Lords Sitting of 29 April 1994

Preamble
The House met at eleven of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.
Prayers—Read by the Lord Bishop of Lichfield.

Great Barr School, Birmingham
Lord Howell asked Her Majesty's Government:
On what date the case of Great Barr School, Birmingham, was referred to the National Assets Board and on what date did the board refer the matter to the Secretary of State in order to determine the ownership of facilities specifically povided for community use as well as school use; why no decision has yet been reached in this matter; and whether they will give an assurance that all such facilities will continue to remain in the control of the local authorities which provided them.
Viscount St. Davids: My Lords, the Education Assets Board first became involved in this matter when the school became grant maintained in April 1991. The board was unable to reach agreement with Birmingham LEA over the ownership of these facilities used jointly by the school and community and referred the matter to the Department for Education in August 1992 for determination. Since then the department has been seeking to put my right honourable friend the Secretary of State into a position to resolve this complex case. Whatever the outcome, continued use of the facilities by the school and community will be protected, as it has been throughout.
Lord Howell: My Lords, I thank the noble Viscount for that reply. First of all, does he agree with me that it is totally unacceptable to this House, or indeed to those in the field of education, that a matter requiring resolve and which has been referred to the appropriate body has still not been resolved three years later? This is bureaucracy gone mad. Secondly, I acknowledge that progress has been made on the general front by the issuing by the Government of Circular 15/93 which I and most local authorities appreciate, but we are still left with the fact that a local authority has spent £1 million on providing sports facilities for the use both of the community and the school and the school is trying to take the ownership of those facilities. That is unacceptable. Will the noble Viscount kindly represent to his noble friend, when she decides this matter, that the recommendation of the assets board about security for the school in maintaining the national curriculum in PE is not a valid argument as the school has four other gymnasiums which it can use and most other schools which have the same obligation to provide PE have no sports halls at all? Therefore the logic of that recommendation seems to me totally uncertain.
Viscount St. Davids: My Lords, my noble friend Lady Blatch is also concerned at the length of time these
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matters have remained unresolved. My noble friend will use her best endeavours to bring them to a conclusion. As regards the second part of the question of the noble Lord, Lord Howell, the points that he raised on financial implications will of course be taken into account by my right honourable friend when he produces his conclusion.
Lord Judd: My Lords, will the Minister assure the House that the Government, in general policy, see the value of school facilities being at the disposal of the community as a whole; that this is a good use of facilities and public money; and that it is also a good way of enabling youngsters in their formative years to relate to the community of which they are a part?
Viscount St. Davids: My Lords, I agree entirely with the comments made by the noble Lord, Lord Judd.

