barber boom and all those things—that contributed to the distortions.

I suggest respectfully to the Government that they should rethink the matter. It does not necessarily follow that the world will suddenly collapse if they withdraw from the exchange rate mechanism or, even more moderately—which I am quite willing to accept—seek a realignment within it. All kinds of catastrophes are forecast, but they are catastrophes which are in the minds of civil servants and some economists who have very little else to think about, bearing in mind that economics is supposed to be the science of rational expectation. But in real life within a comparatively short period of time, the effects would be quite small.

We should not be talking only of abstract ideas, although in the realm of ideas these problems can be solved or attempted to be solved. We should be thinking about the millions of people outside this place who are living in poverty in our country. We should be thinking about the millions of people who are living well below the poverty line and the thousands who are homeless. We should also be thinking of the millions who are unemployed. We should be thinking of people who are enduring those kinds of disabilities. We should ask ourselves whether we should be more actively considering the human aspects of the problem and allow them to condition our minds and our determination rather than to allow ourselves to be sucked in by a great number of abstract theories, most of which with the passage of time have been disproved by events.

5.11 p.m.

Viscount Mountgarret

My Lords, perhaps I may intervene in this debate on one specific point; namely, in relation to agriculture. I have always felt that is was this Government's policy and desire to try to encourage an expansion of new people entering farming, and by that the creation of more agricultural tenancies rather than landowners tending to wish to keep land in hand for all the various fiscal reasons that are attached to it.

I believe that in Schedule 14 to the present Bill my right honourable friend the Chancellor of the Exchequer has been extremely generous and considered giving 100 per cent. relief to owner-occupied land. He has been equally generous in considering giving an increase of between 30 per cent. and 50 per cent. relief on tenanted land. It would be churlish of anyone, certainly on this side of the House, to decry the Chancellor's very generous, understandable and laudable provisions. But unfortunately and probably unwittingly, the knock-on effect has been possibly to discourage landowners even considering giving more land to tenants rather than trying to keep more land in hand for themselves. That is regrettable. It is not in accord with what I believe to be government policy. It is not a measure which the Country Landowners' Association, the Tenant Farmers Association or the National Farmers Union welcome.

This matter was raised in another place at Committee stage. It was well reported in the Official Report. Unfortunately, the point was somewhat turned down by my right honourable friend. However, I was very pleased to see that the party to which the noble Lords opposite belong voted in favour of increasing relief for inheritance tax to 100 per cent. for tenanted land. I am very glad to believe that that party is in favour of giving extra relief for inheritance tax.

I understand the reasons my right honourable friend the Minister in another place gave against the proposal which I believe was raised by the honourable Member for North Cornwall; namely, that it might lead to encouragement for landlords, not necessarily of an agricultural nature, to try to claim that their businesses also qualified for 100 per cent. relief, whereas other provisions applied. I recognise that there are difficulties. It is not a very easy matter to dispose of in a very short space of time. I very much support the remarks made by my noble friend Lord Boyd-Carpenter, that it is regrettable that we do not have sufficient time to make contributions of a fairly important nature on many aspects of this Bill at this time. We could be helpful and constructive to the Government in order to hone the various rough edges which may appear in this Bill. This point is one of them.

All I seek to do is to draw the Minister's attention to this particular problem and to ask whether I can have some assurance that the anxiety which I have briefly tried to express might perhaps be taken on board, and that there will be a positive determination to have a full discussion with the various interested parties to which I have referred, such as the CLO, the NFU and the Tenant Farmers Association. Such discussion will be in order to see whether there can be some way in which our fiscal legislation can be geared so that the discrimination against consideration of the letting of land to tenants might be eased and that landowners will not be penalised by inheritance tax if they decide, very laudably, to encourage farmers to become their tenants rather than entering into various schemes such as share-farming. That is the purpose of my intervention. I shall be very grateful if my noble friend can give some assurance that this point will be actively considered in due course.

5.17 p.m.

Lord Houghton of Sowerby

My Lords, I reckon that on our second debate—a very important one, in which two notable new noble Lords on both sides of the House will he making their maiden speeches—our Front Bench speakers should be speaking by a quarter-past five. That will give the new debate the opportunity of starting at about six o'clock. I wish to contribute to the attainment of something approximating to that programme. Therefore, I shall try to vie with the noble Lord, Lord Rix, and confine my remarks to three minutes. That alone is something of a record.

