HL Deb 16 March 1992 vol 536 cc1569-605

11.26 a.m.

Lord Brabazon of Tara

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

The Bill contains those Budget measures which the Government consider it essential to pass into law before Parliament dissolves. They put the Budget changes implemented on Budget Day beyond legal doubt and they renew income tax, as must be done each year, and enable the Inland Revenue to implement the other Budget changes to income tax in the simplest way.

In more detail, Clauses 1, 2, 3, 4, 7 and 8 confirm changes to excise duties, car tax and VAT which were implemented on Budget Day. Clause 1 confirms the rise of 4½ per cent. in duties on alcohol, in line with inflation. Clause 2 confirms the increases in duties on tobacco—about 10 per cent. on cigarettes, indexation of pipe tobacco and 10 per cent. for other tobacco products.

Clause 3 covers duties on petrol, diesel and other oils. It confirms the indexation of duty on diesel and unleaded petrol, and the rise in duty on leaded petrol by 7½ per cent. Clause 4 confirms the increases of £10 to £110 in vehicle excise duty on cars. It also reduces the duty on small tricycles from £50 to £15—a small but welcome change to the mainly disabled users of such tricycles.

Clause 7 cuts from 20 per cent. to 15 per cent. the rate of VAT serious misdeclaration penalty charged on traders' mistakes. It also reduces from 30 per cent. to 20 per cent. the maximum rate for default surcharge, charged on traders who make late payments or returns. That measure has effect from 1st April, because default surcharge is linked to monthly accounting periods.

Clause 8 reduces car tax from 10 per cent. to 5 per cent. of the wholesale price of a new car.

Those changes had provisional statutory effect on Budget Day. Under the Provisional Collection of Taxes Act that means that they must be confirmed by a Finance Bill before Parliament is dissolved. If they are not then Customs and Excise would be obliged to repay any extra tax which it had collected.

Clause 5 also concerns an excise duty—betting duty. The reduction from 8 per cent. to 7¾ per cent. will have effect from 1st April, just in time for the Grand National on 4th April. It will also coincide with the new levy year. My right honourable friend the Home Secretary has announced that most of the benefit from the reduction in betting duty will go to horseracing through the statutory levy. To ensure betting duty is cut on 1st April the necessary provision must also be included in the Bill.

Clause 6 deals with monthly payments on account for the largest VAT traders. There is no provision for payments on account at present. The existing power to ask traders to make monthly returns has been called into question in a judicial review. We believe it best to put the legal position beyond doubt as soon as possible. That will give businesses which are affected the certainty that they need. It will also give them the time that they need to plan for the change to monthly payments, which is due to be introduced in the autumn.

The two remaining substantive clauses in the Bill deal with income tax. Income tax must be renewed by 5th May each year. If that is not done, no income tax can be collected. There would not be time to be sure of renewing income tax after the election. So Clause 10 reimposes income tax for 1992–93.

At the same time, the Government believe it right to implement the important changes to income tax announced by my right honourable friend in his Budget.

Apart from anything else, to have implemented some changes —such as indexation of the allowances —but not others, would have required the Inland Revenue to go through two recoding exercises. That would have been an expensive burden for the revenue and for employers. It would have been confusing for taxpayers.

Clause 9 therefore provides for the introduction of a lower rate of income tax chargeable on the first £2,000 of taxable income.

Clause 10, as well as renewing the tax, sets the lower rate at 20 per cent. and overrides indexation for the basic rate limit and the married couple's allowance for those under 65. The other allowances—the personal and age-related allowances—are indexed under the statutory provisions.

Clause 10 also sets at £30,000 the limit on mortgage interest relief, which must be set each year.

This must be a record year for short Finance Bills. We have already approved one three-clause Finance Bill this year to raise the threshold for stamp duty on property. Now I commend another short Finance Bill to the House.

Moved, That the Bill be now read a second time. —(Lord Brabazon of Tara.)

11.34 a.m.

Lord Peston

My Lords, I thank the Minister for having introduced the Finance Bill in such a succinct fashion. All things being equal, I hope I can be at least as brief. This House normally has an economics debate on the basis of the Finance Bill. Some noble Lords may be aware that it is not my desire to have a major economics debate today, simply because it is hardly a fortnight since I last spoke in this Chamber on the economy. Therefore I hope your Lordships will bear with me when I tell them—especially those noble Lords opposite who always look forward to my speeches on the economy—that I do not intend to make such a speech today. I said all that I had to say a week ago. I do not wish to bore the House with a repetition of it.

I freely admit that I am also in some difficulty because my right honourable friend the Shadow Chancellor will be making a statement on the budgetary position as we on our side see it in terms of what we should like to do. It is quite impossible for me to jump the gun and tell noble Lords what is in that statement. I am therefore doubly constrained this morning.

I start by telling the Government that I wholeheartedly approve of several matters that they included in the Finance Bill. I shall take them in no particular order. First, the Government are to be congratulated on overindexing the duty on cigarettes and tobacco. The Government have not been backward in raising the real price of tobacco products. I hope to see that continue. I am certain that the next Government, of which some noble Lords on this side hope to be Members, will follow this Government's lead on that matter.

Secondly, I approve of the concession concerning horseracing. My noble friend Lord Donoughue will speak further on this subject. It is a matter which is dear to the hearts of a number of noble Lords. The Government are to be congratulated on that measure.

Thirdly, the White Paper on budgetary reform is a document of great interest. Many noble Lords have argued for some years that it makes very good sense for the Government's expenditure plans to be published at the same time as they are obliged to say how they propose to pay for that expenditure: and, to the extent that they do not propose to pay for it immediately, in what form they intend to borrow. I strongly believe that that is a move in the right direction. It is not a party matter and many of us have argued for it for many years. Indeed, I noticed over the weekend in the newspaper that Mr. Enoch Powell claimed to be the originator of the idea, which dates back to the 1950s. That does not prevent me from agreeing with it.

The help to small firms is also attractive. However, I am bound to say that it seems to me to have taken place rather later than small firms would have desired. Equally, although there are complications with the technicalities of the concession on cars, clearly it was right to do something about the motor industry. We shall not oppose the Government on that point, but there are complications which disturb me.

Those are my remarks in support of the Government. I have not written down any others. However, no doubt noble Lords would be disappointed if I did not at least make one or two critical remarks also.

I wish I were wrong but certainly the Treasury forecast in the Red Book—Financial Statement and Budget Report—seems to me to be completely unbelievable. The suggestion that the gross domestic product in the first half of 1993 will grow at a rate of 3 per cent. per annum above the equivalent earlier period does not seem believable. It implies that the economy is already recovering at the moment. Clearly it is not. It implies a rate of recovery in the second half of the year which I know that no serious economist remotely believes. I must point out to noble Lords that that is simply not a possible view of the matter.

I do not want to say anything that would imperil the currency and other such matters at this critical time. But as we all know, the public sector borrowing requirement as outlined rather appalled serious opinion in the City. As I pointed out a few days ago, in my judgment that is, if anything, a lower limit to the likely outturn. Certainly, if my view of the economy is correct, the PSBR outturn will be rather worse than the Government say and therefore the borrowing problem will be worse. That means that, if this Government are returned, they will have to question whether their overall macro-strategy can work. As I pointed out, it means that the successor government will undoubtedly have to bring financial matters back under control before they can do much else.

I turn to two other matters, slightly but not excessively to provoke noble Lords opposite. I am told that on political grounds the Government chose to introduce a standard Labour Party policy: namely, the lower rate tax band. They did so, although a number of leading figures on their side, not least the former Chancellor of the Exchequer, Sir Geoffrey Howe, argued that nothing could be more ludicrous. I do not criticise them for listening to the Labour Party on this or any other matters. After all, it is part of our educative role on economic matters. But it seems to me that in terms of the possibilities, given the money that was being spent, there were better options available to the Chancellor. Adopting, curiously, what the leaders of noble Lords opposite have argued in the past, my view is that overindexing tax allowances (if one is to work in that field at all), apart from having the obvious advantage of taking many more people out of the tax bands, would be the correct thing to do.

Lastly, let me raise a matter about which everyone seems to remain a little quiet; that is, the technical question of whether it makes any sense whatever for the employees' national insurance contribution to end arbitrarily at a particular income level of approximately £20,000 per annum. My right honourable friends take the view that that is an anomaly. So far as I know, every serious student of the subject regards the cut-off as arbitrary. I look towards the officials in the Box, and I am perfectly aware that no one in the Treasury believes that it is other than an arbitrary cut-off point.

Lord Boyd-Carpenter

My Lords, the noble Lord knows perfectly well that he is not allowed to refer to officials in the Box.

Lord Peston

My Lords, the noble Lord is entirely right. I apologise both to him and the officials in the Box. I am glad that he pointed it out to me. I might well have carried on along those lines whereas my main interest is in the substantive matter. I shall take the House back to that point, and to where the noble Lord wished to guide me.

I simply make the point that all serious students of the subject are aware that the cut-off point is anomalous. Quite independent therefore of what the rate of national insurance contribution ought to be, the fact is that an important reform (which any government will have to face in due course) is precisely the one that my right honourable friends have placed before the country: namely, that we have to end that anomaly. I mention the point simply to forestall any noble Lord who was thinking of intervening to ask why I had not referred to it.

I have tried to be brief and relatively noncontroversial. As we wish to keep matters within the confines of the Finance Bill, I do not believe that we should involve ourselves too much in party politics.

I conclude by asking the Minister when he replies to confirm one statement which I heard on the wireless: that the inheritance tax matter was not included in the Finance Bill simply because the Treasury and the Chancellor forgot. I hope that the Minister will assure us that it was not simply an oversight that the Treasury forgot to include the subject, but that there is some technical reason which is beyond me. I ask that question in the spirit of friendliness which he knows I always have towards him. It would be amusing to know whether the reason is simply that pieces of paper fell on the floor, the provisions of which did not get included in the Finance Bill. Having said that, I look forward to hearing other contributions on the subject.

11.41 a.m.

Lord Boyd-Carpenter

My Lords, the noble Lord, Lord Peston, was in a very agreeable mood even though he indicated a lack of enthusiasm for debating the Finance Bill. That in itself is rather unlike him because he normally revels in any opportunity that he thinks he can find for an attack on the financial and economic policies of the Government.

Before I pass to the substance of the matter, I believe the reason that the changes in the inheritance tax are not included in the Bill is that inheritance tax is not covered by the Provisional Collection of Taxes Act and therefore would not be required to be included in the Finance Bill. No doubt the Minister will confirm or vary that observation, which I offer somewhat tentatively because I have not had an opportunity to confirm it as the noble Lord spoke only two minutes ago.