Rwanda: UN Peacekeeping Operations
11.11 a.m.
Lord Bonham-Carterasked her Majesty's. Government:
What action they propose to take, in co-operation with other Security Council members, to protect. those at risk, including local staff employed by United Kingdom-based non-governmental organisations in Rwanda.
The Parliamentary Under-Secretary of State, Department of Employment (Lord Henley): My Lords, the United Nations Mission in Rwanda (UNAMIR) is working for a cease-fire. It has also been tasked by the Security Council to assist in the resumption of humanitarian relief operations and monitor and report on developments. We are actively encouraging all international efforts, including those by the OAU and regional governments, to halt the killings.
Lord Bonham-Carter: My Lords, I thank the Minister for that reply. Does the Minister share my concern that in the face of massive slaughter, bigger than in Bosnia, bigger than in Somalia, and bigger probably than anywhere else in the world, the UN Security Council decided to reduce its forces in Rwanda and, as it were, to opt out of this operation de facto?
Lord Henley: My Lords, I do accept what the noble Lord said about the massive slaughter in Rwanda. It is difficult to know quite how bad it is but: we have heard of reports of between 100,000 and 200,000 dead. I can tell the noble Lord that the decision to reduce the force level was taken only after the most careful consideration of all the options and on the advice of the United Nations Commander, Major-General Dalliere, and it is merely a reduction in the force level and riot a United Nations withdrawal from Rwanda. We believe that the main task in Rwanda and the most important way of bringing relief to all those concerned is obviously to broker a cease-fire so that the humanitarian operation can begin again and get the Arusha peace agreement back on track.
Baroness Elles: My Lords, does my noble friend agree that the UN personnel who have been in Rwanda are there basically to keep the peace and it is absolutely impossible in the present situation? I think that we have to accept that they are not in a position to have their own lives defended in this difficult situation. We certainly ought to thank those who are there at the moment doing an extremely difficult job.
Lord Henley: My Lords, my noble friend has made the very point that the United Nations Commander in Rwanda made. Very often the more soldiers one has out there the greater the problem in that one ends up having to protect those who are already there. As I made quite clear, the United Nations' decision to reduce force levels was taken only after the most careful consideration. It is not a withdrawal from Rwanda, it is merely a reduction in the force level.
Lord Molloy: My Lords, does the Minister agree that NGOs in general have proved to be excellent voluntary organisations and have given good service to democracy everywhere? Will he therefore consider making very strong representations to the United Nations on behalf of NGOs?
Lord Henley: My Lords, I can only endorse what the noble Lord said. I understand from a press report today, which I am very pleased to repeat, that the Italian Red Cross has been able to evacuate 40 children from an orphanage in Rwanda.
Lord Avebury: My Lords, in relation to the point made by the noble Baroness, Lady Elles, that General Dalliere did not have the forces to cope with the massive armed attacks by one ethnic group on another and the conflict between the RPF and the Government of Rwanda, was consideration given to the alternative of asking the OAU, for example, to reinforce General Dalliere's troops so that instead of a peacekeeping operation a peacemaking operation could have been embarked on at short notice?
Lord Henley: My Lords, I can only repeat that all matters were carefully considered by the United Nations. Peacemaking is a very different activity from peacekeeping and is rather harder to do than some pundits would suggest. As I made clear earlier, maintaining large numbers of troops in Rwanda in itself could create more problems than it might solve. I return to what I said before. The decision to reduce force levels in Rwanda was taken only after the most careful consideration.
Lord Judd: My Lords, does the Minister agree that we may be facing genocide on a scale that the world has not seen since Cambodia in the 1970s, and if that is the case we should be mobilising all possible material, military and financial support to enable the Secretary General to take serious peace enforcement action? Does the Minister agree—I am sure that he does—that the whole story underlines a crazy set of priorities in the world at the moment when more than £400 billion was still being spent on arms in 1993 while only £2.25 billion could be found for peacekeeping? Will the
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Government accept that they will have the fullest possible support from this side of the House if they take consistent action to reverse those nonsensical priorities?
Lord Henley: My Lords, the noble Lord is going slightly wide of the original Question about our policy in Rwanda. I repeat to the noble Lord that we are obviously deeply concerned about what is going on. The number of deaths there is horrendous, whatever figure one takes. The noble Lord tried to draw a comparison between what we are doing in Rwanda and what is happening in Bosnia and elsewhere. It is probably best if I merely repeat what my right honourable friend the Foreign Secretary said in another place two or three days ago. He said:
"We do not have a new world order. We have a traditional set of world disorders and we are trying, case by case and institution by institution, to equip ourselves to deal more adequately with those disorders. Each one is different, and the effort that the outside world can make to help solve each one will differ also". —[Official Report, Commons, 25/4/94; col. 26.]
Lord Bonham-Carter: My Lords, the Minister said that the options had been considered with the utmost care. Is he aware that some of those most closely concerned, including the President of Uganda, President Museveni, took an exactly opposite view and advocated very strongly reinforcement rather than withdrawal?
Lord Henley: My Lords, there are frequently differing views on different sides. That is why matters have to be considered with great care and that is why the United Nations Security Council did consider these matters with great care and came to the conclusion that it did.

Council Tax: Adjustment Notices
11.18 a.m.
Lord Boyd-Carpenter asked Her Majesty's Government:
Whether they are aware that some local authorities which at the beginning of the current financial year had received payment in full of their demands for council tax have now issued adjustment notices demanding additional council tax for the current year and whether such additional demands are lawful or enforceable.
Lord Henley: My Lords, liability to council tax can often change after the demand notice has been issued; for example, when a single person discount is awarded part way through the year. If liability changes, an authority must adjust the Bill and either refund or credit the account or request an additional payment.
Lord Boyd-Carpenter: My Lords, when someone has paid an account for the year in full is it not a little odd that the taxing authority should then come along later and ask for more? Can my noble friend cite any other form of taxation under which the taxing authority enjoys this, no doubt to it agreeable, facility?
Lord Henley: My Lords, I do not consider it odd at all. If one takes the example that I gave of someone who becomes a single person during the year, having

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previously been married, in that case he or she would be entitled to a refund. If a single person becomes a married person during the year obviously his circumstances have changed. It is made quite clear on the original Bill, with which explanatory notes are provided, that if circumstances change there will be increased liability. I see nothing odd about that.
Lord Harmar-Nicholls: My Lords, is my noble friend aware that his answer will drive even more people to think that in moving from the community charge to the council tax we settle for the second best?
Lord Henley: My Lords, I note what my noble friend says.
Lord Eatwell: My Lords, has the noble Lord had the opportunity to reconsider his somewhat miserly Answer given yesterday, refusing to countenance the payment of interest on funds returned after successful council tax appeals? Is he aware that the Inland Revenue demand interest on unpaid sums just 30 days after the issue of a demand? Community charge appeals are now outstanding for more than a year. Surely interest should be paid.
Lord Henley: My Lords, I believe that the noble Lord will be aware—I am open to correction; I speak only from memory—that the Inland Revenue does not demand interest until that interest bill is over about £30. In other words, it applies something of a de minimis rule. If we are talking about a reduction of one band—that is what it is likely to be if someone appeals and their band is reduced by one band—we are talking of a reduction in their bill, on average, of something of the order of £60. I really do think that the interest for six months or longer on a sum of £60 is not something that is within the realms of practicality. I have to say to the noble Lord that I do not intend to reconsider my Answer.
Baroness Gardner of Parkes: My Lords, will my noble friend look further into the answer given to my noble friend Lord Boyd-Carpenter? His answer seemed to be that if the circumstances of the council tax payer changed it was a rebate issue; whereas I thought that the Question tabled by the noble Lord asked whether or not the council could alter the whole council tax assessment for everyone after a period of time. I had thought that that was not possible. Can the noble Lord confirm my understanding?
Lord Henley: My Lords, as I understood it, the Question related to changes of circumstances. Where circumstances change, obviously it is open to the authority to adjust the bill up or down. I am not aware that it is possible, except in particular cases, for the authority actually to change the bill for the entire community which it serves. I shall have to take advice on that.