There is only one matter that I wish to raise, leaving everything else aside. In the next three minutes I wish to speak about the people who are behind this Bill: about 80,000 civil servants. By a long way they deal with the highest proportion of our national revenue. I refer to the Inland Revenue which provides £80 billion; Customs and Excise, which provides £67 billion; and national insurance contributions, which are now a form of proportionate taxation, provide £34 billion. Those are the factors which lie behind this Bill. Yet the Government are stirring up uncertainty and discontent in the Revenue staffs as well as in the rest of the Civil Service by all this talk about privatisation, testing the value for money in the market and other sloganised approaches to the employment and conditions of working life for the civil servants.

The Government are asking for serious trouble in the way that they are going on at the moment with gossip, secrecy, ill-judged speeches by Ministers, and press comments about what is lying in wait for the Civil Service. Noble Lords should read the article in the Life & Times section of The Times this morning as regards the feeling of staff organisations, both high and low, about what lies in store for the Civil Service. We had this out to some extent when we debated the Civil Service (Management Functions) Bill; but that deals with one limited feature of this exercise. It is not certain that what lies ahead needs to come to either House for confirmation. I cannot see that, dealing with the Royal Prerogative, any statute law necessarily has to be passed.

It may be that we have to take every opportunity that we can of alerting the Government to what is the steaming cauldron underneath the Civil Service. I can hardly express my deepest indignation about the way in which the Government are bungling this exercise. They could gain the confidence of the most constructive and moderate leadership of the Civil Service unions today if they would only come clean, give them their confidence and allow them to take part in the decisions which the Government wish to take.

The noble Earl, Lord Caithness, is a Treasury Minister. I ask him to make it clear to his Cabinet colleagues—I ask him to tell Sir Robin Butler, the head of the Civil Service—that the Civil Service is waiting to hear from him as well as from others about the future. The three minutes for which I had intended to speak have now come to four. I have finished, but that is enough.

5.21 p.m.

Lord Desai

My Lords, when the noble Earl, Lord Caithness, was speaking it was interesting to note that there was a problem about whether the aircraft was or was not in flight—and something similar attaches to the economy. We do not quite know whether the economy is in recession. I certainly agree with my noble friend Lord Peston that none of us—even the most pessimistic—expected the economy still to be in recession, and, much worse, none of us thought that the economy would continue to be in recession through 1992 and perhaps into 1993.

The first thing to say is that the assumptions upon which the Budget was based have already turned out to be false. There was a provision in the Budget for an over-spend of £2 billion, adding to an existing PSBR of £26 billion, excluding privatisation proceeds. At that time a lot of people said that, given the size of the PSBR, adding to it by £2 billion was perhaps not the nicest thing to do. But if one wants to add to the PSBR, there are certainly better uses of £2 billion than giving income tax cuts.

Noble Lords opposite are obsessed about income tax for reasons that I do not understand. They continue to think that if they go on cutting income tax the economy will somehow miraculously improve. All I can say is that the past 13 years have shown that that is not so. What we are left with is not a lean and fit economy; it is an anorexic economy. And it is because it is an anorexic economy that we are worried, as my noble friend Lord Bruce of Donington is worried. Although my noble friend would like a devaluation, he fears that if there were to be a devaluation our industries would not be ready or able to deliver the goods that would be required. We have decimated manufacturing industry to such an extent that we are short of capacity.

I should like to discuss the Government's anti-inflationary policy in some detail. But the Government must recognise one thing: although it may be true that we need non-inflationary growth—I shall cast some doubt on this—one way to combat inflation is by having sufficient capacity to produce goods when they are required. If one does not have the capacity to produce goods when they are required, even the tiniest revival in demand is bound to cause inflation or balance of trade problems. The Government have neglected the real economy for far too long and are still not admitting that that is the nub of the problem.

I turn now to the vexed question of the exchange rate mechanism. I have been in favour of entry into the exchange rate mechanism since about 1985. Indeed, I thought that we missed a golden opportunity to enter the ERM when our inflation rate was down to about 3 per cent. or 3.5 per cent. in 1985. We had paid a very high price in unemployment to get inflation out of the system. As my noble friend Lord Bruce of Donington pointed out, that inflation was somewhat domestically created by doubling value added tax, etcetera. However, even after all those sacrifices, if we had joined the ERM in 1985 we would have been seven years ahead by now along the path to convergence.

But we did not do that; we did exactly the opposite. The inflation rate has doubled twice in the past 13 years. When it doubled the second time around, not only was monetarism abandoned, which I cannot complain about, but almost any discipline on credit was abandoned also. We had a fantastic credit boom, which we are now suffering from. Indeed, given what the tabloids have been talking about, we not only have anorexia but bulimia as well. We have gorged ourselves on lots and lots of borrowing and are now having to pay it back through very painful debt deflation. Although that is the case, I believe that the Government have gone too far this time in not relieving debt deflation.