I am sure that your Lordships' House should debate the Finance Bill even in the somewhat inconvenient circumstances of today and even although we shall have to take all stages during the day. This time it is not only the Finance Bill. It has the Speaker's certificate that it is a money Bill. Therefore there is no question of our having any power to amend it. However, that does not mean that the very considerable financial expertise which exists in this House should not he brought to bear either by way of criticism of or support for this enormously important measure. The Finance Bill, even in its truncated form, is of very great importance. Without causing offence down the corridor, I believe that I can say that your Lordships' House has Members who speak with at least the same authority on financial matters as those in another place.

Having said that, I should like to comment generally on the Bill. I believe that the proposals contained in it are well designed for the difficult situation with which any government would be faced at present. They exhibit a nice balance between the desirability of stimulating the economy by the remission of taxation and yet not forfeiting the great gains which we have made in recent months in combating inflation. My right honourable friend the Chancellor of the Exchequer has got that balance about right. I am particularly glad to be able to say that of him, as he is my successor as Member for Kingston-upon-Thames. I naturally therefore have, as have those of your Lordships who served in another place, rather a bias in his favour. Having disclosed that bias, I suggest to your Lordships that on the whole he has got the balance about right.

Certainly the noble Lord, Lord Peston, did not indulge in the violent nonsense which others of his friends have indulged in outside. One spokesman of the Labour Party announced that the Government have caused the longest recession since the war. It is really difficult to assess the intellectual quality of someone who can say something like that. Does it mean that this British Government have caused a recession in Germany, France, Italy and the United States? Such a statement completely ignores the fact that the British economy has to be operated at a time of world recession when other countries, over whose affairs we have no control whatever, are going into recession. To announce therefore that the recession, as it affects this country, has been so caused (that was the word used) suggests that whoever said it is totally unfitted to be put in charge of our finances in this country at any time: and I profoundly hope that he will not be.

The noble Lord, Lord Peston, referred favourably, as I wish to do, to the reduction in the duty on cars. But I am sorry that the Chancellor did not go a little further in respect of cars. Although he has reduced the car tax from 10 per cent. to 5 per cent., he still left what seems to be in principle the very serious anomaly that VAT is levied not only on the price of a car but on the price of the car plus the tax on it. To levy a tax upon a tax must in principle be oppressive and seems to me quite wrong. I would have hoped that if it were impossible, because of European complications—my noble friend Lord Cockfield will no doubt say that that is so—to take VAT off cars, the only alternative should have been to take the car tax off altogether and leave VAT operating on cars as it operates on other articles of use.

I did not see in the Budget speech any reference to the subject which your Lordships discussed at a little length recently, the importation, duty free, of Chinese bicycles. When one of my noble friends answered Questions recently, we were given some reason to hope that the British bicycle industry might be given a little support by means of some compensating duty on imported Chinese bicycles. However, nothing appears to have been done. There is some rather mysterious power which I understand can be invoked without legislation to impose the duty if it is felt that those duty-free importations are going too far and are damaging the British bicycle industry.

Of course I agree with the noble Lord, Lord Peston, about the increase in the tobacco duty. That is absolutely right. My only regret is that it is not larger. If citizens of this country like to add cumulatively to the cost of the National Health Service by smoking, they should be made to pay for it by duties upon that tobacco. I can reminisce a little on rates of tobacco duty. On three occasions during my two terms of office in the Treasury, we substantially increased tobacco duty. On all three occasions, Customs and Excise warned us that we were pushing it too far and that we should lose revenue. The department was concerned not to discourage smoking at that time but about the loss of revenue. It said that if we made the proposed increases we should lose revenue. On all three occasions the same thing happened. For a fortnight Customs and Excise was right. For a fortnight receipts of duty on cigarettes and tobacco went down. But in the third week receipts began to mount again. It was not the officials of Customs and Excise but (I hope that I may say) the worldly wise Treasury Ministers of the day who were right and we received an increased revenue as a result. I hope that after this lapse of years my friends in Customs and Excise will forgive that revelation.

The most important change is that in respect of income tax. The relief of reducing to 20 per cent. the tax on the first £2,000 of income within the the tax level will be of considerable benefit to many people. I have been informed that some 4 million people will be removed from the 25 per cent. income tax band. Everyone, whatever their income, will gain a modest —not enormous—appreciable relief from taxation. That is an ingenious way of concentrating relief on the smaller incomes while not wholly excluding the higher incomes.

In the context of higher incomes I wish to take up a point made by the noble Lord, Lord Peston. He referred to the national insurance contribution and its cut-off point. When I was responsible for national insurance the contribution that one paid was related more or less directly to the benefit that one received. Now people receiving high earnings are paying contributions which, in insurance terms, are far beyond the benefit that they are receiving. To say in that situation that one should remove any limit seems to be an expedient for obtaining more taxation from people on high incomes. I believe that about 9 per cent. is added to the rate of tax paid by people earning high incomes.

It is in respect of that matter that we quarrel with noble Lords opposite. I do not believe that relatively high taxation is at all helpful to the economy. I believe that it discourages enterprise. It encourages the enterprise of working abroad or retiring abroad, even perhaps to the Channel Islands. I doubt whether it makes a great financial contribution at the top levels to national finances. I am certain that it has a dampening effect upon development in this country.

The Leader of the Opposition in another place said that the Labour Party favoured an increase in investment. I was delighted to hear that. But can one imagine a worse way of trying to encourage investment than by increasing income tax? It is by lowering the rate of tax that one opens up people's desire to earn more, to work harder, to be more enterprising and to do all the things that we wish to see in the present state of the economy. Therefore, I differ strongly from the noble Lord, Lord Peston, as regards national insurance contributions.

We do not have time to debate fully this great issue. I regard the Budget as being part of a consistent, sensible economic policy designed to pull this country out of the current recession and bring it back into prosperity as quickly as possible. In that context I take almost as my text a few words spoken by my right honourable friend the Chancellor of the Exchequer at the conclusion of his Budget speech. He said: Over the past decade our belief in low taxation has brought unparalleled growth in the living standards of the British people. My Budget today continues that process, and I commend it to the House".—[Official Report, Commons, 10/3/92: col. 761.] My Lords, so do I.

11.55 a.m.

Lord Desai

My Lords, I wish to start by making one partisan point. I shall then move on to speak in a tone of moderation, as did my noble friend Lord Peston. The noble Lord, Lord Boyd-Carpenter, said that it was wrong to say that the Government had caused the recession. Perhaps that is right. If the Government had said that the miracle of productivity and growth during the 1980s was due to the growth in other countries I should accept the noble Lord's argument. Why is it that when the circumstances are good governments want to claim all the credit for themselves but that when circumstances are bad someone else is responsible? That is not fair. The recession first started in this country. I do not deny that it may have deepened as a result of recession elsewhere, but it cannot be said that it was caused by the world recession.

Whichever party wins the election it must be made clear that our public finances are in serious trouble. There must be no mistake about that. It is not from a partisan point of view that I say that a gross PSBR, not discounting for the proceeds from privatisations, of almost 6 per cent. in 1992–93 and continuing at that level in 1993–94 is a serious issue. It may be said that we are in the ERM, that we are in the global financial markets and that the UK will be able to finance that borrowing requirement. Of course we shall be able to do so, but at what rate of interest? According to some calculations the real rate of interest is almost 5 per cent. to 5.5 per cent. Perhaps that is not solely the Government's fault but is due to a combination of reasons. The state of our public finances is such that perhaps in an unanticipated fashion we are landed with a PSBR of almost £34 billion—I do not include privatisation—even before any stimulus is given to the economy. That is a serious issue and we should concentrate on it. Whichever party is in power after 9th April must rethink all the previous promises and Budgets because the problem of raising resources will he serious.

In that respect I must comment on the fact that all the predictions are based on the Treasury model. The Red Book points out that the average error of the forecasts is as large as the mean forecast. For a large part of my life I have been a practising econometrician and model builder. I know that model building is a difficult art in which people have tried to progress. I believe that in the near future we must examine the entire basis of the Treasury's macro-economic forecasting. The Treasury model influences the models used by all the City brokers. Whether the Treasury model is right or wrong City brokers must follow it because they believe that the Government will do so. Therefore, we are surrounded by compounding errors of forecast, and action based on those forecasts, which may be derived one way or another.

We have learnt that opinion polls allow for three percentage point errors either way. They constantly add that little health warning. Perhaps the time has come for the Red Book to state, "The growth rate could be 0.75 per cent. as it is now: it could be zero, or it could be 1.5 per cent.". Let us hope that the error in forecast is of underestimating the growth rate for 1992. I agree with my noble friend Lord Peston that the growth rate projections for the next year are unbelievably high. Therefore, if there is an unbelievably high projection of growth rate of 3 per cent. and we are expecting the PSBR to be 6 per cent. of national income, we are in really serious trouble.

Lastly, as regards the tax proposals in the Finance Bill, much has been made of the fact that there is a new band of income tax. As noble Lords will know, it is not a new band. That band was abolished in 1979 and has been reintroduced in 1992. If we wanted to help the lower paid it has been known for a long time that it is better to raise the threshold above the rate of inflation—perhaps double the rate of inflation—and that would help the lower paid people more than a change in the band. As the noble Lord, Lord Boyd-Carpenter, quite rightly pointed out, the advantage of the 20p band is that it helps not only the lower paid but everyone.

In looking at the Red Book, I estimate that raising the threshold at double the rate of inflation would cost £700 million extra. The introduction of the 20p band has cost £1.7 billion. That means that that change is costing £1 billion extra, which I believe is not totally unconnected with the coming election. I make that point as moderately as possible. Given the precarious state of the PSBR, which was known before we started, if realistic measures had to be adopted—and raising the threshold would also have been electorally popular—we could have saved £ 1 billion. I believe that a billion here and a billion there matter at this stage of the proceedings. I should prefer the threshold to be raised at double the rate of inflation rather than to have the introduction of the 20p band.

The time to introduce the 20p hand will come. I do not deny that we should all like to pay less income tax. I do not quite understand why we are all so keen to pay less income tax and yet we do not seem to worry about increases in VAT and so on. However, be that as it may, I believe that the time for a 20p hand will come but such fundamental tax changes should be justified by sound public finance rather than by deliberate risk taking.

Whichever party wins power, there will be extremely harsh times ahead. We should bear that in mind when we are discussing the Finance Bill.

12.2 p.m.

Lord Cockfield

My Lords, one always listens with great interest to the noble Lords, Lord Peston and Lord Desai. They are both distinguished economists and their views are well worth attention, whether or not one agrees with them. However, I do not propose to follow either of them in the line that they have taken in this debate.

I do not propose to comment on the specific proposals included in the Finance Bill nor indeed do I propose to comment on the particular Budget which underlies it. Of course, this is a truncated Finance Bill, as is customary when a general election prevents the presentation and full consideration of a normal full length Finance Bill. It will be followed in due course by a much more detailed Finance Bill after the election.