Bullying in Schools
11.22 a.m.
Lord Ashley of Stoke asked Her Majesty's Government:
What steps they propose to take to resolve the problem of bullying in schools.
Viscount St. Davids: My Lords, the Government are naturally extremely concerned at any occurrences of bullying. Available statistics suggest that there is a significant problem. A survey undertaken in Sheffield in late 1990 suggested that a quarter of primary pupils and one in 10 of secondary pupils had experienced bullying. The Government are determined to help schools to tackle the problem. Action Against Bullying guidance was issued to all schools in England in July 1992. New advice leaflets for pupils and parents have recently been prepared by the Department for Education. Further guidance for schools in England based on government-funded research at Sheffield University will shortly be available.
Lord Ashley of Stoke: My Lords, I welcome that response. Is the Minister aware that when Childline and the BBC established a special bullying line, a staggering 18,995 calls were made. Many parents were desperate because they could not get schools to investigate complaints about bullying. Will the Government support a change in the Parent's Charter which guarantees that after complaints of bullying schools investigate the complaints and take any necessary action?
Viscount St. Davids: My Lords, the department is aware of programmes, and comments in the newspapers, on statistics on bullying. I shall certainly bring the second part of the noble Lord's question to the notice of my right honourable friend.
Lord Skelmersdale: My Lords, is it not incumbent on all schools, by government circulars through local authorities, and, in the case of grant-maintained schools, directly, to have a policy on bullying? If I am wrong, is it not about time that there was a policy on the subject of bullying for every school?
Viscount St. Davids: My Lords, my right honourable friend has asked Her Majesty's Chief Inspector of Schools to ensure that inspection teams look at the action that schools take to prevent and eliminate bullying. Inspectors will seek the views of pupils, parents and teachers on the incidence of bullying and the schools' response.
Lord Taylor of Blackburn: My Lords, will the Minister say whether any study on bullying is taking place in the public school sector as well as in the state sector?
Viscount St. Davids: My Lords, I am not aware of any such studies.
The Viscount of Falkland: My Lords, is it not the case that bullying is a social ill which is not confined to education? It appears in the penal system, in the Armed

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Forces, and, if I may say so following an interjection from my left, sometimes in Parliament, probably not in this House and certainly not by Whips on these Benches.
Viscount St. Davids: My Lords, I do not think that the Department for Education has any responsibility for bullying in your Lordships' House.
Lord Renton: My Lords, is my noble friend aware that whether in the so-called public schools or in the state schools one way to reduce bullying is to appoint responsible senior pupils as prefects and to give them the responsibility of detecting bullying and reporting it to the head teacher?
Viscount St. Davids: My Lords, I call my noble friend's attention to the bulletin published by the Department for Education entitled Action Against Bullying, copies of which are in your Lordships' Library.
Lord Judd: My Lords, does the Minister accept that on this side of the House we regard this subject, as do the Government, as a very serious issue? It is not simply the bullying but the evidence that many sensitive youngsters of real ability do not fulfil their potential or complete their studies because of experiences of bullying at a young and tender age. That is potentially a national disaster. Firm action must be taken. Do the Government accept that in taking firm action the general context of values in society as a point of reference is crucial. If we are building a caring, responsible society with an emphasis on community responsibility, it is a good point of reference from which to deal firmly with the bullying when it occurs.
Viscount St. Davids: My Lords, we in this House, and all outside it, have an interest in seeking to solve the problem. It involves the minds of the young people who will be the next generation.
Lord Bruce of Donington: My Lords, following the intervention of the noble Viscount on the Liberal Benches, does the noble Viscount agree that the Government should set some example in this matter? Is the Minister aware that during the Maastricht debate in another place, many of the sensitive souls in this House were extremely distressed at the tactics adopted by the Government Whips towards long-serving and very sensitive Conservative Members of Parliament?
Viscount St. Davids: My Lords, during the Maastricht debate, I believe that it would be difficult to decide who was doing the bullying to whom.
Lord Harmar-Nicholls: My Lords, following the last question, perhaps I may say this. It should not be a matter of blaming the people who try their arm; you should blame the people for letting them get away with it.
Viscount St. Davids: My Lords, to return to the subject of the Maastricht debate, I do not know who got away with what.
Lord Ashley of Stoke: My Lords, I greatly appreciate the Minister's constructive response. Will he ensure that he is not diverted by quite irrelevant points raised by other noble Lords? If there is bullying in the Army, it should be tackled. But that is no reason for not tackling bullying in schools. I am glad that the Minister is responding so constructively. However, is he aware of an article in the Daily Telegraph about school bullying, which stated:
"School inspectors are to pay extra attention to the efforts of teachers to combat bullying … All inspection teams will be required specifically to report to parents on schools' individual arrangements … Special guidance aimed at reducing the incidence of bullying in boarding schools will be issued by the Department for Education today … Advice will be sent to State schools next year".
The article was based on remarks by Mr. Eric Forth, the Minister's colleague. Unfortunately, the date of the article is 19th May 1992. There are now 18,000 children telephoning about bullying. Does the noble Viscount agree that a great deal remains to be done?
Viscount St. Davids: My Lords, I can assure the noble Lord that the Department for Education will maintain its robust policy to counter bullying in our schools.