Unlike my noble friends Lord Peston and Lord Bruce of Donington, I believe that, staying within the exchange rate mechanism, it is still possible to have a more active interest rate policy than the Chancellor has pursued. Once the election was out of the way and the Government had won again, the market had a guarantee that we would stay within the ERM and that devaluation would not be contemplated. I believe that that was the time to take advantage of the credibility that had been established and to follow an aggressive policy of interest rate cuts by half a percentage point at a time, no more than that. There were very good opportunities to do that in April, May and June because the pound was strong. We could have cut interest rates then.

There has been a slight technical debate between various noble Lords about what would happen if we cut interest rates and about whether the pound would appreciate or depreciate. What actually happens when one cuts interest rates is that people hold the pound only if they expect it to appreciate in the future. For that to happen the pound must first fall before it can rise again. Technically, when one cuts interest rates, the pound drops, but because we are in the ERM people expect the pound to appreciate eventually and they will therefore hold it in the meantime. Therefore, although opportunities have been missed, I believe that it is possible to cut interest rates.

I remember saying when we had the debate on the gracious Speech, that it was a mistake to regard the deutschmark as a fulcrum within the ERM. The ERM does not have a fulcrum. That is the whole point of the ERM. If I may make an analogy, the ERM is like several people climbing Mount Everest. They are roped together and because they are roped together they do not have unilateral freedom to move wherever they like. They have to stay in tandem with other people. However, that does not mean that each one is in a straitjacket.

The mistake that a lot of people have made is to go on believing that, because of the past success of the Bundesbank, whatever it does is correct. However, I would say that during the past 18 months or so the Bundesbank has made a total mess of its own monetary policy. When reunification with East Germany took place, it suffered what is called a "supply shock" in economics. Given a supply shock like that, the Government had of course to borrow money, but cutting the money supply—or attempting to cut the money supply—was not the appropriate response to that shock. The Bundesbank has now got itself into the state where it does not quite know what to do. I should have thought that one thing that the Bundesbank should have done was to relax monetary guidelines but at the same time to realign the deutschmark upwards.

Part of the demand for the deutschmark exists not in Germany but in Central and Eastern Europe and because people are holding deutschmarks it looks as though the stock of deutschmarks is out of control. The Bundesbank is making a serious mistake and it would be wrong for us to follow it blindly. Therefore it would be perfectly legitimate for the Chancellor not to follow any increase in interest rates imposed by the Bundesbank.

What is more, at the first opportunity when the pound is off the floor and is anywhere in the range of 2.90 deutschmarks and above the Chancellor should cut interest rates slightly. He has allowed himself much less freedom than is possible. That is not only my view—and it is the one I stated when we debated the gracious Speech—but it is also the view recently put forward by my friend, Professor Mervyn King, chief economic adviser to the Bank of England. As various other commentators have said, given that we are in the ERM and given that we shall converge to a single currency sooner or later, the right policy is to get to 2.95 by 1995 and in the meantime keep the pound down within the 6 per cent. range and take as much advantage as possible of cutting interest rates within that framework.

Things are not as bad as people think, but an active monetary policy is needed. With interest rate stability one can allow oneself a little interest rate variation. Interest rates can go up or down. It is silly to think that they always have to go down. We have been far too cautious in the past year and a half since we joined the ERM. Most other countries have allowed interest rate movements both ways. I urge the Chancellor to do that. By cutting interest rates and by now and then putting them up again he will eventually achieve much more than he has so far.

If one cannot do much with monetary policy one has to do something with fiscal policy. What is surprising in this respect is that since the election the fiscal policy stance of the Government has gone into complete reverse. While the election was still to be won we did not hear any cries about the public sector borrowing requirement being out of control. At that time health could have what it liked; social security could have what it liked; everyone could have what they liked. Suddenly after the election we discovered that there was a PSBR problem. The Red Book showed that we had a PSBR problem. Why did the Chancellor not say at Budget time,"We cannot afford a £26 billion PSBR"? He did not say that and now there is panic about cutting public expenditure.

Although I am as worried about the PSBR as anyone else, I say frankly that it would be a mistake to tackle the PSBR problem by cutting expenditure. I agree with my noble friend Lord Barnett that we should think about increasing taxation rather than cutting expenditure. We have to get out of the American psychology that one cannot talk about increases in taxation because everyone thinks that taxes can only go down and not up.

According to the Red Book the tax concessions excluding concessions for income tax cost £59 billion. The VAT concessions cost £19 billion. As my noble friend Lord Barnett said, and, if I may say so, as I said during the debate on the gracious Speech, sooner or later the Chancellor will complain about Europe and finally abolish zero rating. He has to do that. That is the easiest way to get the PSBR down and to have a tax which is the least harmful—as noble Lords worry about incentives—to incentives. We shall ultimately have VAT with no zero rating. I do not necessarily advocate that but it would be the easiest way, given the philosophy of the Government, to tackle the PSBR and not deflate the economy further. The Government will have to think about that.