It is becoming increasingly obvious, not just because of the arguments advanced in the general election' campaign but for other reasons to which I shall refer, that fiscal policy is moving back centre stage—a position that it occupied many years ago.

There are many reasons for that, not merely developments in this country and the EC but worldwide, both in monetary terms and as regards international and global financial markets. The effect of those developments is that individual countries have less and less control over monetary policy. Increasingly, they are reactive rather than proactive to events.

As we understand it, monetary policy is a comparatively recent invention. It is a theme which I have developed in your Lordships' House on many an occasion. That is why I say that we are now moving back into a position where, before the emergence of monetary policy, it was fiscal policy which occupied centre stage.

We are increasingly moving into an era of uncertainty and danger. Five years ago there was a position of stable equilibrium in the world. It was not an entirely acceptable or agreeable situation but it was a situation of relative stability. The fall of the Berlin wall and the events which followed it led to an outbreak of euphoria. That euphoria has now faded. Increasingly, we are having to come to terms with the fact that we shall be living in the next decade and in the next century in a different world from the world in which we were living before October 1989. That must be true in the economic field as well as in the broader political field.

The economic theories and the policies based upon them, which stood us in good stead, or at times in not such good stead, over the past 50 years—I deliberately quote the past 50 years not simply because that incorporates the heyday of Lord Keynes but also because it covers a period during which both political parties were in office and, therefore, I am not making a party political point at all—are now obviously reaching the end of the road.

In the years ahead, we must not simply repeat the outworn wisdom of the past. I do not regard the wisdom of the past as necessarily unworthy or as something which does not constantly need to be borne in mind, but there is nothing worse or more misleading than people coming forward with discarded, discredited policies of an earlier era, simply because they were not there at the time to see those policies fail.

We shall need a great deal of new thought in the years which lie ahead. That is an area in which your Lordships can play a singularly important part. I agree entirely with my noble friend Lord Boyd-Carpenter that this House has a great reserve, or reservoir, of financial experience. But its experience goes very much wider than that. I have been greatly perturbed in recent weeks to hear the constant repetition of the phrase that your Lordships' House is a revising Chamber. That may be true, but it is a small part of the total truth. Your Lordships' House is the repository of the nation's wisdom. In effect, it is the nation's think tank and it has the enormous advantage that it has a much wider spread of expertise than any other known think tank in this country or elsewhere.

Therefore, I sincerely hope that when we come to debate the next Finance Bill your Lordships will have an adequate opportunity to debate not only the Bill but also the policies which underlie it and the policies which should underlie it. I hope also in that connection that your Lordships' entrenched rights under the Provisional Collection of Taxes Act 1913 as amended, a matter to which I drew the attention of your Lordships' House on 16th July last year at col. 107 of Hansard, will be fully respected.

12.10 p.m.

Lord Stoddart of Swindon

My Lords, I am glad that we are taking part in this debate this morning. It is perfectly correct for the noble Lord, Lord Cockfield, to point out that for many years—I do not know how many—we seem to have lost our entrenched rights, or at least failed to grasp them. I am therefore particularly glad that we are holding the debate today. At the time of a general election one becomes conscious of the fact that we taxpayers, who are also Members of the House of Lords, are not represented in Parliament. We are not allowed to vote for a representative who can vote on the Finance Bill. Therefore we may as well exercise what right we do have—our voice. That is what I propose to do now, as did those noble Lords who spoke before me and as will those who will speak after.

I want to comment on one or two of the tax changes, but first I shall comment on the general economic position. The Government seem to be attempting to do two things. First, they seek to blame everybody but themselves for the recession. We heard from the noble Lord, Lord Boyd-Carpenter, this morning, supporting his Government, that it is all the fault of a world recession. However, as my noble friend Lord Desai pointed out, the United Kingdom was in recession well before any other country in the world. Indeed, it could be said that it was this country that led the world into recession.

Secondly, I want to attempt to show that the proposition that the Tories cut taxes and Labour increases them is not sound. There is no question but that the British recession was caused almost entirely by government mismanagement of the economy over several years. As the Select Committee on overseas trade pointed out, the Government failed to ensure that manufacturing industry did not suffer and decline as a result of the inflow of North Sea revenues. Further, there was a failure to recognise early enough that the 1987 stock market collapse did not herald an immediate slump. Interest rates were held at unsustainably low levels which harmed the economy and, indeed, set off the wild credit boom of 1988 to 1990. That credit boom was exaggerated by the then Chancellor, Mr. Lawson, ineptly handling the withdrawal of double mortgage tax relief. He encouraged a huge housing boom which inflamed the economy even further.

Having stimulated the economy to an unsustainable level, the Government realised that inflation was accelerating out of control. Consequently they slammed on the footbrake by jacking up interest rates to 15 per cent. and holding them there for a long period of time. However, just as that harsh medicine was beginning to work, the Government panicked again and not only pulled on the handbrake but also put the economy into reverse gear by joining the ERM. Incidentally, they joined it at a rate which was far too high and helpful not to British businesses and workers but to our foreign competitors. We are now on the road to an unemployment figure of well over 3 million. It is clear that the claim that the Conservatives are best able to manage the economy is unsustainable and that the reverse is true.

Let us consider the claim that the Conservative Party is the party of low taxation and that the Labour Party is the party of high taxation. Before the debate I looked at page 16 of the Financial Statement and Budget Report. Table 2A indicates that in 1979–80—the last year when a Labour Government had anything to do with the economy—the percentage of non-North Sea taxes, social security contributions and community charge as a percentage of non-North Sea money GDP, was 35½ per cent. I looked at the figures for 1987–88 and found that under the Tories that percentage had increased to 38¼ per cent. Even this year it will be higher at 35¾ per cent. But in 1996–97 it is estimated to be as high as 38 per cent. That gives us 38 per cent. GDP under the Tories as against 35½ per cent, under Labour. In my view that completely demolishes the claim that the Conservative Party is the party of low taxation and Labour the party of high taxation.

I turn to the taxation proposals themselves. Great play has been made of the new 20 per cent. rate for the first £2,000 of taxable income. I am not against lower tax bands. Indeed, I believe that the lower tax band should be 15 per cent. and that people should proceed to the standard rate at a much lower gradient than at present. But such reform should be brought about by a proper examination of personal taxation, not as the result of a cheap party political gimmick. It is much too important for that. As my noble friend Lord Peston said, the correct course of action this year was clearly to increase personal tax allowances by more than indexation.

I wonder also what the Government are thinking of by not indexing the married man's allowance. We hear so much from the Tory Party about the family and the need to keep it together and yet the Government have not indexed the married man's allowance. That is not the way to help to keep the family together. Married couples have lost a fair amount because the Government did not index the married man's allowance last year. Last year it was £1,720. If it had been dynamised—indexed—it would have risen by £172–10 per cent. It was not dynamised this year so a further £76 has been lost. Had the married allowance been properly indexed it would be £1,968 in this Finance Bill, but it is not. It is £1,720. That means in the two years from 1990–91 to 1992–93 in cash terms a married couple will have lost £119.

Lord Boyd-Carpenter

My Lords, will the noble Lord allow me to intervene?

Lord Stoddart of Swindon

My Lords, yes, if the noble Lord must.

Lord Boyd-Carpenter

My Lords, the noble Lord is failing to take into account that which alters the whole situation: that is, the separate assessment of husband and wife.

Lord Stoddart of Swindon

My Lords, I have taken all that into account. We still have a married couple's allowance and it is not being indexed. I am seeking to show that in the two years from 1990 to 1992 a married couple will lose £119. That is not conducive to saving the family, which is what the Conservative Party apparently wishes to do.

Perhaps I may now turn to car tax and give a special welcome to the reduction to 5 per cent. of the special car tax. It is a belated boost to the motor car industry bearing in mind that last year the Chancellor did so much harm to the car industry.

I turn to the excise duty on cigarettes. I was described to my face by a noble Lord as being idiosyncratic.

Noble Lords

Hear, hear!

Lord Stoddart of Swindon

My Lords, we did not have the opportunity to discuss it further. I believe that the reason I am considered by that noble Lord to be idiosyncratic is that I am prepared to stand up for the rights of smokers and also because I still believe that this is a great country entitled to self-government and not government from Brussels. The excise duty on cigarettes is being increased by 10 per cent. It seems to me that the Treasury and the Department of Health are shooting themselves in the foot by their vindictive campaign against smokers who are a very large minority. About 33 per cent. of the population smoke and in my view they are entitled to their rights in a democratic society. However, they are increasingly having them eroded by government action at the behest of self-interested, narrow-minded bigots intent on forcing their own opinions and policies on others.

Noble Lords must remember that there are many vested interests to keep going the campaign against smokers as many of those running it draw substantial salaries which are paid by taxpayers. The noble Lord, Lord Boyd-Carpenter, was actually arguing against himself but I shall not go into that. Despite what the noble Lord said, the Government are shooting themselves in the foot because from 1993 border controls will be virtually non-existent and every person returning from abroad will be able to bring in 800 cigarettes without let or hindrance. The differences in the prices of cigarettes on the Continent and in Britain are great. It is £2.21 for a packet of 20 cigarettes in this country and in Greece they are 41p per packet. Smuggling will become very attractive to many people.

Apart from that fact the extra duty will simply drive smokers from low-tar, British-manufactured cigarettes to cheaper, high-tar imports. That came out in questioning the other day. In fact Greece gets a huge subsidy from the EC to produce very high-tar cigarettes and because they will be cheaper they will be more attractive to smokers. Therefore, the health implications, as a result of this additional taxation, will be worse rather than better.

The noble Lord, Lord Boyd-Carpenter, accuses the smoker of imposing a huge burden on the National Health Service. I say to him that the figures are something like this: the extra cost for the treatment of smokers to the NHS is alleged to be £500 million a year, but because we have smokers who pay £7,000 million into the Exchequer, they are paying for their treatment on the National Health Service 13 times over. The noble Lord must take that into account because, if smokers did not pay that extra cost, the ordinary non-smoking tax-payer would have to do so. I suggest that noble Lords should remember that.

The Budget does nothing to bring Britain out of recession. The danger now facing us is that the economy will go from recession to slump with all that that means for the British people. Michael Howard predicted a Budget for jobs, but instead we have a Budget for more lost jobs. There is nothing that can now prevent unemployment rising to over 3 million by 1993 under this Government. Fortunately, there is hope because the impending election gives people the chance to elect a new government committed to resuscitating our manufacturing industry through investment and education, while at the same time ensuring that wealth not only increases but that it is shared more equitably among our people.

12.25 p.m.