Sunday Trading Bill
11.29 a.m.
Lord Annaly: My Lords, I beg to move the first Motion standing in the name of my noble friend Lord Ferrers on the Order Paper.
Moved, That the amendments for the Report stage be marshalled and considered in the following order—

Clause 1,

Schedules 1 and 2,

Clause 2,

Schedule 3,

Clauses 3 and 4,

Schedule 4,

Clauses 5 to 9,

Schedule 5.—(Lord Annaly.)

On Question, Motion agreed to.

Criminal Justice and Public Order Bill
Lord Annaly: My Lords, I beg to move the second Motion standing in the name of my noble friend Lord Ferrers on the Order Paper.
Moved, That it be an instruction to the Committee of the Whole House to whom the Criminal Justice and Public Order Bill has been committed that they consider the Bill in the following order:

Clauses 1 to 12,

Schedules 1 and 2,

Clauses 13 to 26,

Schedule 3,

Clauses 27 to 40,

Schedule 4,

Clause 41,

Schedule 5,

Clauses 42 to 106,

Schedule 6,

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Clauses 107 to 114,

Schedule 7,

Clauses 115 to 142,

Schedule 8,

Clauses 143 to 148,

Schedules 9, 10 and 11,

Clauses 149 to 152.— (Lord Annaly.)

On Question, Motion agreed to.

Finance Bill
11.30 a.m.
Lord Henley: My Lords, I beg to move that this Bill be now read a second time.
We are here to debate the 1994 Finance Bill and I hope we shall have a full and interesting debate. I can say that we have a full day for it.
The Government's principle of sound finance is embodied in this Bill and it is encouraging to note that a recent CBI survey, among others, suggests further strengthening of the recovery in the months ahead. All indicators show that the United Kingdom has emerged from recession sooner than our main European partners. Growth in 1993 turned out stronger than we were expecting this time last year. In March 1993 the forecast for growth was 1¼ per cent; in November last year that forecast was 1¾ per cent. It is encouraging to note that growth is up 2 per cent. on a year earlier. The economy has been growing for two years and recovery has been broadly based across the economy as a whole, with the manufacturing and services industries expanding and the construction industry now joining them.
Other indicators confirm this picture. Retail sales have been rising steadily and are at record levels. Many more people are buying cars, and the output of our car industry is holding up well. And unemployment is falling at a much earlier phase of recovery than previously. Unemployment has fallen by a quarter of a million since the end of 1992 and has fallen across all regions of the United Kingdom.
We do not believe that these are only short-term developments. The economy is well placed for recovery to turn into a sustained period of growth. This reflects the success of the Government's policy of keeping inflation under firm control: since the end of 1992 we have had the longest run of consecutive months with inflation below 3 per cent. since 1961.
The Budget of my right honourable friend the Chancellor in November was designed to ensure that recovery continued to be steady and sustainable. He set out a clear and credible path to eliminate borrowing by the end of the decade, through higher taxes and lower public spending. Without that, confidence would have taken a serious knock. In fact the Budget strengthened the economy by underlining our intention for inflation to remain at low levels. We got to grips with the public finances in a way designed to do as little damage as possible to incentives.
In line with independent forecasters, we expect the economy to grow by 2½ per cent. in 1994. We believe the economy is healthy enough to take tax increases in its stride. We have had over a decade of reforms that
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have tackled the unions, freed up labour markets, reformed the tax system and transformed the nationalised industries. People are benefiting from low interest rates and companies are in much better financial shape. And the clear message from business surveys and forecasters is that they expect recovery to continue and to strengthen.
Her Majesty's Government have two key policy objectives they intend to pursue to ensure that growth is sustainable: first, to keep underlying inflation within a target range of 1 to 4 per cent, bringing it within the lower half of that range by the end of our current Parliament; secondly, to restore the public finances to better health and bring the PSBR back towards balance over the medium term.
There is still much more to be done. Business must go on playing its part by keeping a tight lid on costs —achieving low wage settlements and pricing products competitively. Some people are waiting for cost control to go out of the window as growth gets stronger. I believe they will be disappointed. British business fought hard to gain a competitive edge. It simply cannot afford to blunt it in another joust with inflation.
Wage settlements are being kept down. Underlying earnings growth in the United Kingdom in recent months is at its lowest level for 25 years. These improvements in our competitiveness are the key to better United Kingdom trade performance in the years ahead. We will not fritter them away by unleashing inflation.
Low inflation is essential for sustainable recovery. Without the sharp reduction in inflation the United Kingdom has achieved, we should not have been able to cut interest rates to their present level. And without low inflation and low interest rates, businesses cannot compete, invest and plan ahead with confidence.
Of course, this Budget deals with both tax and spending. Noble Lords will no doubt be aware that we have set out tough ceilings for public expenditure to ensure that spending falls as a share of national income over time. Total public spending will be reduced by £10 billion over the next three years. This represents our toughest expenditure remit for 15 years, and we will continue to subject spending to searching reviews.
I now turn to the Bill. It is a long and in some places a complex Bill. But it initiates the most radical overhaul of the income tax system since the introduction of PAYE and introduces two new taxes. When legislating for such important measures it is important to be thorough. Sixty pages of the Bill, for example, are taken up by the introduction of the new taxes; another 34 pages cover measures on Customs and Excise appeals and penalties. A further 75 pages of the Bill provide the rules for the introduction of a system of self-assessment and another 40 pages are devoted to substantial anti-avoidance measures.
The complexity of tax legislation reflects the complexity of the modern commercial world. Nevertheless, the Government remain committed to making tax legislation as simple as possible, consulting wherever possible on its proposals. There has been extensive consultation with tax experts and interested parties on 169 clauses of this Bill, of which 102 draft

