§ 3.11 p.m.
The Earl of Caithness
My Lords, I beg to move that this Bill be now read a second time.
Your Lordships will be pleased that in the past week or two we seem to have been fed on a diet of good headlines about the economy. It is clear across the economy that the recovery is gaining in strength and breadth. The vast majority of indicators from both official statistics and business surveys tell the same story. The recession is behind us, and recovery is well under way.
The most compelling evidence is the rise in total non-oil output in the first half of the year. Provisional estimates show non-oil output rising by 1 per cent. in the first half, and total GDP has now been rising for a year.
Manufacturing output rose by nearly 2 per cent. in May alone, and this followed sharp rises earlier in the year. In fact, if the high level in May is sustained, manufacturing output has already risen by more than half the total loss it sustained during the recession, and in only five months. Exports outside the EC have soared 17 per cent. on a year ago in the second quarter to record levels.
Business confidence has improved considerably. The British Chambers of Commerce survey published last week showed a rise in almost all areas of activity in the second quarter in both manufacturing and services, and a further rise in confidence for the future. The recovery is also apparent on the high street. Retail sales in the second quarter were up over 3 per cent. on a year earlier.
This time last year when I addressed your Lordships I spoke of tentative signs of recovery on the high street. Those signs have now become well established, and retail sales have now been rising for a year to record levels.
Unemployment has defied expectations and fallen for five months in a row. The fall is widespread across the country. It is early days, but there is further evidence that labour market conditions are improving and at a much earlier stage than during previous recoveries.
I do not suggest that we can expect our progress to be perfectly smooth and steady. At this stage of the recovery we must expect to see the occasional poor figure among the good ones. But with low inflation and low interest rates, together with a credible strategy to reduce the budget deficit, there is every reason to believe that recovery will be sustainable and that it will be the start of a lasting period of economic growth and prosperity. In fact, the signs of growth have been so strong that already some are prophesying boom and doom. They talk of an unsustainable pick-up induced by depreciation and aggressive cutting of interest rates. They say that the recovery will be frittered away by loss of control over inflation. We cannot afford to allow that to happen.
We currently have the lowest inflation rate for nearly 30 years and the lowest in almost any EC country. Since last December, we have been below the 1180 G7 average. We have the fastest-growing productivity since 1986. Unit labour costs are falling at a record rate while those of our competitors continue to rise. Growth in earnings is at its lowest rate for a generation and still falling.
The evidence favours the optimists. I am not ashamed to say that I am one of them. I expect that the recovery so far this year is a prelude to long and sustained non-inflationary growth. That is what our strategy is designed to deliver. We have to keep downward pressure on inflation; to nurture the recovery and ensure that it lasts; and to restore the public finances to better health. Those aims are complementary. We will not achieve sustainable growth and steady recovery unless we maintain low inflation. And we cannot have a healthy economy without healthy public finances.
We are certainly not complacent. The biggest threat to future growth and prosperity would be to allow the public sector borrowing requirement to run out of control. It has understandably built up during the recession and it is vital to make certain that it comes down fast enough during the recovery. The people of this country have made huge sacrifices over the past three years; some have lost their homes, their jobs and their businesses. For the Government to continue living beyond our means would be to make a mockery of those sacrifices.
There are three clear routes by which the public sector borrowing requirement will be reduced. The first is through growth in the economy. This will mean that the calls on social security spending will be reduced and government receipts from taxation will increase. But even if the increase in the deficit were entirely due to the recession we could not rely solely on recovery to provide the solution. Whatever its origin, the public sector borrowing requirement adds to the amount of public debt outstanding and thus to debt interest payments. The burden of debt interest is already almost £20 billion a year and in four years' time will have risen by a further £10 billion. That is £10 billion less to spend on priority programmes. Let us never forget that debt is a tax on our children and our grandchildren.
The second way of reducing the deficit is through the tight restraint of public spending. Noble Lords will no doubt be aware that the last Autumn Statement set out tough ceilings for public expenditure designed to ensure that spending falls as a share of national income over time. The Government have committed themselves to sticking to those ceilings for this year's spending round. This represents a tough but realistic remit. As the spending round gets under way, the pressures on the ceilings will be intense, but we must not exceed them. If the deficit cannot be reduced sufficiently by these means, then it is only left to do so through higher tax revenues. The Bill before us today contains a number of revenue-raising measures, and the Chancellor will be considering carefully whether there is a need for further tax rises in the Budget on 30th November.
I turn now to the Bill. The Bill gives effect to many of the important measures announced in the Budget Statement in another place. That Budget must be 1181 given a large measure of credit for the signs of recovery. It combined a prudent and determined approach to the management of public finances with policies to encourage and sustain the recovery in its early stages.
It was a Budget which increased some taxes—and that is never popular—but reduced others, and that is never commented on. But virtually no net increase in taxation is proposed for the current year. Instead, the Budget measures—many of them in the Bill before us today; others to be legislated at a later date—will create a steadily rising wedge of revenue from 1994–95 onwards.
Moreover, the measures which do take effect in the current year show a strong commitment to business, which is of course the engine of recovery. The Bill gives business the benefit of around £1 billion in tax reductions in 1993–94 (I shall be mentioning a number of specific measures later) so it is no surprise if the good seed sown by the Budget is already beginning to bear fruit.
Let us not pass over the bad news in silence. Taxes are going up, raising additional revenue of £6½ billion in 1994–95, and £10½ billion in 1995–96. Those increases are essential. The public sector borrowing requirement for this year will be around £50 billion. That is £1 billion a week —£1,000 a year for every man, woman and child in the kingdom. No responsible government could fail to take action in the face of a deficit of that size, and the former Chancellor was right to grasp the nettle. To risk losing control of public borrowing would be to burden future generations with our profligacy. It would be no better than gambling with the life savings of our pensioners. I am sure that your Lordships agree that that would not be just short sighted; it would be morally reprehensible.
This is not a government who would propose tax increases unless they were essential. Nor is it a government who would propose tax increases unless they were fair. The package of Budget measures was carefully designed so as to be broadly neutral right across the income scale. That means that it is fair in its distributional effects. Those who can afford to pay the most will make the biggest contribution.
I have heard some criticism of the length and complexity of this Finance Bill. In general, the increasing complexity of tax legislation reflects an underlying commercial reality. In particular, this Bill includes a number of technical but nevertheless important and necessary measures, such as the provisions relating to foreign exchange gains and losses. Those and others have been the subject of widespread prior consultation. The Bill also contains some anti-avoidance provisions made necessary by the increasing efforts of some taxpayers to find ever more ingenious ways of avoiding paying their share of taxes.
I turn now to the detail of the Bill, beginning with those clauses covering indirect taxation. Some of these are familiar clauses changing excise duties. Alcohol and tobacco duties rise by 5 per cent. and around 6½ per cent. respectively, figures judged to balance the revenue and health policy considerations pointing to large increases against arguments for caution in the 1182 first year of the single market. The notable exception, of course, is that there is no change to duty on Scotch whisky, something I and many others of your Lordships welcome wholeheartedly, I am sure.
Vehicle excise duty for cars rises by £15 to £125—still below its 1979 level in real terms—and fuel duties rise by 10 per cent. That increase reflects in part the need to recoup lost revenue from the widely welcomed abolition of car tax in last year's Autumn Statement. It also reflects the Government's new long-term commitment to raise road fuel duties by at least 3 per cent. in real terms on average in future Budgets, as a measure to encourage fuel efficiency and thus reduce carbon dioxide emissions.
The Bill also legislates for duty on the national lottery. The lottery is an excellent innovation which will provide important funds for important causes. We have always made it clear that the lottery would have to be taxed, to offset tax lost as consumers diverted their expenditure from elsewhere, and I was pleased that we were able to announce an initial rate of tax on stakes of 12 per cent., lower than many had speculated, with no tax at all on winnings.
I turn now to value added tax. Clause 42 of the Bill, which extends VAT to domestic fuel and power, has been the subject of long and intense debate in another place. It will raise very substantial revenues; it will encourage energy conservation, helping the UK to meet its United Nations commitments to reducing carbon dioxide emissions; and it will bring our VAT treatment of energy into line with every other EC member state. The Government have made it clear that extra help will be made available to those on low incomes through income-related benefits, before the effects of higher fuel bills are felt. Cold weather payments will also be increased. My right honourable friend the Secretary of State for Social Security will announce the details in the autumn.
The Bill also contains two important measures on VAT to help business, which have been widely welcomed. VAT relief on bad debts is now available after a six-month waiting period, rather than 12 months, benefiting business to the tune of £150 million this year, and addressing a common source of representations, especially from small businesses. The VAT penalty regime will also be reformed, to remove some of its harsher features and to make it more flexible and fairer to the honest trader.
I turn now to direct taxation. As far as any personal tax is concerned, Clause 52 holds allowances to the level they were last year, a measure the Government believe is justified by the need for revenue, and the current low rate of inflation, while Clause 51 extends the 20 per cent. tax band introduced last year to the first £2,500 of taxable income. A further £500 extension is planned for the next tax year, fulfilling the Government's pledge to make progress towards a 20p basic rate of income tax for all.
The Bill also contains a number of clauses dealing with the taxation of benefits in kind. I draw your Lordships' attention in particular to Clause 72, which establishes a new, fairer and more rational basis for the taxation of company cars, based on the 1183 manufacturer's list price. This reform took into account the results of an extensive process of consultation, and has been generally welcomed.
Turning to business taxation, Clause 53 sets the main rate of corporation tax at 33 per cent., and Clause 54 sets the small companies' rate at 25 per cent. Even in a revenue-raising Budget, the Government felt it vital to retain the advantages of low business taxation. Our main rate of corporation tax remains the lowest in the European Community and the G7.
The Bill also contains proposals to help businesses with surplus advance corporation tax, while raising substantial revenue for the Exchequer in later years. Clauses 77 to 79 reduce the rate of advance corporation tax (ACT) to 20 per cent. in two stages, reduce the basic rate of tax on dividends to 20 per cent., and reduce the tax credit on dividends to 20 per cent. Clause 80 provides transitional relief for charities from the impact of these changes on their dividend income, at a cost of around £100 million.
Clauses 113–115, and Schedules 12 and 13, are also good news for business. They legislate for the time-limited enhanced capital allowances announced in the last Autumn Statement. These were warmly welcomed in the business community, and will surely in due course be given credit for the progress in the recovery which we are now seeing.
I want also to mention a particularly welcome change in the capital gains tax rules as they affect entrepreneurs. Clause 87 and Schedule 7 extend CGT rollover and retirement reliefs for entrepreneurs in a way which should give great encouragement to these individuals—the key to our economic success, and thence of course to employment—who want to go on investing their returns in new enterprises.
There are two long parts of the Bill on which I do not propose to dwell. The first deals with the tax treatment of foreign exchange gains and losses. As I have already mentioned, this is a highly technical subject, but one on which we have consulted widely and on which we have been pressed to legislate. The second concerns Lloyd's underwriters. The changes affecting Lloyd's will place the tax treatment of this great British business on a firmer and surer footing for the future. They are broadly revenue neutral.
The changes to petroleum revenue tax proposed in Part III of the Bill put in place a credible and sustainable tax regime for the North Sea. Abolishing PRT for new fields and cutting it to 50 per cent. for existing fields will make for more soundly based commercial decisions and remove barriers to investment. And the amendments which have been made to this part of the Bill, based on representations by the smaller oil companies, will provide significant transitional protection. The Government believe that the position set out in the Bill, on both the transitional arrangements and the final objective, will endure in the long term, and we have no plans to revisit the issue.
This is a long Bill—longer than I would have liked and I have made a longer speech than I would have liked—and there are many important clauses in the Bill which I have not had time to mention. But I have 1184 no doubt that it is a Bill for recovery, a Bill for business, and a Bill for sound public finances. I commend it to the House.
Moved, That the Bill he now read a second time.—(The Earl of Caithness.)
§ 3.27 p.m.
§ Lord Peston
My Lords, I thank the noble Earl, Lord Caithness, for introducing the Finance (No. 2) Bill. He said that he approached this whole matter as an optimist. I hope that he will forgive me, as a practitioner of the dismal science, if I am slightly less optimistic, but I would not have become an economist if I had the same robust view of life as he has.
I shall follow the noble Earl in looking at the economy in the large and then looking at the detail of the Bill. On the economy at large I hope, as the noble Earl hopes, that the recession is behind us. Whatever one's political views, no one can wish one's country to produce at less than the highest rate of output that we can sustain and no one would wish our factors of production, notably the labour force, to show much unemployment.
However, I must draw to the noble Earl's attention the latest figures available for second quarter of 1993. They show that output (at 114.5) is above the low point—or what appears to be the low point—of the recession a year ago of 112.8. Wearing my economist's hat, I must draw the noble Earl's attention to the fact that at the peak, which occurred in the second quarter of 1990, output was more than 3 percentage points higher than it is now, so we need at least a year's recovery—perhaps more than a year's recovery—before we get back to the previous peak. That is not much of an achievement in a growing economy. What one wants is growth well beyond that.
Therefore, although the position—to put it bluntly—is not as bad as it was it is a long way from any state of affairs that anybody could regard as satisfactory. I could make a similar point about manufacturing. Clearly, manufacturing output is now rising but, again, it is over 5 percentage points below the position that it reached at its peak in 1990.
Equally, the Minister did not place, or if he did I was not paying sufficient attention, enough emphasis on manufacturing productivity. If he did not say it, let me say that manufacturing productivity has clearly risen in the last couple of years, and that is a good thing. The only problem is that it has risen to a considerable extent as a result of firing workers rather than achieving anything positive by obtaining extra output from existing workers.
On the macro-economic position, the Minister was right to draw our attention to the fact that unemployment is falling and not rising, but it is falling from 2.99 million to 2.91 million. It is a sad day for our country when 2.91 million unemployed people is regarded as an acceptable state of affairs. Speaking as an economist I have to admit, as do most of my fellow economists, including the alleged seven wise men, that one is somewhat puzzled by the fact that unemployment is still not rising. But, to say the least, it is not falling very much. I hope that the Minister will forgive me if I point out that unemployment in the best year 1185 during which the Government have been in office was at 1.6 million, and 2.9 million is a fair way from that and is no kind of achievement.
One further matter on the macro-economic picture —unless again I missed the point—the Minister said virtually nothing about the rate of exchange. He did not remind us that we were driven out of the ERM and that sterling has been devalued. He did not tell us something which I hoped he would have told us. I read in one of the Sunday newspapers that the Treasury now believes, in so far as our performance has improved, according to some unpublished but leaked Treasury paper it has improved because we were driven out of the ERM. As an economist, I find that hard to believe. I should like to see that leaked, unpublished report.
I shall be interested to know whether that is the view of Her Majesty's Government: that whatever upturn we have had is connected with being driven out of the ERM. That relates to another matter which the Minister has not discussed. What is the Government's view of the exchange rate? Are they happy with the fact that it is now drifting up again? Do the Government regard that as a satisfactory state of affairs or do they take the view that the devaluation was helpful to us? Are the Government now worried that sterling might strengthen again? Depending on how the clock ticks away, I may have another word or two to say on the ERM. Indeed, the terrible word "Maastricht" might even pass my lips, but I am not certain about that. It will depend upon the time.
Let me accept the Government's dilemma in terms of what policy should be. What should policy be? If we assume that what is called the underlying growth rate of the British economy is between 2.25 per cent. and 2.5 per cent. per annum, then by any standards the current growth rate of 1.5 per cent. per annum is low. We should be growing more rapidly than that. We should be able to sustain growth of over 3 per cent. per annum for a few years.
The question we must ask the Government, while they are still there, is, first, do they agree with that? Secondly, do they feel that they need to do anything to help that or do they accept that it will happen automatically? What one has—one's heart always goes out to the Chancellor—is the obvious contradiction: unemployment by any standards is too high; GDP is well below its peak; and, as the Minister pointed out, the inflation rate is by any standards low, and I congratulate the Government upon that.