Lord Marlesford

My Lords, I was not surprised to be able to applaud the Budget introduced by my right honourable friend the Chancellor of the Exchequer. He and I spent some years together in the Conservative research department. a long while ago. He was always a dogged, determined and cautious Shetland Islander. That is reflected in his Budget and in the Finance Bill which we are considering today. He had no intention of taking his eye off the main target, the reduction of inflation. My noble friend Lord Cockfield referred to new and old thinking. In one sense the problem of the Heath Government—to which I was a minor adviser and my only excuse is that my advice was seldom if ever taken—was that they took their eye off inflation. They tried directly to counter unemployment at a time when unemployment was largely structural rather than cyclical.

The sad thing about the Labour Party is that in many ways it would go back to the policies of the Heath Government. Being as charitable as one can about the prospect of a Labour Government, they will be very like the Heath Government. There would be very high levels of taxation: the trades unions would have a new lease of life: there would be massive public spending: the private sector would contract and the public sector would expand again. I do not believe that we should return to that. We must continue on the new route which has been taken for the past 13 years.

Perhaps I may say a few words about tax policy and the PSBR, bearing in mind particularly the remarks of the noble Lord, Lord Desai. The noble Lord was suggesting that it would have been better to have used any money available to raise the threshold rather than at this stage introduce a 20 per cent. band rate.

In a sense that is surely more regressive than what Mr. Lamont has done because for every £100 by which one raises the threshold, the top rate tax payers benefit by £40. That is because they reduce their taxable income by £100. Whereas, if one introduces a 20 per cent. rate for the low paid then for every £100 the top rate tax payer is benefiting only by £5. In that way, all the cash conceded in the Budget is focused on the low paid with little of it going to the higher paid. Similarly, the Chancellor of the Exchequer deliberately decided in this Budget not to use the Rooker-Wise indexation on the higher rate of taxation. It remains at the same level, which is again a progressive measure. That is an important point to remember.

Such a measure is also a means of bringing forward to reality the Government's 20 per cent. target. People can see that the 20 per cent. band now exists and it will be possible to move towards a 20 per cent. standard rate either by extending the band of income taxed at 20 per cent. or by reducing the 25 per cent. rate eventually to 20 per cent. by stages of 1 per cent., 2 per cent., or 3 per cent., which on the whole is more expensive. That is part of the strategy which is being faithfully carried out. Another part is to keep the top rate of taxation at 40 per cent.

My noble friend Lord Boyd-Carpenter explained why it is not sensible to uncap the NIC so that everyone has to pay the extra 9 per cent. In the terms of the objective of the NIC that would be over-funding insurance and merely taking money in the form of taxation. I am glad to see the noble Lord, Lord Peston, nodding at that explanation. He is admitting that to uncap the NIC and to apply the 9 per cent. NIC to everyone is a means of raising marginal taxation. It would be much better to face up to the fact that the 50 per cent. top tax rate proposed by the Labour Party would in fact be a 59 per cent. top marginal tax rate.

Lord Peston

My Lords, I am sorry to interrupt the noble Lord. He is leading me into other fields. I do not know anybody now who does not understand that the National Insurance Contribution is a tax. It is not, and has not been, an insurance contribution in any meaningful use of the word "insurance" since almost the time that it was invented. That is the point I was making: it is a tax.

Lord Marlesford

My Lords, the logic of that then is to consolidate it into the tax system. I have not heard the Labour Party say at any stage that what they are proposing is to scrap the NIC and to introduce a top tax rate of 59 per cent. I can see why they would not want to say that: because 50 per cent. sounds lower than 59 per cent. But that would be the logic of the position.

Lord Peston

My Lords, I am sorry to interrupt the noble Lord again, but as he can see I am in quite a good mood this morning. However, 40 per cent. does sound a little lower than 49 per cent.—does it not? —for a party that keeps talking about 20 per cent.

Lord Marlesford

My Lords, I should like to move on now to the PSBR of which, again, the noble Lord, Lord Desai, made much. If ever there was an issue on which this present Government have for the past 13 years been able to claim considerable credit it is in the management of the PSBR. First, no less than £26 billion has been taken off the national debt between 1987 and 1990. Secondly, the net public sector debt as a proportion of GDP has been halved. Thirdly, the PSBR has on average been 1.75 per cent. of GDP, whereas under Labour it was 6.75 per cent.—in fact, at one time it reached 9.5 per cent. With the present PSBR prediction of £28 billion it would still be only some 4.5 per cent. of GDP.

It is obvious that the main reason for the increase in PSBR is the recession. First, tax revenues are falling as economic activity declines: secondly, the cost of paying unemployment and other social security benefits to the unemployed is rising. As the economy recovers—and nobody denies that it will recover—the PSBR problem will be self-correcting. It is surely right, at a time when unemployment is primarily cyclical, to allow the PSBR to rise by whatever amount is necessary in order to make the extremely unpleasant experience of being unemployed sustainable and bearable. It is good that we have a relatively generous regime for the unemployed, and that must be paid for. I should have thought that far from criticising the level of the PSBR, that ought to be fully recognised.

I have one slight criticism of the Budget. In my opinion too much has been done for the car industry. Many of the car industry's problems in this country have been brought on by itself. I would be prepared to settle for what was urged by my noble friend Lord Boyd-Carpenter—the reduction of the car tax to zero, provided the amount saved went on to the excise duty. The excise duty was increased from £100 to 110. One of the main problems is that there are too many cars. The more cars there are, relatively, the less use that is made of every car, the greater the imposition of cars on the road, the greater the pollution and the greater the cost of building roads. It is rather ridiculous that the vehicle excise duty has been allowed for so many years to lag well behind the rate of inflation. If it were to be brought back in real terms to the rate it was when it was first put at £100 I think I am right in saying that it would now be between £140 and £150.

Lord Bruce of Donington

My Lords, I am most grateful to the noble Lord for giving way. I understood the noble Lord to say that there are too many cars. I have a direct question to ask the noble Lord. If he has a car himself does he propose to give it up?

Lord Marlesford

My Lords, I have more than one car—that is the whole problem. The reason I have more than one car is because it is so cheap to have a car. One only paid £100, now £110, a year. If we had to pay a great deal more we might think about having a second or third car. That is precisely the point I am making.

Perhaps I may now say a word about bicycles. I know that my noble friend Lord Boyd-Carpenter feels strongly about Chinese bicycles coming into this country. Surely we should welcome them. The more bicycles the better because that means better health and fewer cars.

In place of all the things that have been done for the car industry I had hoped that the Chancellor might have done a little more for the construction industry. There are two ways in which I would have done that. First, I would have hoped to have seen capital allowances restored to their 100 per cent. level, though only for a limited length of time. Secondly, again on a temporary basis, I should have liked to have seen zero-rating of VAT, which applies to new buildings, apply also to alterations and modifications of existing buildings. That would have produced a useful stimulus to small builders as people quickly placed orders. It would have been a great help.

I shall not detain your Lordships any longer. But I should like to say that I am very glad that the noble Lord, Lord Peston—I am sorry that he is not still here —recognises the educative role of the Labour Party. There will always be crumbs to be picked up from the extravagant table at which the leaders of the Labour Party sit when they plan their tax and economic policies. But, basically, I do not see my right honourable friend the Chancellor ever wishing to eat at that table. When we have the cost of Labour's menu revealed to us this afternoon I suspect that most of the electorate will not choose to eat at that table either.

12.36 p.m.

Lord Houghton of Sowerby

My Lords, in your Lordships' House many records are made and some are broken. Perhaps I may be permitted to say that on this day 43 years ago I was first elected to the House of Commons.

Noble Lords

Hear, hear!

Lord Houghton of Sowerby

My Lords, that is not a record. The record is probably that I was 51 years of age when I began and that accounts for my being so old now. I am sure I must be approaching retirement age but I am presuming on the goodwill of the House to give myself a little extension.

When I arrived at the House of Commons on 16th March 1949 I had my eyes on two young men for different reasons. One was Harold Wilson who was then President of the Board of Trade at 33: the other was James Callaghan, aged 37, who was Parliamentary and Financial Secretary to the Admiralty. I am very glad indeed that both of them are here nudging me on this Bench for a place within earshot of speeches in your Lordships' House.

I have been privileged to hear many notable speeches in your Lordships' House. I am coming to the conclusion that one of the most notable of our colleagues is the noble Lord, Lord Cockfield who today made a second very thoughtful and deeply searching speech of recent days. This opens the prospect of your Lordships' House going more deeply into some aspects of our life and our way of living and our social and fiscal system. That may lead us to want some revision of the role of your Lordships' House over matters dealt with in the Finance Bill.

Noble Lords will notice that the Bill states at the top that it has been certified by the Speaker as a money Bill. That is the catechism that goes back 81 years. It is the same as it has always been. But it has not always kept within the original concept of what your Lordships were expected to do and refrained from doing on matters of finance.

We had the extraordinary spectacle of nine days being spent on the Committee stage of the Bill introducing the council tax and then three or four days being spent on Report stage and Third Reading. We went into every aspect of the Bill and hundreds of amendments were tabled. Yet we cannot move an amendment to increase by 50p the personal allowances under taxation. We are beginning to find that to get to the bottom of some of our problems we shall have to go deeper beneath our fiscal system. I hope that in another Parliament we shall deal with the question of the obsolescence of the 1911 Act and allow your Lordships' House wider terms of reference in matters of this kind.

One of the great disadvantages that we have suffered during this recession is the effects of VAT. I know that it is not a tax peculiar to us and that in a way we have harmonised with the rest of Europe. What I am not so sure about is whether the strictness and harshness of the VAT regime is reflected in or derives from the European version of the tax. I am convinced that a large number of the businesses that have had to fold up in recent months have been driven to it by the pressure of VAT.

The present harsh system was introduced in the Finance Bill 1985. However, because it was a money Bill we were not able to deal with the automatic and non-discretionary penalties which were written into the scheme of VAT and which took what had previously been the powers of the courts out of the hands of the courts and put them into the hands of the officers of Customs and Excise. They had no discretion but to apply them. Some modifications of those powers have taken place over the years and more are proposed in this Bill but your Lordships will understand the evil of the VAT regime when I say that, so far as concerns the trader, every time he writes an invoice and adds the amount of VAT he creates a debt to the Customs and Excise whether or not he has received the money.

In its initial form the regime of the tax was that one paid VAT on money one had not received. Written into the code of conduct under the VAT regime was the escape clause that penalties had to be imposed unless the delinquency or fault for which they were a punishment had been committed with reasonable cause. The great bugbear of the whole system of penalties under VAT relates to due cause for having fallen foul of the strict code of the Act. Many of those cases are going to tribunals and a good many are quite farcical. Nevertheless we have under the Bill before us some relaxation.