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clauses were released. We have also published explanatory Notes on Clauses for the first time. We believe this has helped interested organisations to understand the measures being proposed more fully.
I turn now briefly to the detail of the Bill, beginning with those clauses covering indirect taxation. This Government's policy has always been to shift the burden of taxation over time from income to expenditure. This reflects the feeling that people should be allowed to keep as much of their own money as possible. Help must be provided for the less well off, but to give incentives for individuals it is preferable to tax people on what they consume rather than on the work they do.
Having said that, my right honourable friend the Chancellor has to weigh up many factors when making his Budget judgment. In making his decisions on alcohol, for example, he listened carefully to arguments from the industry about declining consumption and the growth of cross-Channel imports. As a result, the duty on beer and spirits has not been increased; Clause 1 amends the duty on wine, sparkling wine and cider in line with inflation and reduces the duty on fortified wine by 5.9 per cent. Clause 2 increases the duty on tobacco products by 7.3 per cent. The Government have also announced their intention to increase tobacco duties on average by at least 3 per cent. a year in real terms in future Budgets.
Clause 3 increases road fuel duties by 3p. a litre. And the Government have strengthened their earlier commitment so that road fuel duties will on average be increased by 5 per cent. in real terms in future Budgets. Clause 4 introduces a modest increase of £5 a year on vehicle excise duties for cars; the duty for lorries remains unaffected.
The Bill also includes two new taxes: air passenger duty and insurance premium tax. Duty of £5 for departures to anywhere in the United Kingdom and the European Union and £10 for departures to other destinations will be levied on all passengers flying from United Kingdom airports from 1st November this year. An ad valorem tax will be levied on insurance premiums at a rate of 2½ per cent. from 1st October this year. This rate is among the lowest in Europe. Tax will apply to most general insurance where the insured risk is located in the United Kingdom.
Clauses 7 to 19 introduce a package of reforms affecting excise law and new appeals arrangements for resolving most difficulties involving excise and customs matters. The purpose is to rationalise and simplify excise law and to make available a simple, economical and independent procedure for appealing against excise and customs decisions that is fair to traders, public and Customs and Excise alike. Clauses 20 to 27 of the Bill reform the powers available to customs officers for access to information from businesses involved in the importation and exportation of goods.
I now turn to direct taxation. Clauses 75 and 76 set income tax rates, allowances and the basic rate limit. These are unchanged for 1994–95. Clauses 77 and 81 of
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the Bill restrict the rate of relief for married couples' allowance and on mortgage interest to 20 per cent. from April 1994 and then to 15 per cent. from April 1995.
The Bill contains a number of anti-avoidance measures. Clause 98 is designed to counter the abuse of tax relief for profit related pay, while Clause 127 tackles the use of artificial schemes (for example, gold bars) designed to avoid PAYE and national insurance contribution obligations.
The Bill helps business. It contains measures aimed at generating new investment in the unquoted company sector. The main rate of corporation tax remains the lowest in the European Union. Clause 138 and Schedule 16 introduce the foreign income dividend scheme which will allow companies to recover repayment of surplus advance corporation tax when they pay dividends out of foreign source profits. And Clause 137 of the Bill introduces the new Enterprise Investment Scheme for investment in unquoted trading companies to replace the Business Expansion Scheme.
Clause 91 and Schedule 11 provide for capital gains tax reinvestment relief to be extended.
Clauses 178 to 218 and Schedules 19 and 20 provide the rules for the introduction of a system of self-assessment of income, capital gains tax and corporation tax. The introduction of self-assessment is a major reform which will make the tax system simpler, fairer and easier to understand, particularly for small businesses.
These measures and the others I have mentioned will go a long way to creating the right kind of climate for British business to succeed now and in years to come. I have no doubt that the "no nonsense" Budget of my right honourable friend the Chancellor has produced a Bill that will tackle the real challenges that face our country today.
The Bill is that of a responsible Government, determined to ensure sound public finances by bringing the PSBR back to balance over the medium term. I commend it to the House.
Moved, That the Bill be now read a second time. —(Lord Henley.)
11.42 a.m.
Lord Eatwell: My Lords, we are most grateful to the noble Lord, Lord Henley, for introducing with remarkable brevity and clarity this extremely long and complex Bill. We have just heard a speech of stirring economic optimism from the noble Lord. As I listened to it, I could not help recalling the judgment of that renowned philosopher of modern political life, Miss Mandy Rice-Davies:
"Well, he would say that, wouldn't he?".
He would say—wouldn't he?—that the Government's considered policies have produced the 2.6 per cent. growth rate of the past year, while neglecting to mention that that has merely returned our economy to exactly the same level of output as four years ago.
He would say—wouldn't he?—that inflation was at remarkably low levels, while failing to mention that that has been produced by a prolonged recession which has not only cost millions of families their livelihoods and