I want to mention one minor element of a certain tax. My noble friend Lord Peston has already mentioned it. I refer to the concession on inheritance tax in the 1984 Finance Act. It relates to concessions given to landlords in respect of access to land. Generous tax benefits have been given but landowners have not been asked to give sufficient access in return. The public's right to free passage has not been properly followed up. When the Finance Bill was in another place the Economic Secretary to the Treasury made some concessions on that and said that he would look into the point that existing agreements on inheritance tax with landlords were not working properly. He said that he would take up some suggestions and have discussions. Can the noble Earl tell us how the Government intend to implement the Minister's concession that the current system of inheritance tax is not working to the public benefit? What discussions are taking place? Who is being consulted about this matter?

I believe that, having had for a long time the single golf club of interest rates, the Government have now decided that they have a single objective of zero inflation. That is madness. There is no other word for it. It is nothing but sheer madness to have as a target not low inflation but zero inflation. Before the election I made some calculations with the easiest available economic model. It is called the Layard-Nickell model and is used by my colleagues. The unemployment figure necessary to achieve a zero rate of inflation as of the first quarter of 1992 is 4 million. It may not be 4 million; it may be 3.5 million, it may be 4.5 million. But the point is that zero inflation is not a sensible target. One must believe in a trade-off at some stage. One must believe that zero inflation at the cost of so much loss of output is not worth having.

I would point out to those who think that inflation is an enemy of growth that the longest period of sustained growth in the capitalist world was between 1945 and 1975. The inflation rate was then between 3 per cent. and 5 per cent. across all advanced capitalist countries and there was the most rapid rate of growth. It is not true that a moderate rate of inflation is an enemy of growth. Very high rates of inflation may be an enemy of growth but moderate rates are not. To believe that there is no trade-off or that one should pay any price to achieve zero inflation is superstitious. It is to make inflation into a totem and sacrifice everything to it. I hope that the Prime Minister will reconsider his policy and agree that there is more to the economy than the inflation rate, especially as, given the appalling way in which the inflation rate is measured, he will not even know until many years later whether or not it has fallen to zero.

I hope that this Finance Bill will be rapidly forgotten as it has become totally irrelevant and that something more concrete will be done about the ills of the economy as things are becoming rather desperate.

5.39 p.m.

Lord Donoughue

My Lords, I should like to begin by thanking the noble Earl for introducing the Finance Bill and by expressing my agreement with those who welcome the intention to merge the budgetary, finance and public expenditure proposals. In future, when everyone will be quite happy to forget most of the measures introduced by the Government—that is, at least since 1987—I suspect that they will remember this admirable reform with approval.

It is in that friendly spirit that I turn to the present appalling state of the British economy. As I said in an economic debate last year and, repetitively, the year before, the Government are in fact boxed in and clearly feel boxed in. That is the main reason why their policies, especially their monetary policy, are so inert. They are boxed in with an exchange rate fixed too high, with real interest rates much too high (at a level unrelated to the stagnancy in the economy but solely to support the wrong exchange rate) and with a PSBR at a level which constrains the kind of further public expenditure increases and tax reforms which would normally be appropriate at this stage of a deep recession.

In the previous debates to which I referred, government spokesmen denied to me that they were boxed in. They forecast a Houdini-like escape from the box. Even the noble Lord, Lord Hesketh—though, perhaps, lacking Houdini's waistline—was confident of escape. Well, we are still waiting. The box remains fairly closed, the Chancellor of the Exchequer is still locked in and the unemployed have little reason for hope.

I shall begin with interest rates which, I believe, are the nails in the box; in other words, the biggest constraint on economic growth. There is apparently little prospect of reducing real interest rates, as the noble Earl confirmed during Question Time and, again, in his opening speech. We are hooked to German monetary policy. No cuts in German rates are expected before the Autumn and there are even some frightening rumours of increases.

Even if UK nominal rates were to fall a little—that is, if we had a small cut—so, according to forecasts which I believe, would inflation fall. Therefore, real interest rates will remain astonishingly high. With a 10 per cent. base rate and below 4 per cent. inflation, that means over 6 per cent. real rates. Moreover, with the average businessman paying at least 3 per cent. to 4 per cent. above base, that points to above 10 per cent. real and is a devastating rate to pay. It is especially devastating to the prospects of investment and, therefore, the prospects of economic growth.