The main problem is the imposition of an extremely complicated and strict regime on businesses of relatively small turnovers. The turnover under the Bill is to be £36,600, increased from last year by the amount of inflation. Last year the threshold was increased to 40 per cent. but it is still very difficult for a small business to have to cope with a complicated system of taxation and have reserves to deal with its position under it. Many small businesses have to give up.

In his speech the other day the Chancellor of the Exchequer referred to this matter. He said: For businesses facing cash flow difficulties, value added tax penalties can be the last straw. It has been put to me on many occasions that the VAT penalty regime is too strict. The serious misdeclaration penalty is catching too many minor mistakes. This must stop".—[Official Report. Commons, 10/3/92: col. 753.] Why has this been left until now? This regime has not been stopped in time to save people from bankruptcy. One finds all through the Chancellor's speech that he is now realising that more flexibility and lower penalties for minor misdemeanours must be made the order of the day. Let us not ignore the fact that the Chancellor is certainly doing a good turn to small businesses in his proposals regarding the fixed small business rate. The Chancellor prides himself on sparing the traders affected by VAT the £35 million of penalties that they would otherwise pay but for the proposals he is making under the Bill. Imagine, my Lords, £35 million into the coffers of the state! That £35 million is being relieved by the flexibility and the lightened burden that the Chancellor is introducing. I welcome that, but the suffering has gone on and the damage in many cases has already been done. Small businesses rarely capitalise themselves sufficiently to stand credit and many businesses fail because they have no capital safeguard against credit. When they cannot get the money in they have to borrow to cover their prospects of revenue from their negligent customers. I welcome these changes to VAT but it is a regime which should be lifted out of the field of strict and harsh application.

One of the problems about VAT is that it was given to the Customs and Excise to run. The tradition of Customs and Excise is that of the Collector of the King's Taxes. The King's servants acted against the smugglers, the bootleggers and the runners of contraband in order to ensure that the Crown received its revenues. The Customs and Excise, with its tradition of dealing with smugglers, drug traffickers, bonded warehouses and all the other factors relating to our traditional system of indirect taxation years ago, is quite unsuited to the application of VAT.

I know that at various stages in the history of VAT —certainly at the beginning in 1973—it was considered whether it should go to the Inland Revenue. It did not go there for various reasons but the two services are very close and ought to come closer together on the administration of VAT. On the one hand, we have the Inland Revenue with its collection of pay-as-you-earn, national insurance contributions and the assessment of profits tax and corporation tax, with its collection and enforcement machinery being applied to the taxpayer, and, on the other hand, we have VAT with its own system of penalties also going to the same person for the payment of a separate tax. To get that taxpayer in focus, one has to look at his position under the Inland Revenue, and, at the same time, look at his position under VAT. He is one taxpayer, one trader: but he has those two monolithic systems of taxation gnawing at his resources. That fact should be borne in mind in any review of administration.

I do not know why it is that this Chamber is thought unsuitable to consider matters of administration. Most of us have had experience of administration in some form. Too much is left to Ministers: indeed, too much is often left to the Prime Minister. He is left to decide what should be the organisation of the whole public service, to suit his own particular ideas about how government should be run. Noble Lords may recall some of the big mistakes that have been made in the past in that direction. I hope that we can have a more understanding and liberal regime.

Finally, I shall say what I have said many times before. The people with whom we are dealing under the VAT system are press-ganged tax collectors. They get no pay for it. They are pursued by the salaried staff of the Civil Service. They are prosecuted if they seriously fail in what they do. The harshness of the regime entitles bureaucracy to give them a very rough time. The threshold should be double what it is. Many more of those people should be outside the regime of the tax.

This is not a conclusive speech: indeed, I should like to call it a continuation sheet. Your Lordships may hear the remaining chapters in the next Parliament, in which, incidentally, I expect to serve.

12.52 p.m.

Lord Bruce of Donington

My Lords, it is always a most agreeable experience to listen to and follow my noble friend Lord Houghton of Sowerby. There are not many ways in which I can beat his record: indeed, he is a record holder of all time in so many respects. However, at least I beat my noble friend in one thing: I was elected to the other place 47 years ago and not 43. Therefore, I beat him slightly on that count.

I very much agreed with what the noble Lord said about the respective roles of the Inland Revenue and HM Customs and Excise. It is of course the duty of those who enforce the law in respect of the legislation to deal effectively with their tasks, always subject to the laws on such matters, which are presumably considered in detail by another place and yet are not considered, as the noble Lord indicated, in this place.

In my professional experience, I have found that the officials of the Inland Revenue have a good deal more discretion than those in HM Customs and Excise. The inspectors and collectors of taxes are, after all, responsible to the nation for the assessment and collection of taxes that are probably due, and it is their prime duty to ensure that that is effective. Yet, in cases of exceptional difficulty—and I could name many of them—in my experience it has always been possible to come to a reasonable arrangement with the officials of the Inland Revenue. It is not always so, but it is very often so. However, as the noble Lord said, when it comes to HM Customs and Excise, the contrary is often the case. There is a rigidity and a lack of give and reasonableness which, I am bound to say, on occasions is characteristic of the officials of the Inland Revenue.

I shall deal with the value added tax aspects of what the noble Lord said a little later in my remarks. But before moving on to that subject, I should like to congratulate the noble Lord, Lord Cockfield, on the contribution that he made today. I found his speech to be most thoughtful, even though it was not entirely politically agreeable. Nevertheless, it should give us cause for some thought. The noble Lord does not really think very much of academic economists. That view was shared in the column entitled "Men and Matters" in the Financial Times a short while ago. The article referred to academic economists and laconically remarked that, "economists know how it works, but it doesn't" and that, "businessmen don't know how it works but it does". I believe that that is a reflection of the state of the so-called "economic science" in this country at present.

All economics—and I stand to be corrected by those whose professional function it is to instruct others in the subject—are based upon expectations. The fundamental thing is expectation. But of course there is the further qualitative factor inserted in that: namely, rational expectations. If noble Lords and academic economists consider that the British public by and large have, first, sufficient and accurate data upon which to make any subjective judgments, I venture to suggest that they are probably a little mistaken. Moreover, in a country where the bulk of the press media is in the hands of organised capital and the political party that supports it, it is not surprising that the facts are very often distorted. Therefore, in the final analysis, any question of rational expectations probably goes out of the window.

We are then left with Treasury and university models. We are left with the whole computerised section of information which depends fundamentally on the nature of the equations and the information that is fed into them. So far as concerns the Treasury model—and I will not answer for the London School of Economics—it must have had some phony data shoved into it at some point to produce the grossly inaccurate forecasts which have been made over the past few years. Of course, the saying is "rubbish in, rubbish out". A fair amount of something bordering on rubbish must have been fed in to the Treasury model ab initio to produce some of the results that we have recently seen.

I return to the noble Lord, Lord Cockfield, who, as I said, made a most thoughtful speech. There was a time when, towards the end of my remarks, I would have expected him to explode but, alas, on this occasion he did not. It is not in his nature to explode: it is in his nature patiently to explain on the basis of one of the most magnificent memories which it has been my pleasure to witness over many years. He will doubtless remember the speech he made in your Lordships' House on 19th June 1979 when we were dealing with the Budget—that is, the first Budget brought forward by his Administration.

The noble Lord made our blood curdle by saying that we faced one of the gravest crises for many years. He said that the balance of payments was £1,000 million in the red. When the adverse balance of payments figures reached levels of £11 billion, £12 billion, £13 billion, £9 billion and £6 billion, I was expecting him to explode at any moment, but I imagine that those considerations no longer have the same significance as they had in June 1979. The noble Lord has passed into a more reflective economic mood, which I welcome. In future, I shall pay very great attention to his further prognostications on the effects of those fiscal controls that remain in the hands of the United Kingdom.

That brings me to the noble Lord, Lord Boyd-Carpenter, with whom I have exchanged arguments many times. Following the somewhat placid opening speech of my noble friend Lord Peston, the noble Lord, Lord Boyd-Carpenter, worked himself up, venturing to bring an air of controversy into our proceedings. Of course that it not entirely unknown when both he and I are present at the same time. The noble Lord referred to "violent nonsense" on the part of all those who have had the temerity to suggest that the depression from which we are suffering is not due to the depression overseas. Those were strong terms, even for the noble Lord.

However, the noble Lord must make up his mind. In one part of his speech he referred to the fact—it is a fact to him —that we must not lose the gains that we have made. On the one hand, he refers to the economic miracle, but he does not then accredit that economic miracle to our competitors overseas. However, if the depression exists—and he does not admit that it does —he says that it is due to what is happening overseas. The noble Lord cannot have it both ways. We either have an economic miracle, which one part of him says that we have, or we have a depression. It is a lawyer's rolled-up plea. The noble Lord is saying, "We have an economic miracle" but he is also saying, "If we have a depression, it is not our fault." One cannot get away from that argument.

The main purpose of my speech is to explode one myth for all time. I refer to the myth that the Conservative Party is not the party of higher taxation. The Conservatives always take the attack into our camp, saying that whenever the Labour Party comes to office, it raises taxes because it is the party of high taxation. They say that Labour will also be the party of high taxation in the future and that voting Labour means voting for higher taxes.

That has been absorbed into what is now almost a myth: that there is only one kind of tax—income tax. For the information of the noble Lord, Lord Boyd-Carpenter, value added tax is a tax. If one wants to calculate the total burden of taxation, one includes both value added tax and income tax. The fact of the matter is—the noble Lord may check this if he wishes—that the amount of total taxation that has been raised by Tory governments in relation to gross domestic product has been consistently higher in the past few years than when the Conservatives took office. Leaving out the oil considerations and taking the total GDP, 34.25 per cent. of GDP was raised in taxation when the Conservatives took office, but for 1991–92 the proportion will be 37 per cent. Therefore, can the media once and for all kill the proposition that the Tory Party is essentially the party that reduces taxation and that, as a matter of course, Labour increases it? That is completely the reverse of the truth.

In fact, what has happened is that the burden of taxation has shifted. In 1979 the total proportion of revenue raised by income tax was 34.4 per cent.: it has now been reduced to 27 per cent. However, VAT accounted for 9.6 per cent. of total revenue in the last year of the Labour Government, but for 18.3 per cent. in 1989—and the proportion is now much higher. The burden has shifted away from taxes upon income to taxes upon expenditure. Indeed, as the noble Lord, Lord Cockfield, will remember because he initiated the debate in this House on 19th June 1979. I reminded him then of what Sir Geoffrey Howe said in another place when he introduced his Budget. Incidentally, that Budget meant that the very wealthy were relieved of a considerable amount of their taxation burden, but there was very little in that Budget for the rest. Let us remember that, in that first Conservative Budget, a low-paid family on £55 per week lost £21 per year, whereas a person earning £40,000 a year gained £4,705 per annum. The noble Lord will be aware that when Sir Geoffrey Howe was taxed on that in another place he said: I shall he leaving people with more money in their pockets with which to pay the increased VAT".—[Official Report, Commons, 12/6/79: col. 251.] Precisely—and that is exactly what happened when the poll tax was abolished. I did not include that in my other categories of taxation. It was not the income tax payers who had to pay for the abolition of the poll tax because, once again, VAT was hiked up. Noble Lords will recall that one of the biggest increases in taxation ever to take place in the United Kingdom occurred in 1979 when the VAT rate of 8 per cent., which the Conservatives inherited, was nearly doubled by them to 15 per cent. Only recently, it has been shoved up to 17.5 per cent.