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thousands of businesses their very existence, but has also meant that this country has over the past four years suffered a cumulative loss of income of £120 billion compared to what would have been earned if the economy had maintained its trend growth rate. That is £2,200 in today's prices paid by every man, woman and child in this country for this Government's recession.
He would say—wouldn't he?—that the Government were facing up to the tough measures that are needed to tackle the budget deficit, taking some pride in the fact, as he did yesterday, that the deficit has come in at just £4 billion under the predicted £50 billion. He would not say that prior to the 1992 election the then Chancellor of the Exchequer told the British people that the deficit for the financial year 1993–94 would be just £35 billion. And on the basis of that prediction the Prime Minister could confidently declare:
"we will be able to make reductions in the rate of taxation year on year … There will be no VAT increase … I have no plans to raise the level of national insurance contributions … We will maintain mortgage tax relief'.
Those were all promises that were made by the Prime Minister. All have been broken in this Finance Bill, as they were in its immediate predecessor. This Finance Bill alone, as the noble Lord told us, has 60 pages devoted to the introduction of new taxes.
Those promises have been broken, of course, because of the transformation after the election of the £35 billion deficit into a £50 billion deficit—with my economist colleagues in the Treasury being forced to take the blame for yet another forecast that had gone wrong.
But did the forecasters really get it wrong? It has been widely reported that in the spring of 1992 the Treasury economists' forecast for the deficit was £42 billion. It was quite a good forecast, with an error of just £4 billion —just the size of the error of which, yesterday, the noble Lord was so proud. It has also been widely reported that that figure was massaged downwards, on the instructions of the Chancellor, to the £35 billion figure that was published in the 1992 Red Book.
Is that account true? If the noble Lord answers no other question at the end of this debate, he should answer that one. For it is one thing for the Government to break their taxation promises because of unforeseen events but quite another thing for the Government knowingly to conceal the true forecast of the size of the deficit, and so knowingly conceal the size of the tax increases that would follow. I look forward to the noble Lord giving the House a true account of this sorry episode.
Not only were the British people misled over the size of the deficit and the subsequent tax increases, they were also misled about the Prime Minister's supposed commitment to fairness in taxation. On 5th April 1992 the Prime Minister told Sir David Frost:
"Look at the relationship between tax cuts and expenditure. This year in his budget Norman Lamont cut taxes by £1.8 billion. And where did it go? To the low paid, to the people who have modest incomes … That is the right way to divide the cake".
If that is the right way to divide the cake, will the noble Lord tell us why, as the independent Institute of Fiscal Studies has shown, the top 1 per cent. of income earners, with average incomes of £120,000 a year, have
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received 30 per cent. of all the tax cuts since 1979 but are now paying only 4 per cent. of the tax rises imposed by this and the preceding Finance Bill?
If that is "the right way to divide the cake", will the noble Lord explain why, according again to the IFS, everyone earning more than £64,000 a year will, after this Finance Bill, be paying less in taxation as a share of income than they did in 1979, while everyone on lower incomes will be paying more?
If that is "the right way to divide the cake" why in Clause 76 of this Finance Bill have the Government used the most insidious form of tax increase—the failure to uprate allowances—thus drawing 300,000 of the lowest paid, including 140,000 pensioners, into income taxation?
This Finance Bill is like its predecessor, and like every Finance Bill for the past 15 years. It is dedicated to the principle of inequality. That is no surprise. That principle has been an important pillar of the Government's economic policy for the past 15 years.
However, what we had hoped for in this Finance Bill, and what we had hoped for in the noble Lord's speech and, indeed, in recent speeches of his right honourable friends the Prime Minister and the Chancellor of the Exchequer, was some indication of what new economic policy they have to put before the country. We had hoped for some new analysis which would give us the confidence that the economic misery which the Government's policies have inflicted upon this country for the past four years will not happen again. It is surely right for us this morning to stand back a moment from the detail of this Finance Bill and ask: What went wrong in the 1980s? What lessons have been learnt'? In what ways has policy changed?
I suggest that the key to our long-term prosperity is now, and always has been, the competitiveness of our industry, particularly our manufacturing industry. Unless British industry is competitive, any sustained rate of growth which might significantly reduce unemployment will eventually be overwhelmed by rising inflation and a growing external deficit.
There was a time in the 1980s when the proposition that manufacturing competitiveness is vital to our economic health was rejected by the Government. The Chancellor of the Exchequer at that time, now the noble Lord, Lord Lawson, rejected the famous 1985 report: of your Lordships' Select Committee on Overseas Trade, which argued that case as,
"a mixture of special pleading dressed up as analysis and assertion masquerading as evidence".
That was the same person, now the noble Lord, Lord Lawson, who argued that he was,
"at a loss to understand the selective importance attached by the Opposition and some Tories to the manufacturing sector"
The conclusions of that report—I am delighted to see the noble Lord, Lord Aldington, in his place as he chaired the committee which prepared it—published in the heady, self-confident days of the mid-1980s, were so remarkably far-sighted that they are worth quoting. The committee said:
"Unless the climate is changed so that the manufacturing base is enlarged … the country will experience adverse effects which will worsen with time. These will include: … a contraction of manufacturing … an irreplaceable loss of GDP … an adverse balance of payments of such proportions that severely