Surely such rates cannot persist for ever, thereby prolonging the slump. As my noble friend Lord Barnett so convincingly said, something must give. In that context and as a personal view, I must say that I agree with my noble friends Lord Barnett and Lord Desai: I prefer the currency risk of cutting real rates to the certainty of a prolonged recession and permanently high unemployment. I should point out that the Labour Party view, with which I agree, is that entering the narrow band reduces the risk.

We are now entering the third year of recession and the prospects remain depressing. The post-election boomlet has disappeared. All those green shoots that the Chancellor of the Exchequer and the Conservative press could see during the election campaign have withered from sight. City forecasters see negative growth for 1992—I emphasise the word "negative"—and only little improvement in 1993. I should like to draw the noble Earl's attention to the July publication of the leading City forecasters, Goldman Sachs, headed Recovery Fears. I enjoyed hearing the reminder from my noble friend Lord Barnett of the Chancellor of the Exchequer's forecast of 2 per cent. growth this year. That has gone.

The housing market seems unlikely to give any help, whatever is done at the margins with stamp duty. The consumer is not helping either, as the savings ratio remains stubbornly high at around 11 per cent. The consumer is as boxed in as the Government; that is, boxed in by high personal debt and high interest rates. He is also boxed in by a diminishing rate of real wage increases which constrains his spending power.

Perhaps the most worrying aspect of the scenario is the effect that it will have on business investment. The brief period of post-election optimism has been squashed. Moreover, seeing consumer spending not rising, unemployment still rising, and the real cost of borrowing at record levels of 10 per cent. and above, why should the businessman invest? It is much more prudent for him to conserve cash and control costs in such a situation. There is no point in borrowing to expand; indeed, the situation may well produce a further run down of stock inventories. All that is very damaging to our long-term economic interests. When the upturn comes, it means that our capital stock will be inadequate and out of date. To me, that is the most fundamental reason why we must get real interest rates down and our economy moving again.

Another side of the box is the PSBR which certain noble Lords have mentioned and which I see is forecast as being at least £40 billion in 1993 and beyond. Noble Lords will recall that those terrible Labour Governments—at least, that terrible Labour Government in 1976 at the time of the IMF—never achieved anything as impressive as that. The problem with such an astronomical PSBR is that it prevents the Government, or the Government feel that it prevents them, from using extra public expenditure or further tax cuts in the traditional Keynesian way, counter cyclically, to stimulate the economy.

As a diversion on tax and in relation to the fiscal provisions of the Bill, I must say that I support the noble Lord, Lord Boyd-Carpenter, in respect of a tobacco tax. In relation to VAT, I should also like to suggest to the Chancellor of the Exchequer in a quite disinterested way I am ever willing to help the Government—that he might raise several hundred millions and make many people happy by ending the VAT zero rating on newspapers. I support most zero-rating exemptions, but not that one. I believe that such a move would bring widespread support, even from the Royal Family, and would also lower the PSBR.

Another side of the box is the huge trade deficit, unprecedented at this stage of peacetime recession. Such a deficit is an inevitable reflection of the fact that the currency was too high when we entered the ERM. Yet, apparently, we cannot devalue; the Chancellor of the Exchequer has said that it is not on the agenda. Therefore, the trade deficit will inevitably deteriorate further when the economy finally recovers.

So we are boxed into a long recession: we cannot, apparently, devalue out of it; we cannot further public spend our way out of it; and we cannot tax cut our way out of it. All the pain of this economic slump produces one benefit—the reduction of inflation. I genuinely congratulate the Government on that. Inflation is a destructive menace and it is in everyone's interest that it is reduced. But, as my noble friends Lord Desai and Lord Barnett well argued, the pursuit of it to zero soon may be much too inflexible to the point of self-flagellation and vandalism. As my noble friend Lord Peston elegantly pointed out, the price is very high and perhaps too high. It is not clear what are the benefits of urgent zero price inflation if millions of unemployed cannot afford to buy at those prices.

In conclusion, what should be done in this plight that we are in where, I believe, we have the worst of both worlds: we have Anglo-Saxon levels of debt and European levels of real interest rates and low growth? That is a very unhappy formula. Well, what is to be done? Being of Irish descent, I must confess that I should prefer not to start from here. It is the result of the disastrous credit boom that occurred since 1986.

Even the Government's strongest supporters now seem stumped for economic remedies, except for the rash departure from the ERM which is as much a political remedy as an economic one. Everything has failed. I read in The Times on Saturday the conclusion of its editorial, that having dismissed every other economic remedy, the Chancellor must now talk Britain out of its recession". What a sad conclusion to 13 years of economic miracle. The Chancellor needs Saatchi & Saatchi, not economic management. PR has replaced the medium-term economic strategy.