Looking at those indicators, there can be no doubt that policy should be in expansionary mode. The Government should be encouraging rapid expansion. When I used to teach that sort of thing, that would be the scenario in which one would say, "Move into an expansionary mode of policy". But at the same time the Government have the problem of the twin deficits. They have the budget deficit. As the Minister pointed out, the interest rates on that deficit will in due course give rise to a serious burden on taxpayers. It would not necessarily be a burden were the deficit used to finance investment. That investment would yield returns that would be beneficial to future taxpayers. The trouble is 1186 that that deficit is financing social security payments which, although it is right to make such payments, yield no returns.
That is one of the Government's problems. The other is the current account deficit on the balance of payments. I have bored your Lordships for years by pointing out the tremendous burden that that will become in due course. We moved to a position of surplus, not unconnected with North Sea oil and the accumulation of foreign assets. I have seen calculations that already suggest that our net asset position overseas is negative. Even if it is not, it is not far off. That has a similar effect in that there will not be a net interest payment flowing across the exchanges to help finance the trade deficit. That is why the Government are in such a dilemma. On the one hand, from the domestic standpoint, they wish to engage in an expansionary policy on the variables that I have mentioned; but, on the other, all the indicators would suggest a contractionary policy.
That is why in the end we have had no indication from the Minister—I do not criticise him for this—about what the Government might do. I can say only that we then find ourselves in a weird position, because in four months' time we shall have another Budget, and although we are debating this subject today—it is no insult to the Minister; he knows that I would never insult him—we are waiting to hear what his right honourable friend the new Chancellor will say to us in November. I should like to see a way out of this dilemma.
What I wrote in my notes, and I might as well go to it now, is that again one has heard nothing from the Minister about the future of the ERM. Now that the Maastricht Bill is law, as I understand it—I am slightly naive about these matters, but I believe that it is the law of the land—the Government are in what we might call, if your Lordships will forgive the poor English, the pre-EMU situation. What interests me is whether we shall see moves relating to the Government's own deficit and the overall ratio of government debt to GDP. Will the Government move to a position where it is up to them to choose what to do about EMU?
I shall not say any more about that subject because by the time that I sit down the ERM may not be there. As the Minister is aware, I speak with forked tongue. On the one hand, I am a strong supporter of the ERM; but, on the other, I am off on my holidays to France next week and a fall in the value of the franc would suit me to a considerable degree. But, of course, as a man of principle I wish to see the ERM survive. We do not know that and so all our debates on these matters may be entirely theoretical. As an economist, of course, I do not mind things being theoretical.
Perhaps I may turn to the details. There are parts of the Finance Bill which are wholly acceptable. Perhaps I may mention two, neither of which I think the Minister mentioned. The first is that it is to the credit of the Government that in real terms they have pushed up the excise duties on tobacco. Whenever my noble friends attack the Government because their 14 years in office have been totally worthless, I always reply, 1187 "They have not been totally worthless; they put up the excise duty on tobacco in real terms". I am glad to see that that has happened again.
Secondly—and I see that my noble friend Lord Donoughue is with me today—I am pleased with what the Government have done about bloodstock and its taxation. There are of course things in the Finance Bill of which we on this side of the House approve. But noble Lords would find it remiss of me were I to devote what time I have to saying what the Government have done that is right. So I must at least mention two or three things about which, to say the least, I am unhappy.
Obviously the lack of change in tax allowances—it is clearly an increase in taxation—infringes a principle about which I am worried. The allowances should be kept at the minimum in real terms. The Government should not duck out of other tax decisions by choosing not to index the allowances.
On purely democratic grounds I believe that not indexing the allowance brings too many people into the income tax net. That is a sheer waste of people's time and of the time of the Inland Revenue. Therefore, I deplore what the Government have done in that respect. Secondly, the increase of 1 per cent. in national insurance contributions is simply an increase of 1 per cent. in the marginal rate of tax. The Government can scream the place down about being opposed to increases in the marginal rate of tax, but that is as classic an example of it as one can have.
Unless I was not listening attentively, I did not hear the Minister mention the fact that the rate of relief on mortgage interest has reduced to 20 per cent. I had assumed that that was done following what we now discover was the view of a former Chancellor of the Exchequer and as a preliminary to the complete removal of mortgage tax relief. However, I gather from today's Financial Times that the Chancellor of the Exchequer has stated categorically that the Government have no intention of removing it. I should be grateful if in reply the Minister would comment upon that. I should like to know the argument behind that. I am puzzled that it has not been mentioned today since I thought that it was a preliminary.
The Minister and the Budget Statement dealt with the increase in VAT on fuel and so forth. The Budget Statement was intriguing in that the Chancellor argued for that increase on two grounds. The first was in terms of a "green" policy—that the increase will raise the marginal cost of using fuel; secondly, and grinning as a Chancellor —I am totally with him on that—that the increase will bring in a great deal of revenue. He said that as regards domestic fuel and power he was introducing VAT at an interim rate of 8 per cent. but that he would raise it to the full rate by April 1995. The Minister did not comment on that in his speech and I wonder whether in reply he will tell us whether it remains government policy.
Our debate gives me one last chance to say something about a matter with which I strongly agree in the Government's approach to these matters. I believe that a Budget which sets out the future in 1188 addition to saying what will happen immediately is good. I am not attacking the Minister's right honourable friend, or his previous right honourable friend, for saying what he intended to do in the future. However, I should like to know whether he will stick to that.
On the plus side there are two or three useful matters in the Finance Bill of a detailed micro-economic nature. However, I hope that noble Lords are aware of the fact that in terms of tackling the underlying macro-economic problems before the country the Government have avoided the question of whether they can set macro policy at a strong, positive level. Perhaps they are so scared that they cannot do that. Therefore, at this point one's judgment is ad interim and one must return to what the correct role of policy should be. In order to leave the House in no doubt, my judgment is that the recovery will not be sufficiently strong. If, as is not impossible, by November I and my noble friends were in charge of macro-economic policy, we should certainly move it into a more positive and expansionary mode.
§ 3.44 p.m.
§ Lord Ezra
My Lords, I believe that debates in this House on finance Bills should concentrate on the broad economic strategy rather than on detail, which is a matter for another place. We should see how the broad thrust of the Government's financial measures is likely to impact on the long term rather than operate simply in the short term. That leads one to consider what our long-term strategy should be, a matter touched upon by both noble Lords who have spoken.
In my opinion, as we come out of the longest post-war recession there must surely be two main strategic economic objectives. The first must be to restore our industrial wealth-creating capability. The second must be to do so on a sustained basis and with an increasing regard for human and environmental considerations. We need to look at the measures in the Bill against those two objectives.
The Government's past economic policy has not been encouraging as regards the long term. Having allowed the economy to overheat at the end of the last decade with rapidly increasing inflation, the Government felt constrained to intervene to deal specifically with the inflationary problem and to do so by substantially increasing interest rates. That was the period of the blunt instrument about which we were all much concerned at the time.
Certainly, the Government achieved their objective of bringing down inflation. However, as a result of that policy, we are confronted with two other problems; namely, rapidly increased unemployment and a substantial budgetary deficit. In the measures before us the Government are concentrating on the budgetary deficit and are hoping that the unemployment problem will be curbed as a result of increasing growth.
We must decide whether the concentration on single issues—on inflation and then on the budgetary deficit—is the right way to plan forward for our economy. Is there not a case for saying that there should be a more balanced approach rather than a 1189 collection of ad hoc measures to deal with a day-to-day problem? I wish simply to pose that issue. I very much fear that if that is to be the approach we shall continue to have the disease from which we have suffered since the end of the last war; namely, stop-go. We have had the "stop" situation and we are coming out of that. We now have "go" but who knows when the next "stop" will come.
I wish to consider how a more broadly-based approach might be applied in relation to three major issues of economic policy; namely, investment, transport and energy. All those issues are dealt with in the Bill before us. I take investment first. During the 1980s the rate of investment while rising in Britain fell substantially below that of a large number of our OECD competitors. We fell signally behind in particular in the areas of innovation and patents. In recent times there has been some improvement in investment. The Government have helped that by the measures to which the Minister referred. But they are short-term measures. The question is whether the opportunity should not have been seized to consider an array of fiscal measures which, applied in the long term, could ensure a sustained higher level of industrial investment.
There is also a real problem as regards the public sector. While the level of investment has risen in a number of areas of the public sector it is, nevertheless, clearly inadequate. It has fallen below the required levels. I express the hope that the unified structure of the Budget to be presented in November, with its proper distinction, we are told, between capital and revenue expenditure, will lead to a better recognition than there has been in the past of the importance of public investment, especially in the infrastructure.
That leads to transport, an area where investment, although rising, has not reached adequate levels. Time and again in this House, when we have debated transport policy, emphasis has been put on the need to improve public transport in order to reduce pressure on the roads. However, what is the situation we are now in? As regards the railways, there is grave uncertainty about the levels of investment which will arise under the proposals for privatisation which the noble Earl is in the process of presenting to us. As regards the London Underground, whereas last year the Government increased expenditure in line with what the management had asked for, to provide a really up-to-date Underground system, those of us who follow the matter were amazed to see that in the Autumn Statement expenditure was cut by one-third. All those plans have now been jeopardised—at the very time when more people may come to work in London, as the economy recovers.
Like some noble Lords, I was disturbed to read an article in The Financial Times of 24th July. It was a special article dealing with the second car market. That is not the second-hand car market; it is the market for people who already have one car and wish to buy another. The article stated:As bus and rail services continue to decline, so the second car is becoming a necessity rather than a luxury".That was written by the motoring correspondent; there is no political bias about the statement. It is the 1190 view of people who study such matters that our public transport is declining. Therefore, people need not one car but two cars in order to do what they have to. Surely, that is a serious indictment of our lack of an effective transport policy.
I turn to energy. The Bill touches on energy in a number of ways. There is the increase in the motor fuel tax, to which the noble Earl referred; VAT on domestic energy consumption; and changes in PRT. All those measures have at least one thing in common—they are revenue-raising. But the question I pose is whether they support what ought to be our long-term energy policy. What should that energy policy be? It would take more time than I have at my disposal to describe it adequately; I shall however make some brief comments. In the first place we have to stimulate efficiency in the use of energy; secondly, we must safeguard our long-term supplies of energy. I should have thought that those were two of the main aims we need to go for in regard to energy policy.
We need to ask whether the measures in the Budget satisfy those requirements. It can. of course, be claimed that any tax increases in energy would stimulate greater efficiency. But has that been done on a carefully thought-out basis? For example, let us take the tax on motor fuel. We need not only to raise increased revenue, but also to encourage people to maximise the efficiency with which they use motor fuel and to minimise the amount of CO2 and other noxious emissions they put into the atmosphere.
It so happens that there have been remarkable improvements in this country as a result of work done by British firms, in particular by Lucas Industries, in the use of diesel fuel. As I am sure your Lordships are aware, diesel results in about a 30 per cent. improvement in efficiency of use and a 20 per cent. diminution in CO2 emissions. The Government have in the past differentiated in favour of unleaded petrol, with some success. Why do we not do the same as other continental countries in favour of diesel energy? Furthermore, if a company in Britain has a leading edge in that technology, why not encourage it? The statistics in France and Germany, where there are differentials, show without doubt that it has an impact on the use of the fuel, with great benefits to their technology, and with atmospheric and environmental advantages. So again I say: have we sufficiently thought out what we are trying to do in that sector?
Let us come to the much-debated question of VAT increases on the use of domestic energy. I presided over an inquiry by one of the sub-committees of the European Communities Committee into the Commission's proposals for an energy tax. We came out with much criticism of that proposition. One of the reasons we did so was that we felt that it would bear very hard on people with low incomes. We were not against the idea of taxing energy, or having incentives for energy saving, so long as they achieved the required objective. However, will the Government's proposed tax do so?
In looking through the debates in the other place, I see that it was stated by a Minister that the Government would expect the measures to reduce CO2 emissions by 3½ per cent. I strongly dispute that 1191 figure. I have considerable experience of the problems of people on low incomes heating their homes because for many years I have been associated with an organisation known as Neighbourhood Energy Action. Its task is to insulate the homes of such people. There is no way in which they can reduce their consumption of energy without causing themselves substantial hardship. I have asked people who are not in that income group about the effect on their usage of energy. Most said, "We will use the energy that we require in order to heat ourselves". I do not therefore see where the saving would come, if that is the objective and it is not simply a revenue-saving measure.
I can tell the Government how to achieve savings in emissions. It is by substantially improving the standard of insulation in British homes. We lag way behind other countries. It is not simply a statistical matter. I regret that it is a matter of life and death because the mortality rate in this country in winter compared with summer is substantially higher than in any other continental country. We have about 30,000 to 40,000 more deaths in winter than we have in summer. In Denmark, the number of deaths in summer and winter is identical and in most other countries it is much lower than here. That is the crucial issue to be tackled by fiscal measures. Let us get our insulation improved; let us make better use of energy in the home. Then we shall achieve what is said to be the objective of the tax.
Perhaps I may turn to the PRT, the petroleum revenue tax. That affects one of the other aspects of energy policy to which I referred; namely, the need to safeguard our long-term supplies. Clearly, the best reserves in the North Sea have already been exhausted. One would have thought therefore that a major objective should be to stimulate companies to explore for the more difficult reserves. Indeed, the PRT system which existed until it was changed by the proposals before us did so. Now the incentive is being removed and the motivation of firms to explore for more reserves in the North Sea has been substantially diminished. Instead, there is greater incentive for those working on the large existing fields. But once exhausted, what will take their place?
The ultimate objective—which is to remove PRT altogether —is highly desirable. What is questionable is whether the interim measures have been adequate. I do not believe that they have, even though some changes were introduced during the course of debate in another place. I do not believe that the energy measures being introduced in the Budget can be regarded as anything other than revenue-raising measures. In my opinion, they do not adequately address the two main objectives of energy policy: first, to stimulate effectively efficiency and use; and, secondly, to safeguard long-term supplies.
On the question of long term supplies, we have only to remind ourselves of the problem that has arisen over the coal industry. It is very rapidly diminishing in size, even though its productivity is improving at a phenomenal rate. In a few years' time, we shall have 1192 very little coal capability left. It seems to me that those aspects of energy policy should be addressed in the future financial measures that are brought before us.
I gain the impression that the Government's's determination to deal with the budgetary deficit—which, of course, is important—has overridden all other considerations and that we are faced with a relatively disparate collection of revenue-raising measures which, having first been thought up by the skilful people in the Treasury, have subsequently been invested with some sort of justification. Too little use has been made of the fiscal weapon to achieve long-term objectives. I should like to conclude by expressing the hope that, in the unitary budget which will be introduced in November, we shall find a serious endeavour to relate financial, and particularly fiscal, measures to what the country needs in the long term.
§ 4.3 p.m.
§ Lord Boyd-Carpenter
My Lords, my noble friend the Minister opened his very interesting speech in moving the Second Reading by saying that it was a very long Bill. It is not only a very long Bill, it is also one of major importance. Indeed, it is perhaps the most important measure with which we shall have to deal during the current Session. For that reason, I am sorry that we are to have only one debate on the Second Reading. I say that because with a Bill of this size, complexity and importance, one's speech would have to be measured in hours rather than minutes if one was to attempt to cover it in its entirety. One can only do as noble Lords who have already spoken have done; namely, pick out particular points in which one is interested and then pass them on. However, one must be conscious—as I am sure we all are—of the fact that a comprehensive debate on the Bill as such is all but impossible. In the light of this experience, I very much hope that when we come to the next Session the powers that be will arrange not only for a Second Reading debate but also for further debates on later stages of the Bill so that we can pick out particular aspects.