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deflationary measures will be needed … lower tax revenues for public spending on welfare, defence and other areas … higher unemployment … the economy stagnating and inflation arising".
Written in the optimistic mid-1980s, that is a remarkable prediction of what has happened over the past four years. It explains the root causes of the £50 million deficit. It identifies why taxes are now being forced up to record levels but still failing to maintain public services. It is the key to what went wrong.
Has anything been changed to suggest that that will not happen again? Have the Government learned from their mistakes —mistakes for which the British people are paying in this Finance Bill?
Yesterday, the Trade and Industry Committee of another place—a committee with a majority of Conservative Members —published a report entitled, Competitiveness of UK Manufacturing Industry. The findings of that report, though sometimes presented in a somewhat more optimistic tone, are remarkably similar to the findings of the 1985 report. In its general conclusion, the Trade and Industry Committee stated yesterday:
"We encountered both alarming and encouraging aspects of UK manufacturing. The alarming aspects are the continuing low level of labour productivity and the remaining deep-rooted problems in areas such as investment, finance for industry, training and the rarity of strategic alliances between firms. The rise of the newly industrialising countries is likely to endanger an increasing range of UK industries. There is a risk of decline in the size of the UK's manufacturing sector".
The committee continued in a somewhat more upbeat mood:
"However, we have no doubt that that can be avoided. Some past problems have been resolved, and there is the possibility of sustained low inflation and interest rates.
But even that optimism is qualified by the fear that urgent action is required if decline is not to continue. Again, I quote the committee:
"There is an unprecedented opportunity to leave behind decades of relative decline and restore UK manufacturing as a whole to a position as a world leader. The opportunity will be temporary, given the rise of the newly industrialising countries, and action therefore needs to begin urgently".
That warning, given yesterday, is as timely as were those early unheeded warnings of 1985.
The failure of this Government to appreciate what needs to be done is graphically illustrated by its response to that growing competition which British industry faces from the newly industrialising countries. A large number of recent studies, most notably the important new book on North-South Trade by Professor Adrian Wood of Sussex University, have shown that, up to now, the main impact on Britain of that competition from the third world has been the enormous increase in the unemployment of unskilled men. Sometimes that is because third world producers capture our markets for goods produced predominantly by unskilled labour and men are thrown out of work. Sometimes it is because British firms stay competitive by investing in capital intensive and skill intensive production, shedding their unskilled labour force.
Whatever the reason, those have been important elements in the fact that, since 1979, the number of economically inactive men has increased from 8 per cent. of the population to around 23 per cent. today. In other words, compared with the situation 15 years ago
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when one in every 12 men was economically inactive, today nearly one in every four men in this country is economically inactive—either registered unemployed, or having simply dropped out of the labour force. That is a terrifying figure. One cannot but agree with the report, which argues that,
"this highlights the need to raise the competitiveness of UK manufacturing and of the UK as a location for manufacturing, especially high-skill manufacturing".
But what has been the Government's response to the potential competition from the third world and indeed from eastern Europe? It has not been a commitment to skills and the quality of the labour force, but an obsession with deregulating and casualising the labour market, eliminating worker protection and effective collective bargaining. The Government seem to believe that the only way to create a flexible labour force is to remove all workers' rights, to water down health and safety legislation in the workplace and to cut social protection.
Nothing could be further from the truth. As yesterday's report—made, I remind noble Lords, by a committee with a Conservative majority—makes clear:
"Successful manufacturing increasingly requires the full commitment of the labour force. Some companies have recognised this through the concept of 'empowerment"'.
That is empowerment of the workforce—not the bonfire of workers' rights to which this Government remain committed. A truly flexible labour force is a well trained, secure and confident labour force, sustained by a framework of employment rights which encourages the worker to invest in and develop his or her own skills.
The Government's deregulated, low wage, low skill strategy is a policy which is doomed to failure. Again, the report by the committee in the other place argues:
"The efficient use of labour and the raising of its value through better education and training ultimately matter far more than low labour costs".
I make no apology for spending so much time in a debate on the Finance Bill on the position of manufacturing industry, for it is on the strength and competitiveness of our manufacturing industry that the nation's financial security and the public purse ultimately depend. What is truly sad and disturbing about yesterday's report, which is crammed with a host of other sensible ideas that I commend to your Lordships, is that, in the words of a famous baseball coach of the Los Angeles Dodgers:
"It's déja vu, all over again."
The policies toward industry, skills and investment that we see in place today are no different from those which this Government pursued in the 1980s. If anything, those simplistic, deregulatory policies are simply being applied with an ever greater intensity, perhaps born of ever greater desperation. If lessons have been learnt, will the noble Lord tell us what they are? Will he tell us what policies have been changed and how they have been changed?
Today, once again, manufacturing is coming off worse. If we look behind the euphoria of that 2.6 per cent. growth rate, we find that manufacturing output is still 5 per cent. down on the level of 1990. More disturbing still, the level of investment in Britain's