Rather than such despair and rather than leave the ERM, the Chancellor might read the public expenditure suggestions of my noble friend Lord Peston; look urgently at reducing real interest rates, as has been suggested; and cease the masochistic pursuit of rapid zero inflation, subordinating all else to that.

I have addressed the Finance Bill in the context of he British economy which it is supposed to influence and steer through its budgetary stance and its revenue-raising proposals. In that context, I am bound to conclude that it seems to have little relevance to the stagnation of growth, to high unemployment, to the slump in industrial investment, and to the alarming deficits on government and trade accounts. The Government are in the same box as they constructed for themselves with the disastrous credit boom that they began in 1986. They now seem to confess that they have no economic measures or proposals to get out of the box. Even their most uncritical supporters admit that only the last resort remains: to talk their way out of it. I look forward to hearing the Minister talk.

5.52 p.m.

The Earl of Caithness

My Lords, I am grateful to all noble Lords who have taken part in this interesting debate. My noble friend Lord Boyd-Carpenter said t hat he wished for a longer discussion on the economy as a whole and on the important points of the Bill. I draw his attention—not that he will need reminding—to the fact that the previous Finance Bill was discussed only a week after a discussion on the economy, so there are opportunities in the House to discuss the economy. It was during that Finance Bill discussion that the noble Lord, Lord Peston, said that he would concentrate upon the Bill and not talk about the economy at large, but he reverted to form today.

Many of your Lordships have expressed the anxiety that the economic recovery continues to be delayed, and some have doubted whether there is an upturn coming. While recent indicators have been mixed, taken together they point to our being close to a turning point, and few independent forecasters question the Government's belief that recovery will be established this year, as I said at greater length when I opened the debate.

We have a real opportunity not just to achieve lower inflation, but to do so on a lasting basis. The benefits from achieving that, in terms of higher sustainable growth over the medium term, will be felt for many years. It would be foolish to put them at risk. By jeopardising the progress that we have made on inflation, a devaluation of sterling, either within the ERM or outside it, would put the future benefits at great risk. It is for that reason that my right honourable friend the Chancellor of the Exchequer has stated in the clearest possible terms the Government's determination to keep their nerve in the battle against inflation and to remain within the ERM at sterling's existing parity.

When talking about inflation, the noble Lord, Lord Peston, said that zero inflation means unemployment at 2 million plus. Low inflation is the prerequisite for sustainable growth and only sustainable growth ensures job prospects in the medium term; so it is wrong to say that the zero-inflation aim is anti-growth. In the long run it is the only way for growth to flourish.

The noble Lord then said that our aim should not be zero but the EC average. For the first time since 1986 our inflation, measured on a comparable basis, is lower than the EC average, but just beating the average at a time when most of our competitors are seeking to reduce inflation even further should not be good enough for Britain. It might be good enough for the noble Lord and his party, but it is not good enough for the Conservative Party. The noble Lord should remember that two-thirds of our exports go to countries with inflation rates lower than ours. That is the measure of the challenge that faces us. It shows graphically that if Britain is to remain a successful trading nation we need an inflation rate as low as the best in Europe or, indeed, the world, whether that be Germany, France, Japan or anywhere else.

The noble Lord, Lord Barnett, also commenting upon zero inflation, said that it was a silly objective. The noble Lord is willing to accept a slightly higher rate of inflation—not the European average, but something slightly higher than zero. He was supported by the noble Lord, Lord Bruce of Donington. The point about inflation is its tendency to rise out of control. Accepting a little inflation today, may mean facing up to a lot tomorrow. That is a bad scenario. A great deal of effort is spent on getting the timing right. Interim measures represent a constant fiddling with the economy. They often prove to be crude and clumsy in practice. Therefore I wholeheartedly support the objective of my right honourable friend the Prime Minister: the only sure way of conquering inflation once and for all, is to aim for a zero rate.

The noble Lords, Lord Barnett, Lord Desai and Lord Donoughue, suggested that interest rates could be cut. The noble Lord, Lord Donoughue, referred to the credit boom of 1986– 87. When we cut interest rates in 1987, I seem to recall the Opposition saying that we had not cut them enough. If we had followed the noble Lord's voice then, we would have had not a disastrous credit boom—in his words—we would have had a very disastrous credit boom; so I have to take what he says with a pinch of salt. But now we are in the ERM. If any country within the ERM is to have lower interest rates than Germany, the markets must expect its currency to appreciate against the deutschmark, as I said at Question Time.