It must be remembered—and, indeed, those in another place must remember—that your Lordships' House includes a great deal of expertise on the subject. The House is full of people with experience either in the Treasury, in the City or in finance. Indeed, given a fair chance, this Chamber can give a great deal of help to the Government and to intelligent public opinion by its debates, not only from those speakers like the noble Lord, Lord Peston, who is an economist, but also from others with practical experience in various aspects of finance. There is far more expertise here than in another place. I hope that those who organise our procedures will, in the future, take note of the lesson to be learnt. I know that we cannot amend a Finance Bill, but we could have several stages during which debate could perhaps, by arrangement, be canalized on certain aspects of financial policy. I note that the noble Lord, Lord Peston, seems to be indicating that there is some point in what I say.
Having said that, I must say how much I admire my noble friend the Minister on the Front Bench—who, 1193 of course, is not a Treasury Minister—for his skill in making that admirable speech. Equally, one must be grateful to him for the very cheerful note upon which he began. He rightly pointed out that, although this country has been through an economically extremely difficult, trying and dangerous time, there are many signs of a recovery in the economy. That leads one to the conclusion that now is the moment for the very greatest care to be taken as regards the measures that are put forward. I say that because it is just at the moment of recovery that a blunder, or some heavy-handed mishandling of the situation, could check the recovery that we all seek. Therefore, although what my noble friend said about the tendency at present is cheering, I suggest that it is also, perhaps, a warning to your Lordships and to the Government that this is the time for the most skilful and most delicate handling of our economy.
I turn now to one or two of the points out of the many to which I should like to invite your Lordships' attention. I regard VAT as a thoroughly had tax. It is a tax which falls very heavily and clumsily right across the economy. It is a tax imposed not only on items but on work—for example, on work contracts. It is very oppressive in many ways and it compares very badly with its predecessor, the old purchase tax. I must confess to having some sympathy with the purchase tax as I administered it for many years. However, it had a great advantage that VAT does not have; namely, flexibility. Indeed, the rates varied enormously. They were very high on luxuries. If I recall rightly, the purchase tax on jewellery was 66⅔ per cent. On the other hand, whole areas of life, such as children's clothes, were tax free. It was a deliberately discriminating tax that I think worked extremely well, while also producing a very substantial revenue. Moreover, it was an infinitely more flexible and civilised instrument of taxation than VAT. I wish that we could move a certain amount of our VAT system in order to achieve some of the merits and assets which we derived from the old purchase tax.
Of course, VAT can be very oppressive. I wish to refer to a tiny example from my own experience. I am churchwarden of a small church in the country. Recently the diocese consulted an architect who told us that our roof had to be repaired. With very great effort we raised the £5,000 required to repair the roof, but then had imposed on us VAT of £850. I am aware that that is only a personal example, but it is a good indication of the clumsy nature of VAT. No one studying a case of that sort can conceivably say that there is any public interest served by imposing a tax on those who, with great difficulty, raise funds to repair a small church in the country. I wish to place on record the view that I consider that one of our present weaknesses is VAT.
I wish to say a few words about inheritance tax. For some time I have been pressing, unsuccessfully, for inheritance tax not to be levied on a principal home. There is already a concession in respect of principal homes as regards capital gain. When someone dies his family is in an unhappy position both from an economic and a personal point of view. For that family then to have to pay tax on a home seems to me 1194 wrong. It also means that people who inherit historic homes—there are quite a number of those who recently have done just that as their relatives have died—find it extremely difficult to carry on. Often they have to approach the Exchequer and ask for grants to enable them to continue to occupy their homes. I feel that when Her Majesty's Government are looking at taxation they should consider removing inheritance tax from people's principal homes.
Those are, of course, criticisms which point in the direction of reductions in tax. Therefore, I must in fairness move the other way. The noble Lord, Lord Peston, referred to tobacco duty. However, there is only a modest increase in that duty. I know of no reason why the increase should not be much more substantial. The Government could obtain considerable revenue thereby.
In that connection I must tell your Lordships of my own experience during my two tours of duty at the Treasury. On three occasions in those two tours of duty I succeeded in persuading the Chancellor to increase substantially tobacco duty. We were advised solemnly by Customs and Excise that we were going too far and that an increase of that kind would discourage consumption, thereby losing revenue. On all those three occasions I have mentioned, the Customs and Excise theory proved right for a fortnight. For a fortnight after the increase in tax, yields went down. However, in the third week, yields started to mount and I was proved to be right and Customs and Excise were proved to be wrong. We obtained a substantially increased revenue and we discouraged smoking, at any rate to some extent. That must surely he an advantage.
Very little has been said so far in this debate as regards my next point. When one is criticising increases in taxation—I very much share the criticism of those who are sad to see VAT imposed on domestic fuel and who believe it will cause a great deal of hardship to a great many people, whatever relief measures are imposed—it is fair that one should indicate how, in one's own view, the Government should proceed to help the development of the economy. I suggest to your Lordships that that must involve substantial cuts in expenditure. These are never popular and they cause offence. But it is essential, if our economy is to continue to work and to work properly, that it should not be exposed to increased taxation. If it is not to be exposed to increased taxation, given the present state of the national finances it is necessary to reduce public expenditure.
Having said that, it is only fair that one should offer one's sacrifices to your Lordships because any reduction in public expenditure naturally causes offence and difficulty to some people. I suggest that legal aid, which has increased and is again increasing this year and now amounts to one billion, four hundred million pounds, is simply too high and that the system requires radical reform. I know this may well cause difficulty to some individuals. It will certainly cause some disadvantage to some members of the legal profession. However, it is nonsense in the present state of our economy to continue to increase 1195 expenditure on legal aid. I suggest that it is time it was cut. I share the admiration of your Lordships for the gallant fight which the noble and learned Lord the Lord Chancellor has been making in that direction. I am only sorry that he has not been successful but there is a considerable saving to be made there.
There are other savings that could be made. One area of expenditure that is much smaller in scale but is not altogether negligible is the expenditure on the war crimes legislation. That is an utter waste of public money. There are a number of areas where, if the Government are determined, they can reduce public expenditure. I ask my noble friend the Minister to deal with that point when he replies to the debate, as it is the key to the problem.
If your Lordships take the view, which I hold strongly, that increases in taxation can only slow down the recovery and damp down the expansion of the economy, the only way to restore the balance is by reductions in expenditure. That calls for great courage and hardihood on the part of Ministers, but I am sure those are qualities they will show. Everything depends on getting the economy going again. If we can restore the working of our national economy, succeed in bringing down unemployment, increase production and productivity and expand our economic activity, then the Government will have given superb service to this country for which I know this country will, in due course, be very grateful.
§ 4.18 p.m.
Lord Bruce of Donington
My Lords, since I first came to your Lordships' House there have been no fewer than 19 Finance Bills and I have participated in 18 successive debates on these Bills. After all that I feel that I have been here many times before and have heard most of the arguments many times before. But what depresses me today is not so much the comprehensiveness —some of it academic but all of it important—of the factors mentioned in describing our economic situation as a lack of urgency in the debate. In no part of the House so far has any real sense of urgency been introduced into the proceedings. I find that a little depressing. I should not like to arrogate to myself the attribute of being the only one susceptible of an emotional response. I am quite sure that I am speaking in the presence of extremely sensitive individuals who are just as sensitive as I am. However, I am disappointed by the lack of urgency expressed by your Lordships in relation to the economic situation as it has been described.
Fortunately, we do not have to enter into a re-description of the state of the economy and of the nation's fortunes during the years that have elapsed between 1979 and the advent of Mr. Major as Prime Minister because he has already done so in some unguarded moments. His comments rather surprise me since I would not normally like children to be exposed to broadcasts which contain four-letter words and other extreme expressions. Nevertheless, he said, with some truth, to his questioner. Mr. Brunson: 1196Just think it through from my perspective. You are Prime Minister. You have got a majority of 18. You have got a party still harking back to a golden age that never was but is now invented".There can be no better description of the regime immediately preceding Mr. Major's.
When we reach a situation in which unemployment as such is mentioned almost en passant, without any realisation of the human misery and degradation that lie behind it, one cannot help but feel that economics is no longer discussed and thought of in human terms but in academic and tidy terms. The economy is regarded as being centred largely in City boardrooms or in the boardrooms of large companies, whereas the total economic activity of a nation goes right down to its smallest member. Its smallest member participates either as a customer or as a producer and enters into the economy of the country either through the receipt or expenditure of money, the receipt of services or as the provider of services. Therefore, the economy includes us all. When noble Lords opposite talk of prosperity I sometimes wonder in what context they think of it at a time when even the basic necessities of life are denied to millions of our fellow countrymen. The mind boggles at the thought.
There are occasions when public expenditure has to be raised. The noble Lord, Lord Boyd-Carpenter—with whom it is always a great pleasure to exchange views—always concentrates upon that. It is sometimes forgotten that the reductions in the cost of labour and in any redistributive taxation benefits are themselves a cut in effective demand for commodities. It is forgotten that it is not only the supply side of the economy that requires attention but also the demand side. Therefore, when there are squeals of delight at shedding labour (to use the impersonal term) and when executives are praised and given lavish bonuses for cutting labour costs, one should remember, as Keynes always remembered, that at the same time one is also cutting down the demand side.
What is vital at this time is urgent steps to stimulate demand. Of that there can be no doubt. As every economist knows—and here I include my noble friend Lord Peston—supply side measures, such as trading and investment, take at least two years from the drawing board stage to come into effective operation. Similar observations apply to training. It takes a long time before the economic effects of investment in skills and new machinery become significant.
Steps ought to be taken now to kick-start the economy. I have ventured to suggest to your Lordships many times that one of the steps is the release of massive funds already in the possession of local authorities to start building and construction. That would be non-inflationary and would immediately reduce unemployment, with all the multiplier effects that follow. That would begin to kick-start the recovery.
There can be no contentment while there are 3 million unemployed. The figure in terms of real unemployment is probably nearer 4 million than 3 million. As long as that remains, the demand-led expenditure of the Government on social security, health, law and order, education and a whole series of 1197 measures will become worse. The only way to get into balance once again is to reduce unemployment drastically as a matter of urgency.
I am not talking purely in terms of encouraging more human happiness among our people, although one could go on about that for a long time. At the moment there is fear throughout the country. There is fear in practically all strata of society. Creativity, purpose and morale do not flourish in a climate of fear. They flourish only when there is a perceptible purpose with which people can identify so that they have hope again. Once they have hope then the country can go forward.
If the Government regard recovery and prosperity in the conventional terms which have been mentioned in the past—which means that City boardrooms can award their managing directors and others terrific increases in salary for increased performance—they are sunk.
In my view the answer does not lie in theoretical solutions. Here once again I must assail the coalition between my Front Bench and the Government on the question of the exchange rate mechanism. Any re-entry into the exchange rate mechanism, notwithstanding the diligent brilliance of my noble friend Lord Peston, is quite out of the question. I tell him so again now and I shall be telling him so in two years time, when I hope he will be able to acknowledge that I was right. Any endeavour to enter the exchange rate mechanism and to remain in it will impose an artificial limitation on our ability to control our own affairs with at least the efficiency with which international bankers or unelected commissioners could control them. I have more faith in my own country than that.
Therefore the Government should take urgent action and should be supported by the Opposition. However, they should not follow the advice of the Opposition to re-enter the ERM at another uneconomic and uncompetitive rate. They should hold their counsel upon that. But one thing that they can do—they did not do it when they examined public expenditure—is to pay attention to the £2.5 billion which is subscribed out of the Consolidated Fund into the European Community. I know that it is an old hobby horse of mine, but nonetheless it is reputable.
I am not surprised that once again not only the other place but this House will be denied the opportunity to express an opinion on the Commission's draft budget for 1994. Once again, owing to some inexplicable delay in providing the documents and explanatory memorandum, the European preliminary draft budget for 1994 has not been presented for scrutiny and it is now too late to do so. It happens every year. It is always too late to do so. It has the convenience of ECOFIN being able to discuss the budget, if it discusses the budget in depth, in the months immediately preceding October, with a view to determining the draft budget to present to the European Parliament, which has to be done before this House or the other place reassembles. Therefore there can be no input from this House into the very considerable expenditure, some of it of a highly questionable kind, in the European budget.
1198 The noble Lord, Lord Boyd-Carpenter, and I have agreed, perhaps not all that uniquely, on the monstrous expense, amounting to billions of pounds, on the tobacco subsidy. But the evidence so far—believe me, I have read through all the documents—is that Her Majesty's Government have not varied more than an inch, occasionally, from the original preliminary draft budget that was presented in the first place. Their influence on the budget of the Community is virtually nil—and whether it is done by any deal or any other means I do not know. All I know is that when Sir John Cope on behalf of the Treasury discussed the European budget with the European Parliament in 1993, he presented a testimony of praise rather than uttering even the mild cautions which emanate from noble Lords such as the noble Lord, Lord Boyd-Carpenter, on the necessity for prudence in expenditure. His speech was one long adulation of the European Parliament for having adopted such a magnificent budget. That will not do.
There is no transparency at present. The £2.5 billion which goes out of this country from the Consolidated Fund is not chicken-feed. For example, if expended on the health service it could have prevented deaths taking place through the lack of kidney dialysis because of the under-use of existing facilities due to lack of funds. Such a sum could contribute considerably to housing programmes. It could contribute more to child care. Yet because the £2.5 billion a year goes to the Community, everyone assumes that it is sacrosanct and no one should pay attention to it. Surely that is an issue that Her Majesty's Government can take on board.
I assure noble Lords that I and many of my colleagues on all sides of the House will be watching this year to see how ECOFIN deals with the budget, even though it is dealt with in Recess. ECOFIN had better be most careful to have detailed explanations in the autumn in support of the various budgetary items. They will be examined line by line and clause by clause. I give my assurance on that. ECOFIN has been warned. I sincerely hope that it will take to heart the other strictures: that unless unemployment is dealt with we shall have years of even more hardship; at higher levels we shall have more sleaze than we have ever had before; and unless drastic steps are taken the country will be a less safe place to live in.
§ 4.35 p.m.
§ Lord Stewartby
My Lords, having attended a great number of ECOFIN and budget Council meetings a few years ago, I am tempted to respond to what the noble Lord, Lord Bruce of Donington, said. I have a good deal of sympathy with his reactions even if not with the details of what he said about the European budget. However, I wish to use my few minutes today to talk about the Budget in the United Kingdom. I believe that it is a fortunate occurrence that the opportunity in your Lordships' House to consider those matters comes at a certain distance from the Budget and the initial impact of the announcements earlier in the year.
I recall last year—it was not exactly at this time of the year because there was a Finance Bill just before 1199 the dissolution of Parliament—that since another place had to wait upon your Lordships' House for those matters to be completed I sat on the steps of the Throne and listened to your Lordships' debate on the Bill. I recall in particular an important speech by my noble friend Lord Boyd-Carpenter on that occasion. Little did I think at that time that I might have the good fortune to be able to listen to his speech this year from very much closer at hand and to be able to agree in this forum with what he said about the importance of having a debate in your Lordships' House on budgetary issues despite the fact that we are constrained from amending the Bill and that our deliberations take place after this interval of time.
I wish to consider a few aspects of the Budget in the context of its economic judgment. I was most interested to hear the comments of the noble Lord, Lord Peston. He suggested that if his party were in control later this year it would be going for a much more expansionary economic stance. His noble friend Lord Bruce suggested that the economy was in need of urgent stimulus. I beg to disagree with the thesis which noble Lords opposite have put forward. I shall attempt to explain my reasons.
However, first I compliment, indeed congratulate, my right honourable friend Mr. Lamont on the Budget that he introduced earlier this year. In economic terms it seemed to me that it was a thoroughly responsible and well-pitched Budget in the economic circumstances of our times. Mr. Lamont has not had what one might call an outstandingly good press. However, it would be a great pity if any finance Minister who has to be in office at a time when exchange rate adjustments need to be made either has to leave office immediately or is so pilloried because of that event that it is impossible for him to stay in office for more than a limited period thereafter.