So, I advise noble Lords, editors of the Tory press and the rest of media that the Tory Party is the party of increased taxation, as the figures prove abundantly, and that that has had an effect. It has meant that whereas, when the Conservatives took office, the bottom one fifth of the population had 10 per cent. of the national income and the top one fifth had 37 per cent., by 1989 the bottom one fifth of the population had 7 per cent. of the national income whereas the top one fifth had increased its share of the national income to 44 per cent. That effect is reflected in the distribution of wealth in exactly the same way.

It would not be possible for me, using hallowed words, to anticipate the Budget statement that I understand my right honourable friend the Shadow Chancellor is making today, but of this much I am sure. When elected to office, not only in terms of taxation but in terms of the other public expenditure measures that they propose to introduce within the public sector borrowing requirement that has been laid down by the Tory Party, a Labour Government will be able to accomplish a far more just, far fairer and far more decent society.

1.10 p.m.

Lord Barnett

My Lords, I am grateful to your Lordships for allowing me to say a few words in what is called the gap. I want to say something about the assumptions underlying the Finance Bill. First, I shall take up a point upon which I agree, at least partially, with the noble Lords, Lord Marlesford and Lord Boyd-Carpenter: that is, on the suggestion, which might be being made now by the Shadow Chancellor, that NI contributions should go up by 9 per cent. on incomes above £20,000, approximately. I hope both noble Lords will accept equally, as I do, that the present profile of tax and national insurance is a nonsense. It has been agreed that national insurance and income tax—there is no national insurance fund —amount to 34 per cent. but at incomes of £20,000 they drop to 25 per cent. Equally, on £200,000 of income, national insurance is 1 per cent., and at £10,000 it is 9 per cent. That kind of profile is a nonsense. While I agree with both noble Lords, I hope that they will agree with me that there is something crazy about our tax and national insurance profile.

I should prefer the Shadow Chancellor to look at that profile rather than merely to take a step leap at 9 per cent. I am delighted to see the noble Lord, Lord Boyd-Carpenter, agreeing, or at least nodding, which, for me, is a huge improvement on almost anything else I have ever had from the noble Lord.

I come now to the assumptions underlying the Finance Bill. The main assumption is that in 1992–93 there will he a borrowing requirement of £28 billion. In fact, as we are all aware, if it were not the creative accounting that is used generally by the Treasury—that privatisation proceeds do not count as borrowing —it would be £36 billion. By any normal accounting procedures, that is what it is—£36 billion of borrowing. I do not normally make forecasts, but I shall make one for 1992–93. It would apply also to almost any other year. Indeed, the noble Lord, Lord Boyd-Carpenter, and myself, who have both served in the Treasury, would be inclined to agree on this. This is no criticism of the forecasters, I hasten to add. The plain fact is—I forecast it now—that the borrowing requirement for 1992–93 will turn out to be wrong to the tune of £1 billion, £2 billion or £3 billion, more or less: and the total GDP for 1992–93 of £621 billion will be wrong to the tune of £1 billion, £2 billion or £3 billion, or maybe even more, because I find it hard to believe—I think that it was my noble friend Lord Peston who said this —that the growth in the economy in 1992–93 will be as has been forecast. I find that hard to accept, given where we are. But let us leave that aside. I believe that the forecasts are likely to turn out to be wrong.

So my criticism is not of the Government, officials, the Opposition or the forecasters: to some extent it is a criticism of the City which believes all those forecasters and which works out everything that is going to happen, on the basis of tiny figures, in relation to the whole of GDP. We have a GDP of about £600 billion. The Chancellor adds, on present assumptions, £2 billion. It might have been £3 billion or £4 billion or £1 billion or none. I do not see why the City should have been alarmed, or otherwise. The City could perhaps have been alarmed at £26 billion, if it wanted to be, but why on earth it should be alarmed by an extra £2 billion in relation to a GDP of £621 billion, as forecast, I frankly do not understand.

Of course, there is the cost of a level of borrowing of that size: of that there is no doubt. We have to pay to borrow. Whether as an individual or a government, we as taxpayers—the Government do not because they are only borrowing on our behalf—have to pay. There is no difficulty in financing a borrowing of £28 billion. There is a cost, but there is no difficulty. What astonishes me is that the Government still stick to the idea that they will balance the budget over a cycle. First, I cannot see why they should bother and, secondly, they do not do so even on the assumptions contained in the Red Book. They still arrive at about £6 billion in four years' time. As I said, I would not like to forecast next year, never mind what it will be in four years' time.

To get excited about needing to balance the borrowing requirement over the cycle when the Maastricht situation requires us only to be within 3 per cent.—make no mistake about it, there will be many countries within the EC which will not be within 3 per cent.—strikes me as a nonsense. I hope that the Government will quietly drop it. I certainly hope that the Opposition will not look for a balancing of the PSBR under a cycle.

The trouble with all those false, or unlikely, assumptions is that they detract from a serious consideration of the real questions. I shall not raise many, but there are two serious questions that I want to mention. First, will the Budget—or this Finance Bill—take us out of the recession? Secondly, is the balance between tax and expenditure right for now and the future?

On the first question, the Budget £2 billion, as I say, is neither here nor there. It will not take us out of the recession. If we are to come out of the recession it will not be because of that £2 billion. One must hope that the Prime Minister and the Chancellor were right when they said that everything is in place to bring us out of the recession and nothing further needs to be done. They are saying that the £2 billion in the Budget —the Finance Bill that we are debating—does not matter. I agree with them. It does not matter. But we are not debating whether anything more needs to he done. That is it. We are assuming—the noble Lord, Lord Boyd-Carpenter, will presumably assume—that we shall be brought out of the recession by foreigners. They will come out of recession and drag us willy-nilly with them. All I can say at this stage is that I hope that he, the Prime Minister and the Chancellor are right.

I come to my second question: is the balance of tax and expenditure right? The honest answer in economic terms is almost certainly that we do not know. We do not know whether the balance is right. The reason we do not know is that we have never properly studied borrowing as between capital and current expenditure. We do not know in sufficient detail. I referred in a Question in the House a week or so ago to a report by Arthur Andersen (a large international firm of accountants) which had studied that aspect of our problem as a nation. I must say that there was much in that report that made a great deal of sense. If we knew what the commercial borrowing was for—whether it was for capital expenditure—and treated it differently from current expenditure we might achieve a better understanding of how we should be moving our economy forward.

I hope that at some point whoever forms the next government will look more carefully, and not seek to make party political points, at whether money left with local authorities from sales of council houses should be treated as capital or allowed to be added to the PSBR. In current accounting terms, it does add to the PSBR. I would not dispute that. In current Treasury accounting terms it does: but why? Why on earth should it? Why do we not look at it more carefully to see whether that money is spent on capital expenditure rather than current? It would be a better way of dealing with it than just leaving it there.

We should have a better look at the form of creative accounting that we have in this country. Perhaps we should take lessons in creative accounting from some people in industry, some of whom may no longer be with us. I do not pretend that that would provide an overnight miracle, but it would make for a more sensible and accurate view of our economic performance in the years ahead.

I do not dispute that it would have to be financed —of course it would—but there is no difficulty in the context of an economy with a GDP of £600 billion and growing. If the cost has to be an extra 1 per cent., I would regret it from the view of mortgage payers and others. However, it is a better way of taking us forward into real growth in the economy than is suggested in either the Finance Bill or the Budget.

1.20 p.m.

Lord Monson

My Lords, I apologise for rising to speak without having earlier put my name down, but I wish to enlarge on the most pertinent observation made by the noble Lord, Lord Peston, in his speech on the Bill this morning.

Your Lordships will be aware that in his Budget speech six days ago the Chancellor of the Exchequer announced that the threshold for inheritance tax was to rise from £140,000 to £150,000. Moreover, it was to do so not from the beginning of the new tax year but from Budget Day itself. Two days later there was the announcement of the general election which appeared to throw everything into the melting pot.

However, two or three days ago the BBC reported that the Labour Party, the official Opposition, was sympathetic to the proposed inheritance tax changes, and that it had no objection to them. Despite that, the Chancellor and the Treasury have inexplicably omitted to include the proposals in the Bill before us today. Whether that is a sheer oversight, as suggested by the noble Lord, Lord Peston, or for other reasons, we do not know.

Where does this leave the families of the unfortunate people who die between 10th March and 9th or 10th April this year? From the BBC report, assuming it is accurate—and its reports usually are —and from the sympathetic tone of the noble Lord, Lord Peston, in his intervention today, one can readily conclude that if the Labour Party is returned to power next month, it would probably agree to backdate the concession to Budget Day.

The noble Lord, Lord Brabazon, can of course only speak for the Government and for the Conservative Party. Can he assure the House in his winding up speech that, if the Conservatives are returned to power, they too will agree to backdate the concession to Budget Day?

1.22 p.m.

Baroness Seear

My Lords, when I came in this morning I was under the impression that we were going to debate the Finance Bill as it stands. That was the lead given by the noble Lord, Lord Brabazon. Since then, we have wandered widely. I do not intend to go over the whole of the economy, but I will take a little time to say this to the noble Lord, Lord Bruce of Donington, who is, alas, not in his seat. Far be it from me to waste your Lordships' time defending economists, but the fact remains that today we are all either professional or amateur economists. Despite the innumerable mistakes made by the professionals, I prefer them to the amateurs. Surely that is a more rational position to take.

I also wish to turn to the point made by the noble Lord, Lord Boyd-Carpenter, about combining national insurance and income tax. As several noble Lords said, surely it is now crystal clear that to do so will ensure that the contribution is a tax. From the very day it was introduced, because we paid pensions straightaway for which there was no insurance base, it ceased to be anything but a tax. It has never been anything but a tax, so we should treat it as though it were part of a tax. Whether or not the way in which the Labour Party proposes to treat it is right is not the point. It is a tax and my own party has for a long time taken that line.

Lord Stoddart of Swindon

My Lords, I am obliged to the noble Baroness for giving way. Is she aware that the 9 per cent. is a tax from which at present pensioners are exempt? If the 9 per cent. national insurance contribution is combined with the 25 per cent. tax, pensioners will immediately have their tax bracket on virtually all their income raised to 34 per cent.