The deutschmark has never been devalued in the whole history of the ERM, so it is scarcely surprising that at present foreign exchange markets are not prepared to hold ERM currencies yielding substanti-ally less than the deutschmark. We need look no further than France for clear and practical proof of that. It has been all of five years since the franc was devalued against the deutschmark. French inflation is below that of Germany; and last November when the French cut interest rates to a level just below those of Germany they were forced quickly to reverse that cut. Nevertheless, some noble Lords have suggested that Britain should have a bit more flexibility, and that allowing the pound to fall to the bottom of its wider band would create scope for a subsequent apprecia-tion and hence our interest rates could be much lower than Germany's. That is theoretically ingenious, but wholly unrealistic. If that were true, the weakest currencies in the ERM would have the lowest interest rates. But foreign exchange markets do not expect a weak and falling currency with low interest rates to bounce back up again. They expect it to carry on falling, and they sell it, forcing up interest rates.

The noble Lord, Lord Bruce of Donington, wanted a depreciation of the currency. He said that the rate at which we entered the ERM was too high. If depreciating the currency solved anything, Britain would already have one of the most successful economies of the world. In 1966, the pound was worth more than II deutschmark, but the devaluations of the past yielded, not booming exports, but a steadily falling share of world markets. The noble Lord did not say at what rate he would have entered the ERM or what he would have done had the rate at which we entered been under pressure. It would doubtless have led to another devaluation.

The noble Lord, to whom I have listened with great attention for many years, as he knows, made one other point. He said that British industry was unable to compete. That is not so. Exports were at a record level in May and the UK share of world trade in manufactures was estimated to have risen over the past three years. He will recall what I said at Question Time about our trade with the European Community.

The noble Lord, Lord Peston, said that it was the most vulnerable in society who were least likely to gain from the defeat of inflation. I beg seriously to differ with him on that point. Those on fixed incomes, for example, are among those most penalised by inflation. I remember that in the 1970s my mother was on a pension and she, together with many other elderly people, was hurt by the high inflation of those days. The noble Lord, Lord Donoughue, summarised the point better when he said that inflation was a detriment to all.

The noble Lord, Lord Peston, chided me about Treasury forecasts. I confirm the line that he expected me to take by saying that he will have to wait for the Autumn Statement in the normal way. The noble Baroness, Lady Seear, the noble Lord, Lord Donoughue, and my noble friend Lord Boyd-Carpenter welcomed the fact that we shall have a unified Budget. I say to the noble Baroness, as did my noble friend Lord Boyd-Carpenter, that the first unified Budget will be in December 1993. I agree with her—and this is something I said when I was in the Treasury—that it seems odd to split the two. It is a good thing that my right honourable friend the Chancellor of the Exchequer has put the two great debates together.

The noble Baroness also referred to investment in this country. She will be pleased to know that business investment increased 3.5 per cent. in the first quarter of this year. Fixed investment and investment in plant and machinery also increased. I wish to spend a moment on another type of investment which the noble Baroness did not mention and which produces enormous benefits for Britain. That is inward investment. We welcome it because it strengthens competition and innovation in the United Kingdom. We are reaping the benefits of it. In 1991, the United Kingdom still attracted one-third of all inward investment in the Community. The next most successful country was France, with only 17 per cent.

As a result of that inward investment, we are now a net exporter of television sets and the trade balance in cars is set to improve during the 1990s, as the massive investments by Nissan, Honda, Toyota and others come on stream. Although some of those investments were criticised at the time, they have done an enormous amount for British industry: they are welcomed and will have a great effect on our balance of payments.

I was interested in what the noble Baroness said about training for 16 to 18 year-olds, two for each job. I shall note the point and put it to my right honourable friend the Chancellor. I am sure that managers and industrialists would also wish to take her advice. The noble Baroness raised the subject of childcare. The wider tax relief will only help with childcare because it will give working wives who are able to pay for the care the extra benefit. The Budget tax cuts reduce the burden for all taxpayers.

Baroness Seear

My Lords, that will not help single parents.

The Earl of Caithness

My Lords, the Budget tax cuts will help single parents but I take the other points mentioned by the noble Baroness. I was interested in what my noble friend Lord Boyd-Carpenter had to say about VAT and car tax. I hoped that he would welcome the fact that car tax had been halved to 5 per cent. I remember discussing the subject with him at the Dispatch Box, when he chastised us for having a car tax at all. The fact that it has been halved to 5 per cent. is something which I am sure my noble friend welcomes.

Lord Boyd-Carpenter

My Lords, it is good that the Government have gone half way to remedy an absurd situation of taxing something at a price inflated by another tax. I hope that the Government will soon tear up the other half.