I do not believe that that is a civilised way to conduct our political or economic affairs. Everyone knows that if, during a period of currency pressure, a Chancellor or finance Minister says nothing it will be interpreted in a way that is bound to lead to greater pressure in the financial markets. On the other hand, if he does say something he cannot say, "I am thinking about taking the currency out of the exchange rate mechanism", or am contemplating a little devaluation", or something like that. To do so would be tantamount to bringing about the result that he was discussing. So he is not in a position to do other than say the sort of things which Mr. Lamont had to say last year, and which countless Chancellors of the Exchequer and finance Ministers in this country and elsewhere have had to say under those circumstances.
I repeat that I think it a pity if it is considered that that should automatically lead to the end of office for any Minister who finds himself in that position. I do not say that because Mr. Lamont was a former colleague of mine in the Treasury, or because he is a personal friend of mine. Both might be considered to colour the judgment which I offer. The judgment that I should like to discuss briefly today is the one that he made in the Budget this year in order to assist and encourage economic recovery from a very long, 1200 painful and protracted recession. That recession has not by any means been confined to this country. It is one that has been heavily influenced by the background of the economy in many other countries.
The one lesson that comes to me from the economic experience of the past few years is that monetary and fiscal policies are likely to produce the results that they are likely to produce. That may seem to be a truism and an almost fatuous remark to make. But how often people forget it. I remember that for a very long time after monetary policy was tightened in 1988, and more so in 1989, there was a serious debate among politicians and commentators in the business community as to whether there would be any recession at all. There was a lot of talk about "soft landing" and whether the economy could come painlessly back to a path of effortless, sustained growth. If one has interest rates raised to the middle teens and held there for two years or more, and an inflation rate—if one takes the underlying rate and not the rate that includes mortgage interest—never more than half that figure, one is bound to have a recession. It is inevitable. If one makes it less desirable and more expensive to spend, and more desirable and more rewarding to save, then one is bound to reduce economic activity. It does not take someone even like the noble Lord, Lord Peston, who is very distinguished in the black arts of economics, to see that. All of us ought to be able to see that if very substantial changes are made in fiscal and monetary conditions, there is a very strong probability that after a period of a couple of years or so they will have the effect which they are intended to have. Just as those effects took quite a long time to come into play after monetary policy was tightened at the end of the 1980s, so the effects of economic expansion take some time to respond to the loosening of monetary and fiscal policy which has taken place over the past year or so.
The noble Lord, Lord Peston, referred to Treasury work on the impact of sterling leaving the exchange rate mechanism last year and the consequence of that for the recovery. The consequence of sterling leaving the exchange rate mechanism was that we were able to resume a monetary policy which was compatible with our own domestic economic needs. It was the reduction in interest rates at that time, more than the change in the exchange rate, which led to the degree of economic recovery which is now perceptible. On those grounds, we should be very cautious about calling for further stimulus to the economy.
One can stimulate an economy either by a loose fiscal policy or by a loose monetary policy. Or one can have it with knobs on and apply both a fiscal and a monetary stimulus. It is interesting to see the combinations in those factors that have been at play in recent years, not only in this country but in other countries in Europe and in North America. If one has both fiscal and monetary policy tight, one will probably have a recession. If one has fiscal and monetary policy loose, at the same time one will almost certainly have an unsustainable boom. Ideally one should get them both about right, in the middle of the spectrum.
1201 When one is in a position, as we are now, of transition from one economic condition to another, then one has to look at the relative balance in power of the ingredients of economic policy. In the case of this country, I would assess those to be as follows. We had an exceptionally tight monetary policy for the first three-quarters of last year, since when we have had a monetary policy which is probably just about right for the state of the economy at the present time; that is to say, we have come from interest rates in the mid teens, when inflation was about 8 per cent., to interest rates of 6 per cent. when inflation, according to whatever measurement is chosen, is somewhere between 1.5 per cent. and 3 per cent. That monetary policy seems to be much more balanced.
On the other hand, we have a considerably expansionary fiscal policy. We have a large public sector deficit. The Chancellor's judgment at Budget time was that that needed attention but that it should not be reduced too sharply in the immediate future because of the need to encourage the economy out of recession. In that judgment I believe that he was right. The cumulative effect of very tight monetary policy for three years, up to September last year, was so severe on economic activity that a degree of fiscal stimulus was entirely appropriate at that time. But I do not believe that it will continue to be entirely appropriate as the economy recovers. For that reason I welcome the inclusion in the Budget of elements which will increase revenue in the coming years. That seems to me the proper way to tackle it.
I cannot tell how much of the public sector deficit and the borrowing requirement is structural and how much is cyclical. Far wiser heads than mine have attempted that analysis, and mostly they cannot agree. There is no chance that I should be the one person to have particular insight into the matter. But I should not he surprised if half, or a little more than half, of the current deficit was due to cyclical factors. I say that because of the astonishing buoyancy of the revenue at the opposite point in the economic cycle. In the later 1980s we had, against all predictions, a public sector debt reduction figure—a PSDR instead of a PSBR—and that moved into double figures. One of the paradoxes of our economic management is that when one has a public sector surplus, one is tempted to reduce taxation because one does not need so much of it, which is stimulatory. And when one has a public sector deficit of this size, one is almost bound to increase taxation because one needs to reduce it. It would be a great advantage if we could bring and keep fiscal and monetary policies more in balance with each other and so avoid the more extreme fluctuations around the trend. I hope that we shall now be able to do so.
I have spoken for too long but perhaps I may conclude with just a few words about interest rates and the exchange rate. I do not believe that we should have an immediate reduction in interest rates. I understand that many people in business would like to see such a thing. I noticed the comments of the CBI to that effect in its quarterly survey released today. In my view it would be wrong to prejudge the fiscal decisions that the Chancellor will take in the next few months 1202 because the fiscal background is absolutely essential prior data to have before one can judge the appropriate monetary policy.
Since we have a monetary policy at the moment which is clearly neither too tight nor too loose, it would be much better to stay even on 6 per cent. interest rates for the time being and have a degree of stability. If we reduced them too quickly, there would be more damage to confidence by having to raise them again than there would by not having lowered them in the first place and having a longer period of stability for businessmen to plan.
I shall also mention the exchange rate. We have recovered a good deal of the ground that was lost against the European currencies immediately after we left the exchange rate mechanism. That is not a problem at all. I believe that it is a good thing. The adjustments usually overshoot and the sterling exchange rate undoubtedly overshot on the way down in the immediate aftermath of those traumatic events. But the exchange rate is a factor against which one should consider one's domestic monetary policy. If the exchange rate continues to strengthen and at the same time continental interest rates come down by a significant amount, it would be appropriate to reconsider the levels of interest rates in this country prior to the Autumn Budget which we now await.
In the meantime, it seems to me that the balance that was achieved in the Budget was appropriate. To say that four months after a Budget is quite a good reflection on the judgment of the Chancellor at the time. I believe that the Chancellor's judgment has been and will continue to be vindicated for a sound Budget and one which I personally regret was his own last Budget.
§ 4.52 p.m.
§ Lord Desai
My Lords, the noble Lord, Lord Stewartby, tempts me sorely to start discussing the merits or demerits of the previous Chancellor. It was not so much what the Chancellor said during the week prior to Black Wednesday but what he did that caused the problems. He borrowed several billion ecus, giving everybody a signal that he expected trouble. He did not raise interest rates, despite saying that he was willing to do anything to defend the pound, and then he raised interest rates too late. I will not go into the matter further.
Basically I take the view that since about 1986 we have not had a sound and balanced fiscal and monetary policy. We have been on the roller-coaster of an outrageous boom followed by a severe recession. I do not know whether the new Chancellor will be any better than the last three Chancellors.
First, let me point out that, although the recession is over, we cannot say that recovery is at all strong. Traditionally, recovery from previous recessions has been much stronger than this one. One should expect an above-trend rate of growth if one is coming out of a severe recession such as we have experienced. We may have a 1 per cent. growth rate in the GDP, as was forecast, or—it may happen by accident—we can have 1.5 per cent. or 2 per cent. Those growth rates are not 1203 at all adequate. We should be seeing 3 per cent. or 4 per cent. growth rates, as we saw when we came out of the previous recession of 1981.
We have not seen those figures because in a sense the Government have fallen into a trap of their own making which has tied their hands as regards fiscal policy. The PSBR is in the state that it is in right now because, at a previous stage in the 1987 and 1988 Budgets, decisions were made about taxation which have shrunk the tax base. Having shrunk the tax base and, in preparation for the last election, having prodigiously given away expenditure bonuses in health, education and so on, they find that the tax revenue is not buoyant and expenditure refuses to come down.
The £50 billion PSBR is not a sign of an active fiscal policy. It reflects a passive fiscal policy. It has been caused more by passivity and is being spent more on consumption rather than investment items. It would be very good if we could spend money on infrastructural investment, as my noble friend Lord Bruce said. It would be very nice if we could start construction programmes. But we cannot start them, partly because of irrationalities in the way that the PSBR is calculated but also because the Government have got themselves into a situation in which the tax base has shrunk too much.
In the last Budget there was a welcome reversal of the old prejudice against income tax. It is true that income tax rates have been left untouched. But there have been sufficient adjustments by way of personal allowances, non-indexation of certain allowances, mortgage interest relief made assessable at a lower rate, and so on. We see that in the full year 1995–1996, the Chancellor hopes to raise almost as much from direct taxes as he hopes to raise from Customs and Excise. That was a welcome move. I do not know how long the Government can go on pretending that—to put it technically—by adjusting the intercept of the income tax rate, they will be able to raise more money so long as they leave the slope unchanged. Sooner or later they will have to re-examine the tax rates, especially above the higher level. It is unlikely that we shall tackle the Budget deficit properly without considering tax in general.
The tax mix in this Budget—the split between direct and indirect taxes—is reasonable. I should have been much distressed to see greater indirect tax compared with direct tax.
I should like to say a few words about VAT in general and its imposition on domestic fuel. In fact, I am not against VAT at all. One should not think of tax rates in isolation as progressive or regressive. One has to think in terms of tax rates and what is done with the tax revenue and with entitlements as such that will make a fiscal regime progressive or regressive. My own preference would have been, while increasing VAT on domestic fuel or anything else one cares to name, simultaneously to adjust items such as child benefit and pension so that the impact on the poorest people is lessened and the richer people end up paying. I still say that perhaps in the next Budget the new 1204 Chancellor will do that and while increasing VAT, benefits are so adjusted that only the better-off end up paying the tax rather than the poor.
Something will have to be done very soon if the PSBR is to be tackled. The PSBR needs to be tackled, but not because of notions of fiscal orthodoxy. I quite agree that if we had a proper accounting system, capital budgets and revenue budgets it may turn out that the true PSBR on revenue account is perhaps half what it is right now and perhaps half of the PSBR is on capital account. Incidentally, I also welcome a feature of the Budget which means that a cyclical component of expenditure has been separated out. That comes to about £15 billion. It is quite wrong to think of the figure of £50 billion as a totem and bow down to it.
However, what is true is that both our trade deficit and the Budget deficit are jointly an indication that the economy over-consumes and does not invest enough. I am not saying necessarily that we ought to cut benefits. We need to know who in the economy over-consumes. It is true that all the so-called "marvellous" direct tax cuts, which were supposed to encourage investment, effort and enterprise, have simply made the rich richer. The rich have not invested more; they have spent more on consumption and often on imports.
Basically we have got to improve our fiscal regime. By giving tax cuts in the past we have ended up in a situation of over-consumption and simultaneously increasing poverty. To get a rough idea of the over-consumption we need to add together the deficit on the revenue account and the balance of trade deficit. When they are added together roughly speaking we find that our over-spending totals between £35 billion and £40 billion.
Unless we take a long-term view on tackling the structural problem in the economy, the "stop-go" cycles, mentioned by the noble Lord, Lord Ezra, will continue. I find it distressing that in the Government strategy such as it is —they are concentrating on obtaining a low rate of inflation; they are not examining the question of whether that low rate is due to a severe recession in the economy or is permanent. The government need a low rate of inflation with a sufficiently high level of employment and a balance of trade equilibrium. That is the only question worth worrying about. A low rate of inflation achieved by ruining the economy shows no merit on anybody's part.
I hope that in the future some thought will be given to the fact that, not only on the foreign trade account but also on the domestic revenue account, we cannot go on over-consuming at the present rate. From that point of view the fiscal policy of the past eight years stands indicted. Although at one stage, as the noble Lord, Lord Stewartby, pointed out, we were in a PSDR framework—repaying debt, including privatisation proceedings and so forth—the structural problem of our trade deficit was not tackled in those years. We over-consume and thought should perhaps be given to introducing tax structures to encourage savings rather than over consumption.
1205 I wish to make one comment on the ERM. The Government claim the great merit of achieving a low inflation rate. There may not be a definite answer to the question, but one could argue that the low rate of inflation achieved is partly due to the severe shock of being in the ERM. Now that we are out of it, sooner or later the economy will return to its old habits and the low rate of inflation may not be sustained.
Now that we are out of the ERM, let me say this. Since we left the ERM we have been in a shadow ERM situation—the same situation we were in before we entered. All the Government have done is shadow 2.5 deutschmarks. That can easily be seen from the way in which their monetary policy has been formulated. And the reluctance to cut interest rates below 6 per cent., despite the feebleness of the recovery, makes me feel that the Government are frightened of losing their anti-inflationary start. They want the exchange rate to creep up again. It is already in the range of 2.55 and above.
If getting out of the ERM and having all this freedom simply means that we will be tied to a slightly lower value deutschmark and still confined to a relatively tight economic monetary policy, will all that misery have been worthwhile? Perhaps the Government should have followed the policy suggested by Neil Kinnock before his departure as leader; that is, that we should have realigned within the exchange rate mechanism.
Be that as it may, I do not agree with the noble Lord, Lord Stewartby. The Government should perhaps be asking themselves whether they should be shadowing 2.40 rather than 2.50, if the recovery is so weak. If they want a strong recovery they should cut interest rates. They can easily afford to do so and I urge the Chancellor to join the Bundesbank next Thursday when it cuts interest rates. He missed the opportunity last time and could easily cut interest rates in the next round. Even at 5 per cent., the real interest rate is still quite stiff. It is stiff because we still have 2.9 million unemployed and a weak recovery. There is no reason, now that we have this sought-after freedom, why we should not use it. This may be the one point in the past 30 years of our history when we can afford not to be obsessed by inflation. We can afford to worry a little more about unemployment; 2.9 million is too high. As my noble friend Lord Bruce said, that is the official figure and the real figure may be much higher.
Without in any sense losing control of the economy, it is possible for the Chancellor to try a bolder monetary policy. He can take advantage of the shadow ERM and, even if he stuck at 2.50—it does not have to be above that number; it could be below —he could still cut interest rates. At the moment we have a Budget which is not too bad. However, the economy is in a poor situation and I hope that something can be done before the next Budget in November.
§ 5.7 p.m.
§ Lord Brabazon of Tara
My Lords, I am grateful to my noble friend the Minister for his detailed explanation of the Bill and for the generally optimistic and bullish news on the economy which he brought us.
Inflation is at a 30-year low. Interest rates have been cut from 10.5 per cent. to 6 per cent. and they are now lower than anywhere else in the European Community. According to the European Commission, Britain will grow faster than any other country in the European Community this year and next. It is greatly to the credit of the Government that that will happen. But I join my noble friend Lord Stewartby—I already had a note to this effect—in saying that credit should be paid to my right honourable friend Norman Lamont. After all, it is his Budget which we are discussing this afternoon; it was he who set us on the right road, and it is perhaps unfortunate that he left office just as the signs were beginning to turn the right way for the recovery which is now under way.