Baroness Seear

My Lords, I am grateful to the noble Lord, although the intervention takes us away from today's debate. If he will read the literature—though that is rather an exaggerated term for it—the publications of my party, he will find that we have expressly arranged for that. When the two items are combined, pensioners will be excluded from paying the addition. The noble Lord is right but I assure him that the point has not been overlooked.

On the Finance Bill, the point which I feel needs to be emphasised first and foremost is that we are looking for assistance for industry at all levels. The criticism of the Budget itself and of the Finance Bill in particular is that they do not give sufficient encouragement to industry for the recovery which we all know we urgently need. The Finance Bill must be short, but why have the changes to the business rate not been included in it? The position of the small trader and the small business is, as we all know, extremely difficult. One of the encouraging points in the Budget was the assistance to be given in the adjustment of the business rate. It is surprising to find that it is not included in the Finance Bill. I know that the Government are optimistic that they will return to office and will be able to introduce the provision, but it would be encouraging if it were included. It is difficult to see why it should not be.

Another item in the Budget which would be of the greatest assistance to small businesses is the decision that there should be a right to claim interest on overdue bills. That may seem a detail in terms of the national economy, but it is by no means a detail for small businesses. If the Government wish to give assistance—and far be it from me to encourage them to put in electioneering sweeteners—it would be both a genuine contribution and undoubtedly an electioneering sweetener. Will they reconsider the point to see whether they can do for small businesses straightaway what they promised in the Budget that they would do ultimately?

I wish to concentrate on the use to which the money is to be put. Perhaps not surprisingly, we are taking a somewhat Gladstonian view about the Budget. The need is not to increase expenditure for consumption but to increase it for capital investment in industry. That is where we feel both the Budget itself and the Finance Bill are lacking.

We do not agree with the Labour Party by any means about all the lines they take, but together with them we have rejected the idea of the cut to 20 per cent. We believe that all resources ought to be focused on giving the assistance that industry needs. It is because that is not being done sufficiently that we feel it is wrong to give an extra £100 per person—and that is what it amounts to—to those who qualify for it. As has been pointed out, if we are determined to deal with the problems of poverty, some of the people who are worst off will not benefit by the reduction to 20 per cent. because in any case they are not in a position to pay it.

We support the borrowing requirement. I agree very much with the noble Lord, Lord Barnett, that it is not something of which to be frightened if it is used in the right way. To borrow for consumption is frivolous and dangerous, but to borrow for capital investment is not. We need to get this much clearer. That is why I entirely endorse what was said and I am glad that the point was made. We hope that whichever government are in power next time, we shall be able to take the matter up and have the issue made far clearer than at present. To borrow for capital investment in the infrastructure, in education and training can only be a good investment. To encourage greater spending by any form of concession to taxpayers, except for the mere indexing of tax levels, is neither wise nor safe in the present state of the economy.

1.30 p.m.

Lord Donoughue

My Lords, the Budget was at first scrutinised for its election content, hunting for bribes. Inevitably, there was not room for many in this truncated version of the Finance Bill. The most significant and most alarming revelation of the Budget was the statistical framework of the economy. The City's alarm was revealed by the fact that the Stock Exchange fell 100 points in the 48 hours after the Budget was announced. The Chancellor commented on the past year's economic performance and made forecasts for next year. Despite what the noble Baroness, Lady Seear, said, I shall discuss those performances as they are intrinsic to the Finance Bill and they define what it is possible or not possible to do within the Finance Bill.

The Chancellor gave the growth figure for 1991–92 as minus 2.5 per cent. However, many people believe that that will be revised to minus 3 per cent. That is the worst performance in a calendar year since the 1930s. The Government are looking to a rise of 1 per cent. in growth in the coming year. However, in manufacturing the Government expect a growth rate of only 0.5 per cent.

In the current year the Government's public sector borrowing requirement will be £14 billion; next year the Government will borrow £28 billion. I accept what the noble Lord, Lord Barnett, says. One should discount the receipts from privatisations when considering the Government's public sector borrowing requirements. If privatisation receipts are discounted, one realises that the Government will have to borrow £36 billion. Some leading companies in the City such as Phillips and Drew and a few others who are supportive of this Government are talking of a borrowing requirement higher than £50 billion in the year after this one.

The noble Lord, Lord Marlesford, claims that the Government are good at managing the public sector borrowing requirement. On the basis of the figures I have just referred to, I can only say that I hope the Government do not become bad at managing the PSBR. We should reflect on those figures. The borrowing figures, when taken over two years, account for an average 6 per cent. of GDP. That percentage is about as bad as the borrowing position was believed to be at the time we entered the IMF. That action was subject to a great deal of attack from noble Lords on the Benches opposite. The figures I have just referred to were subsequently adjusted downwards. For some years ahead the British people will have to pay for what the Chancellor rather openly admitted was a process of borrowing to pay for borrowing. I am not sure that that is a good way to go about one's business.

As regards public sector debt, I am grateful to my noble friend Lord Desai for drawing my attention to page 14 of the Treasury financial statement. I am sure that the document is good bedtime reading for all noble Lords. A graph on page 14 shows that from 1974 to 1979 Labour cut net public sector debt as a percentage of GDP by a greater amount than the present Government are doing, although that was done from a higher inherited level of public sector debt. I recommend that the noble Lord, Lord Marlesford, should not always believe what appears in the Tory press but rather should read what the Treasury says. That is the sad tale of the public sector borrowing requirement.

The Budget forecasts a decline in investment next year. A deficit is forecast in the balance of payments of around £9 billion. It is taken for granted that unemployment will rise, sadly, to 3 million. As has been pointed out, those forecasts should be studied against the background of events over the past two years. That was the period leading up to an expected election and a period during which all Treasury forecasts were amazingly overoptimistic. Therefore it is quite possible that the reality will be even worse than what has been forecast. My noble friends Lord Peston and Lord Barnett mentioned that. I believe that the City's worries were well founded. It sensed that any variations on forecasts would almost certainly be detrimental to the economy. I cannot imagine at what rate of interest gilts will have to be sold for the City to cover its losses. I repeat that the reality may be even worse than the appalling forecasts.

We have had depressing forecasts for the future and a depressing recent history. Since 1979 growth has averaged 1.7 per cent. That is the worst percentage figure since the war. Since March 1990 1 million jobs have been lost. Last year 50,000 businesses went bankrupt and 75,000 homes were repossessed. I note that the Policy Studies Institute estimates that 2.5 million people are currently in deep trouble with personal debt.

I wish to refer to the comments made by the noble Lord, Lord Boyd-Carpenter, on the world recession. Currently the Government seek to blame everything on the world recession. They try to duck the blame and also the facts of the situation. My noble friends Lord Stoddart of Swindon and Lord Bruce of Donington mentioned that. The facts are that we entered the world recession earlier than the rest of the advanced world because of the deregulation of the monetary system in 1986. Monetary and fiscal slackness existed until 1988. A consumer and housing credit boom then followed which subsequently required a prolonged monetary squeeze. Those events caused the recession. Britain has the fastest growing unemployment of all the countries affected by the recession and we have been in the recession longer than any other country.

I accept that the world recession makes it difficult for Britain to recover. However, the main blame for the present situation lies in Downing Street. I should refer to what my noble friend Lord Cockfield said. The noble Lord is not my noble friend, but I am happy to have him as a noble friend. His comments were much praised by my noble friends Lord Houghton and Lord Bruce. The noble Lord, Lord Cockfield, appeared to announce the end of monetarism, Keynesianism and neo-Keynesianism. I should appreciate hearing what would replace those systems. If monetarism were to come to an end, it would have had the briefest run of any "ism" that I know of. I wonder whether the Bundesbank is aware of that situation.

I certainly accept that the Budget was not monetarist and not Keynesian. Indeed, I cannot detect any philosophical basis in it whatever. I believe that that aspect troubles some noble Lords opposite. Monetary targets were introduced by a Labour government, as were medium term financial strategies. However, those have disappeared. It appears that they have been replaced by a kind of fine tuning—one might call it crude tuning—that involves real interest rates going up while nominal interest rates come down. However, I am not sure how that works as a monetary policy when we are in the depths of a recession. Some opportunist tax cuts have been offered before the election but they will undoubtedly be followed by a rise in VAT after the election, as was the case in 1979–80. I am not sure that that process constitutes a fiscal policy.

There seems to be no theme behind the Budget and this Finance Act. In former years there have been Budgets for savers. We have been promised Budgets for jobs and this was said to be a Budget for the election. However, it has clearly failed to win the support of the electorate. This Budget is without philosophy, theme or coherent direction. It illustrates how this Government have lost their way since Mrs. Thatcher was deposed. There now seems to be an intellectual vacuum filled by a hotchpotch of unrelated measures.

I shall briefly discuss those unrelated measures as my noble friend Lord Peston covered them in his brilliant and succinct speech. The Government have offered a hotchpotch of small offerings. Several of the offerings are perfectly reasonable and we would not oppose them. Some of the offerings meet the cries for help that some damaged lobbies have uttered. Some of those lobbies are deserving, such as the motor car industry and the racing industry. I was delighted to see some help offered to the latter industry. However, I am troubled that tax on company cars now appears to favour large cars rather than small ones and encourages companies to buy large cars for their employees.

I take the Budget's general fiscal stance to be mildly reflationary, which appears perfectly reasonable against the background of recession. Against the background of a PSBR of £28 billion the amount of fiscal stimulus in a tax sense is dwarfed.

Finally, I should like to look at what is not in the Budget, because of the terrible constraints created and imposed by economic failure. There is nothing for investment; there are no increases in capital allowances for investment. Therefore there is nothing for the construction industry and nothing for the unemployed. There is nothing for training: the Budget has not restored the savage cuts in training. There is nothing for the homeless: the Budget has not allowed local authorities to use capital receipts to build low-cost housing.

Even the lower rate tax band of 20 per cent., as has been said, was something introduced under my noble friend Lord Callaghan in 1978 and abolished, with devastating contempt, by the first Conservative Chancellor. I must agree with my noble friend Lord Desai that that is not the best way to help the poor. For the same £1.8 billion, personal allowances could be raised by nearly £400, helping far more people.

In conclusion, looking at the Budget and what happened previously, it seems to me that recent Conservative Chancellors have been at their best when reforming taxation technically and at their worst when mismanaging the economy. This Finance Bill and the economic numbers which it encompasses and which constrain it reflect too little of the former and too much of the latter. It is a balance sheet of mismanagement, and the shareholders in Great Britain Limited, who used to be referred to often, are about to vote on that. The Government are right to be nervous.

1.41 p.m.