The Earl of Caithness

My Lords, we are half way there and I am sure that my right honourable friend the Chancellor of the Exchequer will continue to listen to my noble friend on these matters. The noble Lord, Lord Barnett, quoted from the Budget speech when he said that most forecasters expect growth to resume this year. He said that he had seen no signs of it. It might be true that most independent forecasters have adjusted their projections, but the vast majority still believe that growth will re-establish itself this year, as do the Government.

The noble Lord went on to say that I was smiling when he asked me whether, if we were going to reduce borrowing, we would put taxes up. Of course I was smiling. It was a gem of a question from a former Chief Secretary, the kind which one believes will never be asked. He knows very well that I cannot answer it today, and, as usual, he will have to wait. If he had been at the Dispatch Box, he would have suggested that we would have to wait and he would make appropriate remarks as and when it was suitable to do SO.

The subject of the zero rate of VAT was also raised by the noble Lords, Lord Barnett and Lord Desai. The Government will not agree to any directive in Brussels that removes our right to continue levying current zero rates. We have an absolute veto on this. The Government have no current plans to change the present rate or scope of VAT.

I now turn to what the noble Lord, Lord Rix, said. I listened with great care to him. He suggested that Clause 12 of the Bill was inappropriate. The vast majority of disabled people benefiting from the exemption—400,000—are in no way affected by the clause. These people have transferred from the old mobility allowance to the higher rate mobility component of the new disability living allowance, which carries automatic entitlement to the exemption. Because of this change, we are bringing an additional 10,000 people into the scheme who did not benefit from it previously. I am sure that the noble Lord welcomes that.

Nor do the Government seek to alter the position of those who use invalid carriages. Their vehicles will continue to be exempt from vehicle excise duty. However, those sections of the Finance Acts and Vehicles (Excise) Act which we propose to repeal concern the disabled passengers scheme. That does not mean those who own or operate buses or coaches for the benefit of the disabled. Like invalid carriages, those vehicles will remain exempt. Rather, the disabled passenger scheme covers those disabled people who have their own car but who, because of their disability, are unable to drive it. Current beneficiaries under the scheme will not lose out as a result of the repeal. The Government propose the repeal of the relevant sections of the Finance and Vehicles (Excise) Act 1971 because the new machinery for disability benefits makes them administratively unworkable. The old scheme depends on establishing, among other things, the extent to which a person's walking ability is affected. We cannot rely on self-assessment claim forms used for attendance allowance and the care component of disability living allowance to provide the level of information required to make a fair decision on this. The Government's present assessment is that to introduce new procedures for continuing the relief would be difficult, expensive and intrusive. I am sure that the noble Lord will agree that that would not be welcomed.

As my right honourable friend the Paymaster General said at Report stage in another place, we shall take careful note of the views of MENCAP and other bodies representing disabled people.

My noble friend Lord Mountgarret referred to Clause 73 and Schedule 14 when talking about inheritance tax. The clause and schedule make changes to the rate of relief from inheritance tax for certain business assets and farmlands. The higher rate of relief is increased from 50 per cent. to 100 per cent. The lower rate of relief is increased from 30 per cent. to 50 per cent. There is a difference between the rate of an owner-occupier and that of a landlord of a tenanted farm. The reason for the difference reflects the greater risks involved. I add for my noble friend that the changes apply to deaths and other transfers occurring and charges arising on or after 10th March 1992.

Talking of inheritance tax reminds me that the noble Lord, Lord Desai, also raised the matter. He said that public funds had been used to purchase public access to the countryside, but that the public had not been allowed to know where the access land is. I put it to him that that is incorrect. The Inland Revenue insists that, as part of the undertakings entered into by the owner, the owners give publicity to access arrangements. The owner need not publicise the fact that access results from conditional exemption unless he wishes to. The legislation requires that reasonable public access should be secured as a result of the conditional exemption. If, in the view of the Countryside Commission, existing rights of way or other paths already provide a reasonable level of public access, it would be unreasonable to seek a further degree of access beyond that.

I was slightly saddened by the noble Lord, Lord Houghton of Sowerby. I sat back to enjoy more than four minutes of what the noble Lord said. After 43 years in politics, and with a long career before that, he is listened to with great respect and interest in this House. I fully sympathise with him about the views of the Civil Service. It does an excellent job. It has served past governments and this Government extremely well. Our intention is to provide it with stimulating jobs and the best opportunities possible.

The Finance Bill, which was the subject of our discussion today before we went to the wider economy, is a link between the last Government—we discussed the Finance Bill just before we rose—and the beginning of this Government. The work of the Finance Bill continues the good work of the past 13 years and continues to offer greater opportunities for British businesses in the 1990s. I commend it to the House.

On Question, Bill read a second time; Committee negatived.

Then, Standing Order No.44 having been dispensed with (pursuant to Resolution of 13th July), Bill read a third time, and passed.