I join too the noble Lord, Lord Peston, in being somewhat surprised that in his final speech my noble friend made no reference whatever to our departure from the ERM last September. I believe that that had a marked effect on the economy, particularly in allowing our interest rates to come down to a much more competitive level and our exchange rate to be more competitive in relation to our exports. I hope therefore that I detected in the words of my right honourable friend David Hunt last week that the Government's attitude is hardening away from rejoining the ERM. I hope that my noble friend will be able to tell the House this afternoon what the attitude of the Government is to the ERM, particularly as the ERM appears to be collapsing around its present members. Perhaps he will say what the Government think about that. I wonder also whether noble Lords who last week were urging us to join the social chapter so that we could influence from the inside and not be on the outside will urge us to rejoin the ERM, if there is one left to rejoin, so that we can influence events from the inside.
I should like to concentrate on two aspects of the Bill, both of which are in Part I. The first is alcoholic liquor and tobacco duties and the second is motoring taxation. An article in The Times of 12th July headed:Customs loses £5 million to Cross-Channel Bootlegging Gangs",stated:Customs investigators are gathering intelligence on criminals taking advantage of the abolition of EC trade barriers".That prompted me to wonder what impact the abolition of physical frontiers on 1st January was having on trade and indeed on the Exchequer's revenue. I am indebted to one of Britain's largest brewers, Courage, to the Brewers' Society, to the Scotch Whisky Association and to the Tobacco Advisory Council for providing me with facts and figures and their views on this matter.
In his Budget statement this year the then Chancellor of the Exchequer said:The removal of customs controls at the channel has been welcomed by many thousands of travellers who are now 1207 seeing the benefits of the single market at first hand. It has also brought many benefits to British business, including some 10 million fewer forms this year. But there is a natural concern as well about the impact of an increase in cross-border shopping, and the effect that it might have on British businesses, particularly in the south-east.In considering what changes to make to Excise duties, I have had to balance that against the need to raise revenue".—[Official Report, Commons, 16/3/93; col. 176.]He then proceeded to raise the duties on most alcoholic drinks by 5 per cent.—more than double the rate of inflation.
As a former Treasury spokesman, I am more than aware of the problems faced with the public sector borrowing requirement and the need to raise tax revenues which have been referred to by nearly every noble Lord who has spoken this afternoon. However, I am also concerned about the effects of the wide divergence in excise rates across the Community and the impact that this is having on many parts of the United Kingdom economy, including Treasury revenues, and particularly the brewing industry, whose figures I have been given.
The problem stems from the ceasing of border controls with the single European market. Now travellers have an indicative personal allowance of 110 litres of beer. That is not a maximum level. Should a traveller be stopped by a Customs official—and if one watches the streams of cars and passengers arriving from France one will realise how unlikely that is—one has only to persuade the official that the imports are for personal consumption (say, a private party) and one can bring in more than the indicative limit. This has led to, for example, private clubs sending articulated lorries to France to buy drinks supplies.
But there is another even more worrying problem; namely, illegally imported products for commercial resale in the United Kingdom without payment of duty to the Exchequer. The lack of border controls and the enormous financial incentive involved have led to some large-scale illegal importations. While Customs and Excise is having some success in controlling this problem, the logistics are such that it is unlikely that it is doing more than hitting the tip of the iceberg.
British brewers, retailers and others are more than happy to compete in a free and open market. In fact they believe that they could increase sales. British brewers can compete with French brewers on price, quality, service and choice. However, they cannot compete in a distorted market where the excise rate in the United Kingdom is 29.7p for an average pint of beer against only 4.2p in France, 7.7p in Belgium and 3.8p in Germany. The Government are therefore impeding the British brewing industry's ability to compete, not to mention how this affects retailers in the South of England. Just imagine being an off-licence in Dover at the moment.
Results from research currently in progress on behalf of the Brewers' Society suggest that 8 per cent. of the off-trade, which is 2 per cent. of the total UK beer market, is now accounted for by duty free or duty paid elsewhere in the European Community. This is an increase of 3 per cent. of the off-trade before the single market. While no one wants to stop travellers 1208 going to buy cheap beer, we should allow our industry to compete. The Danes, when faced with the German border and a wider divergence of excise rates, recognised the problem and slashed their rates by 46 per cent.
The lack of excise harmonisation has a number of results. Sadly, the French exchequer is gaining at the expense of the UK Treasury. The Government are currently working on the assumption of a £250 million loss in excise revenue. While that is already probably on the low side, it does not take into account the loss to the revenue which stems from a number of other points. The erosion of the beer market, which is already hit by recession, means that British producers will have to reduce production. That means cuts in jobs and investment. It also means cuts in profits on which corporation tax is paid and of course a reduction in income tax revenue. So all round it is bad news for British industry.
Turning briefly to whisky—and I wish I could—the problem is not quite the same because Scotch bought in France is still Scotch. I warmly welcome the fact that there is nothing in the Bill which raises duty on spirits, as my noble friend mentioned in his opening remarks. But of course the industry has consistently raised with the Government the issue of tax discrimination against whisky in the United Kingdom. This Bill, which freezes excise duty on spirits while raising it on other alcoholic drinks, goes some way therefore to recognising that.
Lord Bruce of Donington
My Lords, I am grateful to the noble Lord for giving way. If he proposes to reduce the duty on beer, how does he propose to compensate for the loss of revenue? What other duties would he raise?
§ Lord Brabazon of Tara
My Lords, my argument is that we are in danger of losing revenue to the French Government. If we reduced the rates on beer, and perhaps particularly whisky, we might actually increase the total sum of revenue brought in as we would not any longer be losing the revenue which the Exchequer is at present not receiving under this scenario. I shall turn to some suggestions in a moment which might help my noble friend with this problem.
Excise tax and VAT on whisky in the United Kingdom swallow up 66 per cent. of the price of a typical bottle of whisky. The comparable figure for a typical bottle of wine is less than 40 per cent. This has had the effect of depressing demand for a domestically produced product. Whisky sales are down more than 5 per cent. That answers to some extent the point raised by the noble Lord, Lord Bruce of Donington.
There is the possibility for increased revenues with a reduction in taxation. Revenues on spirits fell by £80 million in the last financial year, a drop of £7 million in real terms. And of course we have a worsening in the balance of trade, which has also been referred to by other noble Lords. So I think that the Government are in danger here of killing the goose that laid the golden egg.
The other danger is that overseas governments will indulge in copycat action and impose high taxes on spirits. From 1st July France has imposed a 16 per 1209 cent. increase in spirits' duty. That could well lead to a 5 or 6 per cent. drop in export earnings in France, which is the second most valuable export market for the Scotch whisky industry.
The noble Lord, Lord Peston, and my noble friend Lord Boyd-Carpenter wished that the Government had gone further in raising duty on tobacco. I would merely point out that a popular brand of king-sized cigarettes already costs £2.37 in the United Kingdom as against £1.71 in France and only £1.34 in Spain. So the incentives for either legitimate or illegitimate entry of cigarettes from both those two countries are very high. Many retailers, particularly in the South East, are already experiencing a drop in business. The average smoker, I am told, buys some 300 packs of cigarettes a year. If he brought them in from Spain on his holiday he could save about £300. Those savings would equate to an annual loss of more than £710 in turnover for every regular customer; and there is the attendant loss to the Exchequer.
What is required is an approximation of excise rates so as to take away the financial incentive for UK travellers to go over to France or indeed to Spain to buy cheap beer and other drinks. Naturally, some travellers will still wish to buy in France because they may prefer French beer. However, I believe that an equation needs to be worked out that balances the average extra cost involved in travelling to the Continent to buy products and the Excise rate which takes away the incentive—either that or we persuade the French Government to put up their rates for beer. But I cannot see us necessarily having much success in that direction.
I also support the excellent efforts of HM Customs on enforcement. I hope that it will get all the support that it needs when it comes to tackle the problem of illegal imports. I also urge my noble friend's own Department of Transport to be particularly watchful for overladen cars, lorries and minibuses coming back from the Continent full of these goodies.
I turn briefly now to motoring taxation. This Bill is of particular significance for road users and as regards the cost of road transport. Those costs are a very significant element in our industrial and commercial competitiveness as well as being important to very many individuals. The Chancellor signalled the Government's intention to raise fuel duty by at least 3 per cent. in real terms for the remaining life of this Parliament. I believe that the noble Lord, Lord Peston, said that in one sense it was helpful to have this kind of forward planning; but in this instance is it particularly well conceived?
The taxation of road users is already at an unprecedented level. The various forms of road-user tax—namely, vehicle excise duty, fuel duty and VAT—among them yield the Chancellor about £21 billion a year. The Government spend only about £5.5 billion on the roads, both local and national, so the ratio of tax to spend is now at its worst from the road users' point of view since the Second World War. There is a real issue of equity at stake.
Perhaps I may ask my noble friend this question: what does the 3 per cent. increase in fuel duty in real terms actually achieve? All the evidence suggests that 1210 far greater increases than that would be needed to have a worthwhile impact on people's propensity to use roads. Do the Government genuinely believe that this proposal will help to reduce the environmental impact of road travel or alleviate congestion? The price of fuel has been low in real terms for much of the past decade. Taxes already account for 65 per cent. of what the motorist pays at the pump. Adding to that proportion begins to look like a deliberate attempt to buck the market, which I find hard to reconcile with a belief in market forces.
My right honourable friend the Secretary of State for Transport, in commenting on the 1993 Budget, said:We must also recognise that transport must play its part in meeting the threat of global warming and achieving the CO2 reduction target by encouraging greater fuel economy".However, taking the environmental justification at its face value, it seems to me that no account has been taken of the natural movement of the price of fuel in the market place. What do the Government intend to do if the price of fuel rises by 3 per cent. or more, as many analysts think likely? If that is the kind of increase which the Government consider necessary to help the environmental cause, may we have an undertaking that, in the event of such an increase occurring naturally, the artificially determined 3 per cent. increase will be set aside for the particular year in question? My noble friend may say that that is a hypothetical question, but I do not believe that it is. It deserves an answer. I know that he is unlikely to give me such an undertaking but in justifying the proposed increase the Chancellor referred not only to the environment but also to the need to raise more revenue. We all of course understand the economic imperatives behind that objective.
I hope that my noble friend will be able to give some answers to the points which I have raised. In general terms, of course, I welcome this Budget and I hope that he will be able to take some account of what I have said when my right honourable friend comes to present his next Budget, which is, after all, only a few months away.
§ 5.24 p.m.
§ Lord Houghton of Sowerby
My Lords, I am glad that the noble Lord, Lord Harmar-Nicholls, is able to join us in the debate this afternoon because he and I, I believe, can modestly claim to be the pioneers of the effort to get a more positive role for your Lordships' House as regards the formal stages of the Finance Bill as it goes through this House. It has taken 10 years at least to get a debate of the quality that we have had this afternoon.
I come straightaway to the suggestion made by the noble Lord, Lord Boyd-Carpenter, that we should develop this kind of occasion. However, we need to do so a little earlier in the parliamentary year; otherwise through lack of time we cannot do the job properly. From the debate so far excellent grounds have emerged for claiming the ear not only of the other place but of the public and of all those who discuss these problems in an intelligent way.
There are views to be gained from your Lordships' Chamber that we can put alongside the rather rough 1211 and tumble political atmosphere of the House of Commons. I must not be disparaging about the other place. I was in it for 25 years and grew to love it very much. But reading the debates of the other place at the present time one is conscious of the difficulty of getting coherent and uninterrupted expression of opinion. That is a great mistake which develops because of the political nature of the representative Chamber.
We are free of that; but we are inhibited by the Parliament Act, and its shadow is very long indeed. I remember this as if it were yesterday. My father was jubilant when what he called the "House of Lords' veto" was removed so decisively. I did not quite understand how wrong he was or how right it was to make a clear division between the responsibilities of the two Houses on matters of finance.
The noble Earl introduced the debate in a most interesting fashion. His speech encouraged the very thought that the noble Lord, Lord Boyd-Carpenter, expressed. He went through the Bill in more detail than I ever remember before. I have listened to every one of these debates since I came to your Lordships' House 19 years ago. I believe that I have taken part in most of them. I want to encourage the idea that at a suitable earlier stage we could spend longer on the main issues in the Finance Bill.
I wish to turn to one or two other matters concerning our deliberations on the Finance. Bill. I agree with the noble Lord, Lord Ezra, that we should adopt in our approach a broad sweep as regards economic and fiscal policy. But detail is important in some respects. I believe that this House retains, and cannot be deprived of, its interests in the rights of the citizen. We have to watch what happens in another place regarding the citizen and his duties as a taxpayer, or as an unpaid, press-ganged tax collector. Many matters of administration and discipline are swept into the Finance Bill and we are thereby unable to debate them because of the 1911 Act. The dreadful words that Mr. Speaker certifies the Bill to be a money Bill is a warning to all concerned. But when under that cover some of the rights of our citizens are taken away by a Finance Bill, it is the duty of the House of Lords to express a view on that.
I mention as an example the way in which some years ago the House of Commons changed the penalties for default in Customs and Excise operations and converted the functions of the courts into the powers of the department. The VAT regime became very harsh when what are called "non-discretionary penalties" were introduced. They are imposed irrespective of the plea that the taxpayer may make unless he can satisfy one flexible condition, which is that what he did was "with reasonable excuse". The interpretation of the words "without reasonable excuse" now litters the pages of taxation, accountancy and other technical journals because of the decisions reached by the tribunals on what is and what is not a "reasonable excuse". That is an important point.
I draw attention also to the fact that in 1970 the Government introduced a comprehensive Taxes Management Act for the Inland Revenue. Since then no amendment to that Act has been undertaken 1212 outside the Finance Bill. Every amendment to the Taxes Management Act that has been made over the course of time has been under the cover of the Finance Bill barrier.
These things need watching. Matters of principle, especially in the field of criminal law, require the vigilance of your Lordships' House. After all, we now have mandatory sentences in magistrates' courts under the Dangerous Dogs Act. We also got into trouble because Parliament passed an Act for mandatory money penalties relating to the believed ability of the defendant to pay. That has run into serious difficulties. Another Criminal Justice (Amendment) Bill is to be introduced in the autumn, some parts of which need to be watched.
As regards indirect and direct taxation—the twin sisters that Gladstone had to eye with equal affection and attention (and what a difficulty he was in at times in deciding between them)—I think that our VAT system of taxation is virtually a European system. It will be extremely difficult to modify or replace it. We are all subject to VAT now in the Common Market and will be indefinitely. The problem with VAT lies with the harmonisation of rates within the EEC itself. Many current practices are thoroughly undesirable. Some traders are trying to take advantage of the differing rates of VAT applying in the different countries of the Community on the goods and services in which they are interested. Goods are being pushed around so that they attract the lowest level of VAT. That is an impediment to the free movement of goods and to free trade.
I should like to say something about a matter which I think is of some urgency. I hope that your Lordships will not feel that it is an intrusion upon a high level debate on other matters, but I feel that I must refer to the people behind this Bill. The Bill before us has over 300 pages, nearly 220 clauses and 23 schedules "etcetera, etcetera"—to borrow something from the title of the National Lottery etc. Bill. I refer to the people who are members of two revenue departments, Customs and Excise and the Inland Revenue. Altogether they comprise about 100,000 civil servants. They are gravely disturbed, as are other parts of the Civil Service, by the time being spent trying to find areas of public administration to put through the process called "market testing" and sold off to practitioners who will undertake the work. It is most upsetting. The morale of both departments has been affected. Many people do not know about their future. They do not know whether their work will be transferred to a private company.