Lord Brabazon of Tara

My Lords, we have had an interesting debate, but one which was slightly more extensive than I had expected. As the noble Lord, Lord Peston, said, we had a debate on the economy only the week before last. The noble Lord was kind enough to say that he did not wish to bore the House with another debate on the economy today. Perhaps I may say to the noble Lord that he would not have bored the House because we are always interested to hear what the noble Lord has to say. However, I was very glad, as I am sure were other noble Lords, that he chose not to do so.

Also, we have the prospect of the Labour Party's alternative budget being issued today, as the noble Lord mentioned. I do not know whether that has yet happened while we have been debating the Finance Bill. I am jolly glad that it did not happen earlier because I can only think that that would have meant that our debate would have lasted twice as long.

I have found today somewhat unreal. As I said, we had a debate on the economy only the week before last. I have a certain feeling that during the next three and a half weeks the economy may be debated outside this Chamber. Of course none of us is standing for election and none of us has a vote, so perhaps it is right that we should have the opportunity to debate the matter today.

I shall not attempt to reply to general economic points which have been raised today. I shall deal merely with points of criticism or approval which have been raised in relation to the Finance Bill which is before us today. I am very grateful to noble Lords who have supported a number of the measures in the Bill. I refer particularly to the changes in car taxation, which I believe will be of benefit to the motor industry and to the economy in general. I refer, of course, to the halving of car tax from 10 per cent. to 5 per cent.

My noble friend Lord Boyd-Carpenter would have liked that to have been abolished altogether, or at least he drew attention to what he described as the anomaly of VAT being charged on the price of a car inclusive of car tax. That is not unique. VAT is charged on the duty-inclusive price of all goods such as cigarettes and alcoholic drinks which are subject to excise duty. Although my noble friend may not like that, it is not unique in this particular case.

My noble friend Lord Marlesford was the only noble Lord who did not welcome the change in car tax. He suggested that in order to reduce the number of cars on the roads vehicle excise duty should be increased substantially. I point out to my noble friend that the freezing of vehicle excise duty in recent years and the relatively modest increase this year have been more than matched by the increase in duty on petrol. That is a better way of going about it: one pays as one uses one's car rather than paying to own a car.

I turn now to the 20 per cent. lower rate tax proposal in the Finance Bill, which has attracted a good deal of debate today. Noble Lords opposite, including the noble Baroness, Lady Seear, criticised the reduction in income tax to 20 pence on the first £2,000 of taxable income. However, noble Lords will recall that we have long been committed to a basic rate of 20 pence for everyone and this measure marks a significant first step towards that objective. As my noble friend Lord Boyd-Carpenter pointed out, it is a step which will particularly benefit those on low incomes. Some 4 million taxpayers will find that they keep 5 pence more out of every pound which they earn. It will, of course, benefit all taxpayers as well. So would the suggestion made by noble Lords opposite that personal allowances should have been raised by more than the rate of inflation. That would have given greater benefit to higher rate taxpayers, a strange suggestion for noble Lords opposite to make.

There is a clear division between us on the issue and the electorate will judge. I believe that the electorate will note that the party opposite wants to raise the marginal rate of tax by 25 per cent. for some 4 million people on low incomes. That is scarcely consistent with not raising taxes for Mr. Average.

I turn now to national insurance contributions, which are, of course, not a matter for the Finance Bill. They are a matter for the Social Security Bill. That reminds us, as my noble friend Lord Boyd-Carpenter said, that those are contributions which are linked in some respects with entitlement to contributions. All I would observe is that the noble Lord, Lord Peston, proposes that employees earning more than £21,000 should pay an extra 9 per cent. of that out of each extra pound which they earn. That is scarcely in line with the claim that the party opposite will not raise taxes for Mr. Average.

The question of inheritance tax was also raised in the debate although it is not included in the Bill. Noble Lords asked why it was not included in the Bill when it had been announced by my right honourable friend that most business assets would be exempted from inheritance tax and the threshold would be raised by more than indexation to £150,000 and that both measures would have effect from Budget Day. Both changes require Finance Act legislation. Normally such measures would not become law until the Finance Act received Royal Assent in mid July but they would be backdated so as to have effect from Budget Day. That applies to many Budget measures.

The short Finance Bill for approval before the election deals with Budget measures which cannot safely be left until after the election. People started paying more excise duty or less car tax from 11th March so those changes had to be confirmed before the election. However, inheritance tax is paid well in arrears so the tax will not be collected on transfers after Budget Day for some months. There is nothing to prevent a Finance Bill in a future Parliament implementing those measures with effect from Budget Day as proposed by my right honourable friend the Chancellor in his Budget. It is this Government's firm intention, if re-elected, to introduce provisions giving effect to all the Budget measures in a second Finance Bill. They will have effect from the dates announced by the Chancellor in his Budget and the associated press releases. In the meantime statutory indexation will raise the inheritance tax threshold to £147,000. That is automatic and can be overridden by subsequent Finance Act legislation. There is no confusion or mistake. Which Budget measures will become law before the election and which will not were set out in a Treasury press release on 12th March. I hope that that explanation clarifies the matter.

The noble Lord, Lord Stoddart of Swindon, among other points, asked why we had frozen the married couple's allowance for two years running. The married couple's allowance was introduced as part of independent taxation of husband and wife. It provides recognition of marriage in the tax system. This year we felt that it was right to release resources for those on low incomes by freezing the allowance. No one will pay more tax as a result of the married couple's allowance remaining unchanged because of the benefits of the 20 per cent. rate band and increases in other allowances. However, we shall review that every year.

The noble Lord, Lord Stoddart, was critical of our proposals for tobacco taxation, although they were warmly supported from both sides of the House by my noble friend Lord Boyd-Carpenter and the noble Lord, Lord Peston. In fact, my noble friend argued that it should have been even higher. I am not certain whether I would go along with that.

The argument of the noble Lord, Lord Stoddart, was that there was already a large difference in cigarette prices between ourselves and our EC neighbours and that cigarettes are roughly twice as expensive in the United Kingdom as they are in France. The duty increase in this year's Finance Bill will not significantly alter the attractiveness of buying cigarettes duty-paid from other countries. The Government are working hard in Europe to persuade our Community partners to follow our lead in taxing tobacco at a high level for health reasons as well as for fiscal reasons. Indeed, my honourable friend the Minister of State at the Treasury is discussing these issues at a meeting of the ECOFIN Council in Brussels today.

In case that is not successful, we are prepared to combat increased smuggling of tobacco products after the abolition of tax controls at frontiers between Community countries on 1st January 1993. Customs and Excise are planning a range of anti-smuggling measures to deal with the challenges that will come with the single market. These will be intelligence based, allowing additional resources to be targeted inland from the UK borders both to detect and deter any growth in illicit trade. At the moment imports represent a relatively small proportion of the UK cigarette market—about 11 per cent. Indeed, the level of cigarette imports has fallen by about 10 per cent. since last year's Budget. There is no reason to suppose that the duty increases in this year's Budget will cause that trend to be reversed. I hope that the noble Lord's fears about increased imports and particularly those of high tar cigarettes, will prove groundless.

I have several more points to cover. My noble friend Lord Cockfield and the noble Lord, Lord Houghton of Sowerby, as well as other noble Lords raised points about the procedure of this House in relation to Finance Bills. I entirely agree with my noble friend that this House has a reservoir of financial expertise that we should do well to tap. I can tell the House that on this perhaps unusual occasion your Lordships have spent almost the same time considering this Bill as did another place. I do not think that that can normally be said to be the case. Also, as I have just said on the inheritance tax point, I can tell the House that there will be a second Finance Bill. In addition, we shall want to implement in a second Budget those budget measures which do not appear in this Bill. Our commitment to those measures remains firm.

Finally on that point, there has been a warm welcome from all sides for my right honourable friend's proposals on budgetary reform. The proposal to bring tax and expenditure decisions together in a December Budget from December 1993 is sensible. That was a point endorsed by the noble Lord, Lord Peston. It will also have implications for the consideration of the Finance Bill in this House. As my right honourable friend said, we shall welcome any comments on the mechanics of that important reform of budgetary procedures.

I should like to congratulate the noble Lord, Lord Houghton, on his anniversary of having been elected to another place 43 years ago today. The noble Lord referred to the VAT penalty regime and the changes proposed in it. I welcome his support for the reductions in the VAT serious misdeclaration penalty and the default surcharge. The noble Lord may feel that the Government should have gone further in modifying the penalty regime, but there is still a need for a deterrent rate of penalty for the most serious errors made by businesses. In their visits to traders, Customs and Excise have identified in each of the past two financial years over £1 billion in undeclared VAT. That is clearly unacceptable. However, the Government recognise the need to meet the most pressing concerns of business over the VAT penalty regime and it is for those reasons that the measures have been included in the Bill.

In addition, the review of the serious misdeclaration penalty announced by my right honourable friend the Chancellor in last year's Budget has confirmed the need for radical reform of the system. But it would be wrong to rush into fundamental changes without consulting further those affected on the options for reform. Customs issued a consultation paper on Budget Day on those further issues. The noble Lord also suggested that the VAT registration threshold should have been increased by considerably more than the rate of inflation. He referred to the increase to £36,000. However, a larger increase could invoke infraction proceedings by the European Commission.

The noble Baroness, Lady Seear, asked why the cuts in the unified business rate were not in the Bill. They cannot be amended in the Finance Bill. They require a local government finance Bill. I know that it is a very welcome measure. It will cut business rates by almost half a billion pounds in the coming year. Again, we are committed to introduce the necessary legislation in the next Parliament. As for paying bills on time, the Government will do that straightaway for their own bills, as my right honourable friend made clear. I hope that other businesses will follow suit shortly.

Baroness Seear

My Lords, I hesitate to interrupt the noble Lord but this is a point of considerable interest to some people. Do the Government not intend to legislate in any way to ensure that non-governmental debts are paid? Is there to be no legislative intervention so that people have a right to claim interest on overdue bills?

Lord Brabazon of Tara

My Lords, as I said, if there is to be legislative intervention, it would have to be in the next Parliament. I refer the noble Baroness to the remarks of my right honourable friend on that subject in his Budget speech last week.

I welcome the support of the noble Lord, Lord Donoughue, for the relaxation of betting duty. It will take effect in time for the Grand National which is one of the major betting days of the year. It will also be in time for the general election which may be another quite considerable betting day. The noble Lord made one serious mistake in his speech when he said that VAT would have to rise after the election. My right honourable friend made quite clear in his Budget speech that he had no intention of raising or indeed extending the scope of VAT after the election.

In conclusion, as my noble friend Lord Boyd-Carpenter said, this is a Finance Bill to stimulate the economy. As he and my noble friend Lord Marlesford said, it is also one in which we do not wish to forfeit the great gains that we have made in dealing with inflation. I commend the Bill to the House.

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

Then, Standing Order No. 44 having been suspended (pursuant to Resolution of 12th March), Bill read a third time, and passed.