Two companies are now bidding for the information technology department of the Inland Revenue at Telford, where over 1,000 staff are employed. Both companies are American. We do not know what may be in the draft contracts. It is conceivable that that work could be transferred to America. It is conceivable that the firm in Southern Ireland which is doing similar work for the police in New York could undertake that work also. One wonders what is going to happen to data going through the system, bearing in mind that much of what both the Inland Revenue and Customs and 1213 Excise handle is highly confidential information. Even if it has been described at the lower level as "support services" or "computerisation", there is every reason to believe that information relating to persons or firms being dealt with could become known. Confidentiality could be put at risk if a good deal of that work is put out to tender.
I turn to another point relating to the staff. As was true of the staff of British Rail until your Lordships' House recently passed that important amendment, the staff of those departments are forbidden to bid for their own work. They have been approached by consultants and firms of great standing and considerable resources which have said to them, "If you will make a bid, we will back you financially". But they are not allowed to bid. The contracts have to be placed outside. Although a good deal of capital must he raised if an inside bid is to be made (in order to acquire the rights and the capital assets of the work to be transferred), at least a partnership with the quality of some of those who are under threat could probably acquire those interests.
I have given the office of the noble Earl notice that I would raise this matter. Advertisements appeared well over a year ago asking for bids for, for example, the work at Glasgow. The advertisements indicated that the number of staff already in post was approximately 300. That mode of approach to the transfer of such work has been abandoned as unsuccessful. It was difficult to define the terms of the contract which had to be given a price, together will all the incidental and related matters. It was most intricate. However, because these are commercial operations, the staff do not get to know anything about them. There is an atmosphere of secrecy and concealment which I think is very bad all round.
Indeed, in regard to the Civil Service generally at present, I think that there is an urgent need to reconsider the joint machinery of the Whitley Councils and to get them working again on the basis that there will be the utmost candour in the exchange of views during discussions. I mention this as an important matter from the point of view of those who will be asked to work the new conditions introduced by this Bill and other legislation. We want a contented and enthusiastic public sector. We want to restore the philosophy and ethos of British public administration. We do not want them to go into the market-place. We do not want to make civil servants feel as if they are being sold in the slave trade. Someone at the top must pay attention to that matter.
I am not giving this warning at anyone's instigation, but I have many friends in both departments. I read their journals and the reports of their conferences. There is now a revival of militancy. It had been long gone under the legislation passed in this House a little while ago relating to trade union ballots for executive councils. It is creeping back. People are saying that they cannot make sense of or resolve the situation. They feel that a threat is being held over them all the time. They ask, "How can we emerge from feeling uncertain and unsettled and being subject to indifference by the administration?" After all, they are civil servants. The idea that they transfer 1214 to private employment or face redundancy is anathema to them. I am sure that they are right to feel that way. I have said it now, and I shall leave it with the Minister. Unless something is done to disperse the cloud of fear and uncertainty, the Government will shortly face an unhappy period with the public sector.
§ 5.40 p.m.
§ Lord Clark of Kempston
My Lords, it is always a great pleasure to follow the noble Lord, Lord Houghton. We worked together in another place when I was chairman of the Select Committee inquiring into tax credits. He was a member of that committee, as indeed were the noble Lord, Lord Barnett, and the noble Baroness, Lady Castle. I am sure that the warning given by the noble Lord, Lord Houghton, will be taken on board by my noble friend the Minister.
I welcome the Bill because, by and large, it helps small business. There is a reduction in corporation tax which is now much lower than anywhere in the European Community. I, and I am sure most economists and financiers, look towards small business to increase employment. In the growth of small businesses more and more employment will be found.
I should like to refer to one or two matters contained within the Bill. The first relates to lottery duty. The national lottery will, of course, help charities. The qualifying donation for charities has been alleviated in the Bill. Now, anything over £250 given to a charity qualifies for tax relief. That must be good, because it helps the voluntary sector. More and more emphasis should be placed on the voluntary sector. There are many voluntary workers who will be able to do much of the work that social workers are trying to do. I welcome, as I am sure everyone else does, tax allowances on industrial buildings.
My noble friend Lord Boyd-Carpenter referred, rightly, to inheritance tax. He made a strong point. Exemption should be given in respect of an owner-occupied house as happens with capital gains tax. I read an article a little while ago which claimed that if there were a Labour administration the threshold for inheritance tax, which has been increased by this Government to £150,000, would possibly be reduced. That will of course cause great hardship to many beneficiaries.
I should like to discuss pensions. Pensions will pose a problem for future governments. I know the year 2020 is a long way away, but this country's population is ageing and the number of workers available to support pensioners then will be insufficient to pay the state retirement pension. Consequently, the Government must concentrate upon occupational pensions. There are fiscal advantages. Contributions to an occupational pension fund are allowable against tax. The pension fund itself is free from tax. That all helps occupational pensions. Actuarially, if any of those fiscal concessions are altered or removed the pension will be reduced, or the employee and employer will have to contribute more. If employers have to contribute more to the pension fund to make up for the fiscal loss many employers might say, 1215 "Pensions are far too expensive for us. Although our present employees must pay into the pension scheme, new employees will not be allowed to join the pension scheme". That will place an extra burden on the state. At the moment, many retired people have two incomes. They have, rightly, an income from the state, and an occupational pension. If that occupational pension is removed those pensioners will require more income support. The Government must ensure that the fiscal incentives remain.
My honourable friend in another place, Mr. Stephen Dorrell, gave an undertaking that those fiscal arrangements would be maintained. Will my noble friend the Minister confirm that undertaking when he winds up? For the year 1993–94, there has been a freeze on earnings. I hope that that will be a one-off and for this year only.
I now turn to life insurance. In this country, the life insurance industry is a great industry. We talk about the Single Market. The Single Market in insurance comes into force on 1st July next year. We shall then be competing with Continental insurance companies. If a British insurance company wants to sell a subsidiary abroad, all well and good! It can then sell life policies to people on the Continent. If, on the other hand, that insurance company sells from here a policy to France, Spain, Italy, Germany and so forth, the tax treatment of the profits on life assurance will be different.
Your Lordships' Select Committee reported in June 1991 and drew attention to the discrepancies that exist within the tax system throughout the Continent. The Government welcomed the report. Will my noble friend tell us what action the Government propose to take on that report? If we become uncompetitive because of the difference between the tax system in this country and abroad, we shall be unable to take full advantage of the Single Market. In his Budget Statement the Chancellor promised a document relating to occasional and exceptional losses in respect of the tax relief on equalisation reserves of life companies. I should like to know when that document will be published.
The change to a Budget on 30th November has been generally welcomed. It has always seemed silly to deal with money coming in and money going out months apart. It is ridiculous. No company in the world could remain solvent if it carried on its financial dealings in that way. I take the point made by my noble friend Lord Boyd-Carpenter, and the noble Lord, Lord Houghton, about the lack of time afforded to your Lordships' House when dealing with Finance Bills. One is inhibited, because one cannot change a Finance Bill. I agree with my noble friend and the noble Lord, Lord Houghton, that there is a wealth of knowledge in this place. We have here former Chancellors, former chairmen of clearing banks, former chairmen of merchant banks, and top industrialists. We know something about finance and can give a great deal of advice.
§ Baroness Seear
My Lords, I am sure that the noble Lord did not mean to omit the economists from his list of experts.
§ Lord Clark of Kempston
My Lords, the noble Baroness is right—they appear on the last page of my notes.
§ Lord Harmar-Nicholls
My Lords, I do not know whether or not my noble friend omitted the economists inadvertently but it is wise to separate the practical and theoretical economists. There is a great difference between them.
§ Lord Clark of Kempston
My Lords, that too was on the last page of my notes but my noble friend Lord Harmar-Nicholls has made the point. A November Budget, having incomes and outgoings on the same day, is absolutely right. I welcome the fact that there is to be a differentiation between revenue and capital. We have a borrowing requirement of £50 billion but how much of that is capital? It is not all revenue; some of it must be capital. According to the last figure that I had it was approximately £20 billion.
The Maastricht debate has overshadowed everything that we have done during the past few months and we have overlooked the signs of recovery in the economy. There are improved figures as regards retail sales and productivity; and unemployment is down for the fifth successive month. Inflation is well down and interest rates are the lowest in the EC. Exports have increased and during the past three months industrial production in the UK has risen by 2.1 per cent. as opposed to France where it was down 3.5 per cent., Germany down 8.4 per cent. and Italy down 4.1 per cent. As a country and an economy we have the best record in the European Community. Next year we shall be net exporters of motor cars, a situation that we have not enjoyed for many years.
We should be talking about our successes. Confidence is growing fast. The noble Lord, Lord Peston, said that because he was an economist he could not be optimistic. I know many economists who are optimistic. Continuing to talk down our economy will affect confidence within the country. I say to economists and to everyone else, "Please stop denigrating the economy". We must talk the economy up. There are good signs and we must take advantage of them.
§ 5.53 p.m.
§ Lord Rix
My Lords, as might he expected, I wish to concentrate my few remarks on VAT changes, setting them in the charity-giving provisions of Clauses 67 and 68. The Bill has been characterised trenchantly if a little unfairly as one which encourages the public to give more of less to charities, which in turn will be required to do more with less as extra few costs bite and needs increase.
It puzzles me that as economic modelling becomes more sophisticated and computer programmes carry out statistical analyses which defy pencil and paper and the non-specialist brain, we seem to be as unable to avoid giving with one hand and taking away with the other as we were in the wax-tablet days of my youth. Perhaps the Autumn Budget will begin to change that. Having expressed that pious and probably unrequited hope, I wish to express my disquiet that as we reflect in our pricing structures the 1217 real cost of energy, housing, water or transport we lack the means of protecting the interests of the most vulnerable other than by means-testing.
We all know that means-testing is a little like trying to hit the bulls-eye by throwing all the darts at the board at the same time. It is a selective system but not a highly efficient one. Take-up and disincentive are problems, as are borderlines of eligibility. I wish that I could believe that citizen income and similar approaches to combining tax and benefits offer a better alternative to targeting and help. But, sadly, much of what is on offer in that area seems to add to the complexity and the cost and does little to resolve the problems.
Perhaps, with great temerity, I may offer three principles which all those involved in shaping the direction of public policy in general, and the Autumn Budget in particular, might have in mind. First, we cannot rely on growth to solve our social problems. Growth makes it all very much easier but in growth, stagnation or decline we have to make choices about sharing. That is inescapable. Secondly, as well as environmental impact statements, small business impact statements and European Community impact statements we should have attached to all major shifts in public policy social impact statements. Thirdly, I suggest that it would help the reality of decisions which may have significant effects on the real lives of real people if alongside the abstractions of modelling financial aspects we had volunteer, real families in relation to whom the impact of proposed policy changes could be assessed.
Whenever I have a recognisable interest in proposals I ask MENCAP members and officers for cases. Noble Lords who were in the Chamber last Friday will recall my somewhat over-use of some of those cases in what could be described as my "Ill-starred" Question. I see no reason why the Departments of Health and Social Security—and they still talk to each other—should not maintain on behalf of Whitehall generally contact with a sample of volunteer families. They should include, for example, families with profoundly and multiply-handicapped members. That should not be left to the voluntary bodies once the proposals have been announced or even implemented. Checking up on the likely effects of real people should be a routine part of planning. I am sure that that suggestion could well appeal to the noble Lord, Lord Bruce of Donington.
I suspect that the energy changes in Part III might have been rather differently handled had what I have suggested been established practice; putting the humanity back into planning and supplementing statistics with people. I realise that your Lordships have little or no influence on money Bills but one can see how marvellous it would be if those who are so grievously disadvantaged, together with their families, really had an influence on their own financial futures and their future quality of life.
§ 5.57 p.m.
My Lords, I am no economist and nor do I feel competent to comment generally on the Budget or on Budget strategy over the years, but 1218 I hope that I might be a little competent to flag a particular problem which I believe does not appear within the Budget and which might be set right. I am encouraged by my noble friend the Minister who said that he saw the Budget as having a strong commitment to business. I agree with him but the issue is a business problem which has perhaps been overlooked. It is perhaps, as was stated by the noble Lord, Lord Houghton of Sowerby, an impediment in the matter of free trade. It is a problem which was touched on briefly by my noble friend Lord Clark of Kempston and I should like to describe it in a little more detail. It relates to life assurance.
Many of us who supported the Government through the debates on the Maastricht Treaty did so at least in part because we believed that we have a better opportunity to trade profitably from within the market than from outside. Within the treaty there are a number of playing fields which we need and which will give us level playing fields provided that we can persuade our partners in the Community to action the terms of the treaties. But it is clear that tax is one area in which the treaties do not become involved and the playing fields are not equal.
To the life assurance industries, that is a particularly important point. I am no expert on the matter but I should like, using layman's terms, to go into the differences. A life assurance company in the UK, whether a UK-domiciled company or a foreign company domiciled here in order to trade in the UK, will be taxed on its profits. Also, the funds that it holds for the policy holders will be taxed over the 25 years or whatever it is that they are being rolled over. On maturity, when those funds are finally passed to the policy holder, they are not taxable.
If the company is resident on the continent, whether it is a continental insurer, a UK insurer in France or a subsidiary on the continent, again it will be taxed on the profits of the company. However, the funds that are being accumulated will not be taxed. Finally, on maturity, the benefits to the policy holder will be taxed.
It has taken the UK life assurance industry a little time to come to conclusions about the results of that policy. As far back as the beginning of the year the Association of Consulting Actuaries was advising the Government that in its view the disadvantage to UK companies who wish to trade on the continent by services, rather than by setting up a subsidiary or a branch, could be as much as 40 per cent. Such a disadvantage would wholly outweigh the savings which could be made through not having a branch or subsidiary overseas. Therefore, the position is one where the UK company is non-competitive.
Others have also made similar comments, including the Linked Life Association and the Association of British Insurers, which made the point very strongly and commissioned Price Waterhouse to submit a report. The report states that in Price Waterhouse's view, the maximum differential disadvantage to the UK is not as much as 40 per cent. but probably a maximum of 30 per cent. Either way, those are large numbers.
1219 The point I wish to put to your Lordships is that unless we make a change the life assurance industry's business will, as a result, leak to the continent. Already, major UK companies are setting up their subsidiaries in Luxembourg and Dublin, where the tax advantages are best. So unless we do something about it, as my noble friend Lord Clark said, there will be a leak of existing revenue to the Treasury in much the same way as my noble friend Lord Brabazon suggested happened with VAT.
As I understand it, what the life assurance industry would like to see happen—and certainly the ABI and the Linked Life Association would like to see it happen—is for the taxation system to be changed from the current UK basis to the continental basis. The industry believes that in that way it would have a level playing field. In addition, not only would the UK's tax revenue be prevented from leaking, but it might well increase because the industry is confident that its skills and products are such that they can be sold to great advantage on the Continent of Europe, given that the industry has level playing fields in all respects including tax. The matter is not something which has to be dealt with now. Like other noble Lords who have spoken about their anxieties, I believe that it would be possible to pick it up in the November Budget. As my noble friend Lord Clark has already said, the effective date is 1st July 1994.
§ 6.3 p.m.
§ Baroness Seear
My Lords, it is common ground on all sides of the House that we have faced for some time, are facing and will continue to face three major problems: the balance of trade; the Budget deficit and the unacceptably high level of unemployment. One looks to the Finance Bill and asks: what contribution does it make to the solution of those problems, or at least their alleviation? "Solution" is too optimistic a word. One hopes for the alleviation of the problems, not only on a short-term basis of 12 months from one Finance Bill to the next but over a longer period. It is that in particular that many of us would like to stress in considering this Finance Bill.
Before I make a few short comments on the three problems, I wish to raise a rather dull but important point: the statistical basis and the facts and figures which lie behind the Finance Bill which are absolutely essential to any proper calculation of what policy should be and the sources from which the figures come. Nowadays the Central Statistical Office is a subsidiary of the department of the Chancellor of the Exchequer. I suggest that it was a mistake to move the Central Statistical Office to the department of the Chancellor of the Exchequer. I am sure that no open skulduggery goes on between the Chancellor and the members of the Central Statistical Office. But it is essential that the office should be able to carry out a totally independent, professional job. It is at least likely that its findings could be somewhat biased by the position in which it finds itself in the structure of government.
It was not always so. The office was not always under the Chancellor the Exchequer's department. 1220 But it would be a good thing if it were no longer there. In my view, the office should be directly responsible to the Prime Minister, and no one else. What is more, it should be adequately staffed. There is reason to believe that we do not obtain the information that we ought to have. Sir Samuel Brittan of the Financial Times has said again and again that there are huge gaps in the trade figures, unknown elements which never appear. Yet we base all our policies on figures on which we cannot totally rely. I believe that it is important that the Government should reconsider this. To economise on the essential raw data on which all other considerations must be based is the falsest possible economy.
In addition, when we consider the way in which the Finance Bill is presented to us, I wish to echo what the noble Lord, Lord Desai, and others have said. When and why did we ever lose what in my young days we used to call "above the line" and "below the line"—the revenue account as distinct from the capital account? It does not matter if we are borrowing for capital account, for capital expenditure. It matters tremendously if we are borrowing for a consumption bonanza. But we ought to be able to look at those two quite differently. If, as some noble Lords suggest, the capital account accounts for about £20 billion to £25 billion of the £50 billion deficit, we ought to know. It makes our whole thinking about the matter totally different. Until we have greater depth and accuracy in the presentation of the position, our judgment of the problems and the suggestions we make for dealing with them are inevitably—I am determined not to say "fatally flawed"; that is another of the horrible expressions which everyone constantly uses—at any rate inaccurate, which is much more important. That is for starters.
When we consider the balance of trade, of course it has been improving slightly in recent months. But I wish to put in a caveat against the assumption too easily made that that is a result of our coming out of the ERM. I refer noble Lords to the current edition of the Economist which produces good arguments and figures to suggest that it is coincidental with our coming out of the ERM but not consequential on it. It is not because we came out of the ERM that the recession began to recede. (Can a recession recede?) The recovery had started before we came out of the ERM. If that is so, one cannot say that coming out of the ERM led to the recovery. It may or may not have assisted it, but it cannot be the sole cause.
We should be careful before we assume that we were necessarily right to come out of the ERM, and I do not say that solely as a dyed-in-the-wool European. There was a discipline in the ERM; it gave us stability. Industrialists will, if asked, say that what they want above all is stability. They have to make long-term calculations and know what the value of their money will be not only today and tomorrow but in two or three years' time.
A number of people in a position to know say two things unreservedly: first, that we were overvalued in relation to the dollar but we were only very slightly overvalued in relation to a basket of ERM currencies; and, secondly, that we could have adjusted inside the 1221 ERM and did not have to come out to make the necessary adjustments. Certainly when we came out we let the pound fall further than it was right to. But that being so, it will go up again, and in any case we have not yet felt the results of letting the pound fall as far as it did because we have not yet felt the results of the increase in import prices which is bound to follow.
In the face of the latter, I certainly do not agree that we ought to cut interest rates. That was one of the few points upon which I do not not agree with the noble Lord, Lord Desai. I believe that a cut in interest rates would lead to further instability and would certainly encourage what we want least of all—any kind of consumer boom which may well lead to an increase in imports. With that would go any improvement that has been achieved in the balance of trade over recent years. Therefore, I do not see that as a solution.
Although there have been improvements, we must be extremely cautious because we do not know how long they will last. Further, if we look at their causes, can we rely upon them staying with us? A great deal depends on what happens to unit labour costs and therefore to pay levels and increases therein. Recently there has been a very welcome reduction in the increase of pay levels. But over the years there have been very few periods when pay levels have not outstripped the rate of inflation and certainly not grossly outstripped the levels of productivity. When noble Lords opposite say that the matter is now under control because of their enlightened "labour policy", I believe that they should think again. I suggest that the control over pay and the limitations on pay increases that we have seen are largely the result of unemployment rather than anything else. However, if the unemployment position were to improve, the boasted control over excessive increases in pay might become a thing of the past. Therefore, very little of what has been claimed as a secondary success is necessarily secure.
I turn now from the balance of trade to the Budget deficit and the contribution that the Finance Bill makes to it; to changes in taxation; and to some of the smaller but none the less important points. I entirely agree with the noble Lord, Lord Boyd-Carpenter, which is something that does not often happen. I believe that we should attack the tobacco industry with all the force that we have. I fail to see why it should not be taxed very heavily indeed. Surely we could gain more money in that direction.
Very little mention has been made of mortgage interest relief. There is some movement in the Finance Bill in that respect. Nevertheless, we must grasp the nettle. We cannot abolish mortgage interest relief straight away, but we could do a great deal more to cut back on it. Even at current interest rates, mortgage interest relief is costing the Government just under £5 billion. I can hear mutterings from the Front Bench to the effect that I may be £1 billion or so out in my calculation. At any rate, it is costing the Government a great deal in tax which could be collected.
Further, mortgage interest relief distorts the working of the economy in a variety of highly undesirable ways. It has been the cause of the excessive investment in housing which has trapped so many 1222 people who now find themselves in debt. I am rather surprised that there has been no mention of the problem of debt in the country, which is one of the big underlying factors holding back any recovery that we may be able to achieve. I ask the Government to take their courage in both hands and get together—and why not?—on a three-party basis to see what can be done about mortgage interest relief and how we could save money in that area.
I move on now to the question of unemployment. We cannot allow the present level to continue. It is said to be 2.9 million. I believe that everyone recognises that the real figure is considerably greater. That is not necessarily for reasons such as fiddling the figures but because there are many people, especially older women, who are not working but who would do so if the jobs were there. That is the true definition of unemployment, not the numbers of people who are or are not claiming unemployment benefit. It is a most appalling waste of wealth-creating resources and a very heavy cost on the Budget and to British society as a whole. It also has the most frightful social consequences, many of which are extremely costly.
I had the opportunity—if that is the right word —to talk to the governor of one of our newest prisons, dealing with the most difficult and dangerous prisoners. I am informed that it costs £1,000 a week to keep people of that level in prison. Anything that can get people into employment and help prevent the development of an underclass and all that goes with it is not only a top social priority; it is a top economic priority. We must start tackling the problem at its root.
In the longer term—and there is very little reflection of the longer term in the Finance Bill—we shall be up against the most tremendous competition from East Asia. China's growth rate (although its statistics are probably even worse than ours) is said to have been 12 per cent. last year. Well, even if it is not 12 per cent., it is certainly very high. Like other Members of this House, I once had the privilege of teaching people from East Asia. They are alarmingly able and hard working. The competition from them will be most alarming; indeed, it already is. They will take markets that we already have. But there will also be opportunities for people who have what it takes to get into the new markets which their success will create. But with our present level of untrained and uneducated people, we shall not be able to do so. That is the most serious long-term problem that faces all of us.
Any amount of money spent on reducing the number of people who will not be capable of competing must be money well invested. We want investment. I do not mean capital expenditure or expenditure on consumer goods. Let us not begin to think of recovery by that route. As many other noble Lords have said, we want investment in infrastructure but, above all, we need investment in people.
§ 6.18 p.m.
§ Lord Eatwell
My Lords, as the end of the recession is at last in sight as well as the end of today's debate and, indeed, the end of the parliamentary Session, it is 1223 surely time to stand back and ask, at least with respect to the recession: what went wrong? How did the policies of the past decade come to precipitate such a deep and enduring recession? What mistakes were made and how are they to be avoided next time around? Further, what new policies are to be advanced to ensure that the British economy is not launched on another cycle of boom and bust? I believe that it would be most helpful to your Lordships' House if, in his concluding speech, the noble Earl could give some indication of what he believes were the erroneous policies of the past decade and what new policies are now planned to be put in place to prevent all that happening again.
I wish to focus on three aspects of the British economy which bear directly on the Finance Bill and which I believe are highly relevant to the overall performance of the British economy up to the end of this century. I take the injunction of the noble Baroness, Lady Seear, to look at the longer term. Those three aspects are, first, inequality, secondly, unemployment, and, thirdly, industrial performance and competitiveness. It may surprise your Lordships that the fiscal deficit is not included in that list as the deficit, and in particular the Red Book projection of a government deficit rising to £50 billion for this year, has dominated the debate. The reason the deficit is not included in my list is that I suggest to your Lordships that the deficit is a symptom of economic failure but it is not the disease. If we concentrate purely on the symptom without referring to the disease, we are unlikely to achieve the economic cure that the British economy requires.
The deficit is high because Britain has an unequal, slow growing, broadly uncompetitive economy, with high unemployment. What is most disturbing about the Finance Bill is that the Government not only seem to regard the deficit as the disease—and have been most successful in convincing many economic commentators of that view—but also that the measures which the Government have outlined in the Bill are, I suggest, likely to make the underlying deficit worse rather than better.
Of my three aspects I wish to deal first with inequality and the relationship between inequality and the Finance Bill. It is perhaps one of the most shameful aspects of the Government's economic record over the past decade that there has been a marked increase in inequality in this country. Inequality in relative pay is now greater in Britain than at any time since 1886. Moreover, during the past 14 years, at a time when the top 10 per cent. of households have seen an increase in their real incomes of over 50 per cent., the bottom 20 per cent. of households, according to the Department of Social Security, have seen their real income fall; that is, their real income is now lower than it was in 1979. Much of the increase in inequality is due directly to government policy. Let us, for example, consider the impact of the tax-cutting policies which the Government pursued in the 1880s. Between 1979 and 1992—
§ Lord Eatwell
My Lords, did I say the 1880s? The level of inequality is so reminiscent of the 1880s that I think your Lordships will understand why I made that slip, Freudian or otherwise. Of the £31 billion in tax cuts which have been given away (returned to the taxpayer, if you like) between 1979 and 1992, 27 per cent. of all that money, or just over a quarter, went to the top 1 per cent. of income earners and 15 per cent.—just about half of what went to the top 1 per cent.—to the bottom 50 per cent. of income earners. So we have a situation in this country today where the bottom 10 per cent. pay 43 per cent. of their incomes in taxes and the top 10 per cent. pay 32 per cent. of their incomes in taxes. That is the situation we have. What have the Government done about it in this Finance Bill? The noble Earl produced a staggering assessment of the impact of tax changes on the distribution of income in this country. I believe his precise words were that the impact is broadly neutral across the income scale. I cannot believe that he was serious in making that remark. Let us consider the measures in the Finance Bill.
Take, first, the VAT on fuel. The poorest 10 per cent. of households spend over 13 per cent. of their income on fuel and the richest 10 per cent. spend 3.5 per cent. of their income on fuel. How can that be a measure which is broadly neutral? Then, at the time of the Budget, there was the increase in national insurance contributions, flagged up from 9 to 10 per cent. Could there ever be a more cynically regressive tax increase? There will be 500,000 people paying that increased tax on their incomes who are even too poor to pay income tax. And there are, of course, no allowances against national insurance contributions. Moreover, national insurance contributions stop on incomes of a little over £20,000. The upper earnings limit means that the tax increase will not apply to incomes over and above £20,000.
Then there is the freezing of tax allowances which keep 200,000 low-paid people in taxation when, if the real value of the tax allowance had been maintained, they would have been taken out of taxation altogether. All those measures represent a continuation of this Government's assault on the poor and on the average family and of their cosseting of the better-off. What did we hear the Chancellor of the Exchequer say down in Christchurch the other day? He feels that the VAT net needs to be widened. Perhaps it would he helpful if the noble Earl would tell us what the Chancellor of the Exchequer has in mind. Where is VAT to apply next?
If this massive increase in inequality has been the Government's policy, what has it achieved? I suppose it is just a rather unfair debating point to say that since the tax cut for the better-paid in 1988, the economy has been in almost permanent recession. No one, however, can possibly argue that the increase in inequality has achieved a superior performance for the British economy. Moreover, inequality, as we know, tends to perpetuate low skills and low educational levels. But of course the prime cause of inequality in Britain today is not just the Government's fiscal policy but another aspect of government policy; namely, the policy of high unemployment.
1225 This is my second theme. Of course, we all welcome the falls in unemployment which have occurred over the past five months. However, we must remember, as several noble Lords have said during the debate, that the level of unemployment remains unacceptably high. We must also remember that each person who is unemployed costs the Exchequer £9,000 per year. Therefore the overall bill of the current level of unemployment is running at £27 billion. That is the cost of unemployment.
It is worth asking what is the Government's attitude to unemployment now. The former Chancellor of the Exchequer told us that it was a price well worth paying. Is that still the position of the Treasury with respect to unemployment? I rather suspect it is. I wish to refer your Lordships to the evidence given by the chief economic adviser, Professor Alan Budd, on 25th November 1992 to the Treasury and Civil Service Committee of another place. Professor Budd told the committee that a level of unemployment of 7 to 8 per cent. was natural in Britain. That constitutes roughly between 2.1 and 2.4 million people unemployed. Moreover, Professor Budd told the committee that unemployment could not now be lowered below that level without inflation accelerating uncontrollably. May we therefore assume, as it is the Government's policy to maintain low inflation, that it is not the Government's policy to lower unemployment below 2.1 to 2.4 million at best? Will the noble Earl confirm Professor Budd's remarks to the Treasury and Civil Service Committee and will he tell us whether they represent government policy?
What has the Finance Bill done for unemployment? There is new money for unemployment schemes in the Finance Bill totalling £125 million, which we must welcome. But we must compare that with the cuts of £1.2 billion which have been made in spending on the unemployed and training of the unemployed since 1990. What a miserable record—cuts of £1.2 billion and an increase in this Finance Bill of £125 million.
The problem is that unemployment is seen by the Government as a major cost upon the economy with no recognition that it is one of the causes of our current economic malaise. It is a waste of resources. There is a lack of training. Not only has training been cut but training targets are below those of our competitors. It is that continuous lack of utilisation of one of our most important resources, the one unique resource we have, in an era when capital and techniques are mobile around the world, which diminishes the productive capacity of this economy and diminishes the strength of the economy.
My third aspect is that of competitiveness. The Red Book states that the current account deficit is expected to rise to £17.5 billion this year and to go on rising thereafter. I suggest that the failure to compete, measured precisely by the current account deficit, is the central failure of the Government's economic policy. It is a central failure not only because it represents the lack of competitiveness of British industry but also because it is a significant drag on the Exchequer. A high level of spending on imports means that jobs are created abroad instead of being created at home and, moreover, that tax revenues go to 1226 foreign governments while our own government have to pick up the tab for unemployment. A significant cause of the budget deficit is the lack of competitiveness embodied in the current account deficit. The Government are in the red because Britain is in the red.
What measures do we find in the Finance Bill which might tackle the general lack of competitiveness in the British economy? There is what we might charitably call the accidental policy of devaluation, which has been referred to by several noble Lords. It would be helpful if in summing up the noble Earl answered the questions asked by his noble friend Lord Brabazon of Tara and told us what the Government's exchange rate policy is now. Perhaps we may ask him the broader question. Are the Government in principle in favour of managed exchange rates or are they in principle in favour of free floating exchange rates?
I should like to suggest to noble Lords, as I believe the noble Baroness, Lady Seear, hinted in her remarks, that the exchange rate is not the whole answer to the competitiveness problem. If we do not invest in our industry and if we do not increase our competitiveness by improving the quality of our training, our research and our design as well as the quality of our machinery, then in the medium term no exchange rate is sustainable.
Yet what we have seen over the past five to 10 years has been a significant bias in the British economy against investment and in favour of consumption. For years and years in the British economy, roughly 60 per cent. of GDP went on personal consumption. That was almost an historic concept. Then, in the mid-80s it started to rise and it has now risen to 67 per cent. of GDP. That sharp increase in consumption, fostered by the policies of the Government, has resulted in a counterpart squeeze on investment and a deterioration in the foreign balance. In the current recovery we find the same story being repeated, with consumption growing at an average rate of 2.4 per cent. and investment growing at an average rate of only 1.2 per cent.
What are the Government going to do to re-balance the economy and to increase the volume of investment? Will the investment allowance introduced in last year's Autumn Statement be extended beyond October? What about the Government's suggestion last year that they were going to encourage greater private investment in public sector enterprise? Has there been any greater increase in private investment in the public sector? What proposals do the Government have for ensuring the rate of return which private investors will receive when investing in the public sector? And what measures do the Government propose to increase expenditure on research and development and on training? I believe that this Finance Bill is seriously deficient in all those areas.
I come finally to the question of the deficit, which is the result of all that mess. We have now a government policy which appears to be dominated by fear of the deficit. The reaction is to attack the weakest in society and to make them pay for the mistakes of 1227 the Government. The Government's policy towards the welfare state and in their spending review is one of cutting expenditure. It is not a policy for social justice.
That attitude towards cutting the deficit, an attitude which is now shared, regrettably, not only here but among all our partners in the G7, is seriously reminiscent of the attitude prevalent in the 1930s when spending cuts, wage cuts, unemployment and growing deficits chased each other downwards in a continuous vicious spiral towards the disaster at the end of the 1930s. What the G7 now desperately needs is a co-ordinated expansionary policy among all the industrial countries.
President Clinton has called for a summit on unemployment. Can the noble Earl tell us what proposals the Government will be taking to that summit on unemployment? What proposals does the Treasury have for creating jobs around the world instead of simply cutting government expenditure, which will cut demand and is likely to stifle a fragile recovery when it has barely begun.
This is a Finance Bill which fosters inequality. It does nothing to cut unemployment by building the skills of the labour force. It does nothing to foster the investment boom which Britain so desperately needs. It is a Finance Bill which fails to face up to Britain's economic problems and fails to present a new economic strategy.
§ 6.37 p.m.
The Earl of Caithness
My Lords, we have had a full and most interesting debate on the Bill before us. It has been a unique opportunity for your Lordships because, as some noble Lords mentioned, my right honourable friend the Chancellor will be presenting a further Budget on 30th November. Therefore, your Lordships have had the privilege of having the opportunity to present your views, which I know my right honourable friend the Chancellor will read with great interest.
I must also agree with my noble friend Lord Boyd-Carpenter about the high quality of the debate. I noticed in particular that my noble friends Lord Stewartby and Lord Clark of Kempston and the noble Lord, Lord Houghton of Sowerby, wanted further debate on the economy, not merely on the Bill. I would welcome that at any time, particularly when the noble Lord, Lord Desai, says that the Budget is not too bad and the noble Lord, Lord Peston, thinks that things are getting better. I am game for any debate on the economy.
I am particularly grateful to those who have had the opportunity to serve in another place who say that your Lordships' House is the right place to discuss these matters. Some of us have been saying that for a long time. I hope that those of your Lordships who have friends at the other end of the building will convince them that we have been right all along.
I was amazed by the speech of the noble Lord, Lord Eatwell. I was longing to take his blinkers off. He concentrated on the United Kingdom. Until the last moment of his speech he did not even look towards Europe, let alone anywhere else. The noble Lord, 1228 Lord Desai, did much the same. They talked about boom and bust in this country and seemed to ignore the misery which is present in other parts of the world —in America, in the rest of Europe, in Japan, in Australia and New Zealand.
The other point which struck me about the speech of the noble Lord, Lord Eatwell, was that he seemed to be longing to squeeze the businessmen, the entrepreneurs, the wealth creators and those who create employment, until the pips squeak. He was longing to go back to the miserably failed policies of the 1970s. However, I was grateful to the noble Baroness, Lady Seear, because she at last raised the question of the competition that faces this country: the competition that is coming from the Far East. I had the privilege of being in the Foreign Office and saw that competition coming three years ago. I told my right honourable friend the Foreign Secretary just what a threat we faced then.
The noble Lord, Lord Eatwell, said, "Yes, we have to be competitive". How right my right honourable friend the Prime Minister was not to allow us anywhere near the social chapter in Europe. The fact is that we are uncompetitive in Europe; that is our major flaw. That is our great handicap for the future; and although Europe is a mature society with high labour costs, until it starts to become competitive with what is coming from the far side of the world we always have serious problems in this country. It is no good just building a fortress around Europe hoping that we shall survive. We shall not.
The noble Lord, Lord Eatwell, and other noble Lords referred to unemployment. There is not a single noble Lord in this House who would not agree that unemployment is too high. We all want it lower. But the noble Lord signally failed to tell your Lordships that unemployment is falling in the UK. It is rising in every other major European country.
Let me turn now to the ERM. I can reassure the noble Lord, Lord Peston, that the Government continue to monitor the exchange rate as one of a number of indicators which guide monetary policy. The noble Lord will be delighted about that and I hope he will cogitate on it when he takes a very happy holiday in France. We wish him a good exchange rate at the appropriate time both in France and on the way back.
The noble Baroness, Lady Seear, was quite right to draw your Lordships' attention to the role that the ERM played in getting inflation down. Your Lordships must, of course, recall the five point cut in interest rates while we were in the ERM. There was a further four point cut following our leaving the ERM.
The noble Lord, Lord Peston, referred to the 1 per cent. increase in employees' national insurance contributions announced in the Budget Statement in another place. That measure forms an important part of the Government's revenue-raising strategy, raising an additional £1.75 billion in 1994–95 and £2.1 billion in 1995–96. The growing deficit in the national insurance fund which will require a Treasury grant of £7.5 billion this year to bring it into balance made an 1229 increase in contributions essential and the Government thought that it would be wrong to impose the burden of that increase on employers.
The noble Lord, Lord Peston, also referred to an article in today's Financial Times. I am not a great believer in what one reads in the press but I can assure him that it is the Government's intention to maintain the mortgage tax relief. My right honourable friend the Chancellor of the Exchequer, in the Treasury response to the report of the Treasury and Civil Service Committee made that clear. However, I noted what the noble Baroness, Lady Seear, said on that point.
The noble Lord, Lord Peston, also asked me to confirm the announcement of my right honourable friend the Chancellor that VAT on domestic fuel and power would begin at a rate of 8 per cent. in April 1994, rising to the standard rate of 17.5 per cent. in April 1995. I can confirm that that is the Government's intention. It is provided for in Clause 42 of the Bill before us. Again, it was a point to which the noble Lord, Lord Eatwell, referred, but of course he failed to mention that I had said in my opening remarks that there would be extra help for those on low incomes.
While talking on the question of energy, of which he is very much a recognised expert in your Lordships' House, the noble Lord, Lord Ezra, talked about the benefits of diesel. The duty differential with leaded petrol, including VAT, has risen from 5.8p to 6.4p per litre. However, I question whether the environmental case for or against diesel has been proven as he would believe. Diesel engines emit less greenhouse gases per mile but more per litre, but catalytic petrol engines emit less nitrogen oxides and particulates. Diesel running costs per mile in any case are lower due to the greater economy.
While on fuel duties with regard to petrol, I can confirm to my noble friend Lord Brabazon that the intention is to increase road fuel duties on average by at least 3 per cent. a year in real terms in future budgets. But as my noble friend will know, one cannot be too specific because each budget must be looked at and the freedom must he there for my right honourable friend the Chancellor of the Exchequer to do what he thinks fit at the right time. The reason that we have given this long-term duty commitment is to make a major impact on the United Kingdom's carbon dioxide emissions. It is intended to encourage manufacturers and drivers to greater fuel efficiency. We should be able to reduce CO2 emissions by about 1.5 million tonnes of carbon by the year 2000 and a further 1.5 million tonnes from VAT on domestic fuel and power. That is a major commitment towards what was agreed at Rio at the climate change conference. We estimate that we need to save some 10 million tonnes of carbon to get the year 2000 emissions back to the 1990 levels. About 20 per cent. of the total carbon emissions come from road transport. Therefore, we are now two-thirds of the way there.
I was sad that no one from the Liberal Benches commented on that point. When I was Minister with responsibility for the environment, I remember always being told about the necessity to get carbon dioxide 1230 emissions down and to increase fuel duties. Now that we have done so, the Liberals are amazingly quiet on that subject.
The noble Lord, Lord Ezra, suggested more action to improve insulation standards in homes. The Energy Efficiency Office has a budget for this year of nearly £70 million. That is 12 times the level of 1979–80. Some £40 million is being spent on the Home Energy Efficiency Scheme which provides grants for low-income households. The Government also take forward a number of ideas in the European Community context: for example, standards for energy labelling on new appliances.
The noble Lord, Lord Ezra, also questioned our investment policy in the 1980s. I am sure that he will recall that in the 1980s we had the fastest business investment growth of any G7 country except Japan. If he looks further back, he will recall that in the 1960s and 1970s we were second from bottom of the G7 table—quite a major change round. Of course, there has been some fall since the onset of the recession but, even at its forecast trough in 1994, business investment will be 14 per cent. of GDP; and that is higher than any year between 1970 and 1986.
The noble Lord, Lord Ezra, raised the question of petroleum revenue tax. I had thought that he might do so and I spent some time wondering about the outcome of the last licensing round. That took place after the Budget. I can report to him that the outcome was a successful licensing round and there is continued high interest in the North Sea. We have talked to a number of companies that are responsible for a substantial share of the activity. They say that they have no plans to cut exploration further. Therefore, although the noble Lord might fear that there will be a reduction in exploration, that has not been shown to date. We shall continue to look at that important area.
My noble friend Lord Boyd-Carpenter wishes to increase the tax on cigarettes. He was backed by the noble Baroness, Lady Seear, who wants to attack cigarettes with all vigour. My noble friend Lord Brabazon of Tara would not agree with either my noble friend Lord Boyd-Carpenter or the noble Baroness. Rather than referring to tobacco duty, my noble friend Lord Brabazon of Tara spoke about alcohol duties. The Customs are keeping the position on legal cross-border shopping under review, and the situation with regard to illegal bootlegging. That could be a problem if we raised tobacco duties more than we have done. It is a matter that needs to be borne in mind.
What is clear at the moment is that the revenue losses that were anticipated are in line with our expectations. It does not look as though we are on the point of diminishing returns, as my noble friend Lord Brabazon suggested, but again it is something that we need to continue to monitor. However, my noble friend will he delighted to know that new powers have been taken to impose severe penalties for offences of bootlegging: up to seven years in prison and unlimited fines, as well as confiscation of goods.
I was surprised that my noble friend Lord Brabazon wanted further tax approximation within the European Community. I can understand that from 1231 the point of view of the Brewers' Society that might be quite a good idea, but I know that in his heart of hearts my noble friend would not wish in any way to tie the hands of my right honourable friend the Chancellor of the Exchequer who needs, as every Chancellor does, the right amount of flexibility.
My noble friend Lord Boyd-Carpenter raised the important point of inheritance tax. He was backed by my noble friend Lord Clark of Kempston in his call for this to be abolished with regard to owner-occupied properties. I shall, of course, put that proposition to my right honourable friend the Chancellor of the Exchequer. I can say to my noble friends that inheritance tax now affects less than one in 30 estates. If the building is of outstanding historical or architectural interest, conditional exemption from inheritance tax can be claimed when the property is passed on following the death of an owner, provided that in return the new owner agrees to maintain and preserve the property and provide the public with reasonable access.
I am grateful to the noble Lord, Lord Bruce of Donington, for giving me warning yesterday that he would raise the case of the draft budget in the European Community and the lack of time that there is to discuss that. That is a question for the House to decide, and in particular for the European Communities Committee of this House. One always has had a problem of timing on this matter. As the noble Lord, Lord Bruce of Donington, will know, it is not until mid-June that the Commission publicises the preliminary draft budget in detail. It will of course have provided an overview in about May. On 22nd July the Budget Council gives the budget a first reading. It then goes to the European Parliament, where it is discussed at its first meeting in about the last week of October. It comes back to the Budget Council in mid-November, and back to the European Parliament in mid-December. This year is no different from any other year. We have always had a problem, but I will draw the noble Lord's remarks to the attention of the noble Lord, Lord Boston of Faversham, because it is a matter that the European Communities Committee of this House might wish to look at.
The noble Lord, Lord Houghton of Sowerby, expressed concern over the operation of VAT penalties. The noble Lord will be pleased to note the introduction of a new system of mitigation of VAT penalties set out in Schedule 2 of the Bill. The noble Lord also raised the question of market testing. I am sure that he would agree with me that it is important that the government services are delivered as efficiently and effectively as possible. We owe that duty to the taxpayers and to the population as a whole. In some areas that means opening up public services to market discipline by inviting outside tenders. That, I can assure the noble Lord, has already delivered substantial savings, although I understand the very real concerns that people have when they are faced with a situation such as market testing.
The noble Lord, Lord Rix, raised the question of charities. It is worth recalling that although VAT on 1232 fuel and power will be charged to charities, they are contributors to carbon dioxide and to the pollution that that causes with regard to global warming. So I think it is equitable that they too suffer what we as individuals will have to suffer. But charities were by no means forgotten in the Budget. Together with payroll giving and gift aid, about £30 million was granted to charities in a full year. It is worth recalling that, in total, between direct and indirect tax reliefs, the value to charities is now about £1.3 billion a year. That is a substantial sum of money from which the charities benefit.
My noble friends Lord Clark and Lord Chelmsford raised the important question of taxation on the life assurance industry. Again, the timing of this debate is very useful, so far as my right honourable friend the Chancellor of the Exchequer is concerned, in that I know he will read with great care what my noble friends had to say. However, I can say to my noble friend Lord Clark that on equalisation reserves my honourable friend the Financial Secretary announced last week in another place that a consultative document will be issued this week inviting comments on whether there should be a regulatory requirement for, and tax relief on, equalisation reserves for certain volatile types of insurance business. I have arranged for copies to he placed in the Library of the House.
On another concern of my noble friend Lord Chelmsford, I know that the tax treatment of life assurance business conducted here with non-resident individuals is seen by some in the industry as an impediment to full participation by UK insurers in the single market. The Government are currently studying the report made last autumn by the Association of British Insurers.
In conclusion, I would say that the economic context in which we are considering this Bill is steadily brightening. The main economic indicators published in July are all moving in the right direction. To find such unanimous improvement as we have seen this month would have been to go back over five years. The Budget of 16th March and the Bill that we are considering today have already made no small contribution to the restoration of confidence and brightening of prospects. Without this Bill every sector of our economy would have suffered from the cloud of uncertainty that would have hung over our public finances.
My right honourable friend the Chancellor of the Exchequer will deliver the first unified Budget on 30th November, bringing tax and public expenditure together for the first time in this country—something that all of us have welcomed. He has made it clear that he will look carefully at the economic situation at the time and take whatever action is necessary on both sides of the account to sustain the recovery and continue bringing the budget back towards balance in the medium term.
My noble friend Lord Boyd-Carpenter said that tax increases will damage recovery and that we must cut spending. I am sure that he acknowledges that the public spending limits agreed in the Autumn Statement are the toughest for 15 years. We are determined to stick by the limits. We cannot say that 1233 we shall not raise taxes. That is because we recognise that the greatest threat to recovery will be to fail to bring the public finances back to health.
To the noble Lord, Lord Peston, I say that we have come through a very long recession. Of course output is lower and unemployment much higher than we want, but we now have the best possible foundations for growth. Retail prices, producer prices and average earnings are rising at the slowest rates for a generation. At 6 per cent. interest rates are at their lowest for 15 years and are the lowest in the European Community. Productivity growth is the fastest for over six years and unit wage costs are falling at a record rate. And, my Lords, we are not to be tied to the social chapter. The Bill before us today makes a vital contribution towards our goals. I commend it to the House.
On Question, Bill read a second time; Committee negatived.
Then, Standing Order No. 44 having been suspended (pursuant to Resolution of 22nd July), Bill read a third time, and passed.