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manufacturing industry is still more than 20 per cent. below the level of four years ago and at present shows no signs of recovery.
This Finance Bill and the new unified Budget from which it sprang contain not an iota of new thinking. The Government seem to have learned nothing from their mistakes. Unless there is a fundamental change of direction, a new commitment to investment in skills and to the creation of a new financial structure for manufacturing industry, we cannot look to the rest of this decade with confidence. A re-run of the 1980s looks ever more likely—déja vu, all over again.
Noon
Lord Ezra: My Lords, both the noble Lord, Lord Henley, in introducing the debate, and the noble Lord, Lord Eatwell, indicated that the Bill is a complex measure. That is putting it mildly. It is one of the longest and most complicated documents we have ever had to debate in this House. The noble Lord, Lord Henley, said —and I much appreciated the thought—that the Government's intention is to simplify the tax system so that the ordinary taxpayer can understand it. But they seem to be seeking to reach that objective by a very complex route. When the Chancellor introduced the Budget he did so with great skill and verve. Indeed, there was much laudatory comment in the press on his performance. It was only when the Bill itself was available and people were able to read the small print that second thoughts prevailed. There is now grave concern about what. the Bill will do to individuals and to enterprise.
The whole operation of the Finance Bill suggests that the Treasury was motivated by the single objective of cutting back the public sector borrowing requirement; reducing public borrowing so as to bring expenditure and income more into balance. That is an entirely desirable and proper objective. Any organisation, particularly a government responsible for the finances of the nation, must see that expenditure and income are kept roughly in balance. The trouble with this exercise is that it seems to have been the exclusive intention. As the noble Lord, Lord Eatwell, so effectively indicated, there has been little regard for longer term considerations.
In that connection I was interested this morning to read what has happened to the Treasury building. It appears that the Treasury so limited expenditure over the years on repair and renovation of its own building that it is now in a state in which the bill for putting it right will be so high that it may well have to leave the building. Does that not indicate how shortsighted is the view of cutting back for the short term without any regard to the long term? I shall use that example as the theme of my remarks; I shall call it the "Treasury building syndrome".
I am glad to say that Sir Terence Burns, the Permanent Secretary at the Treasury, is beginning to feel that the Treasury should be taking a longer term view. He is reported as having said in a speech at Durham University on 27th April that he thought it was about time that the Treasury took a more strategic role.
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That is excellent news. I thought we might use some of the time available to us in this debate to give Sir Terence a few ideas.
We heard from the noble Lord, Lord Henley, that the economy is showing much better signs at the moment: he went through all the positive indicators of recovery. We are of course delighted that we are recovering. Why should anyone argue against the fact that GDP is rising again at a rate of 2.5 per cent., that inflation has been kept down to the lowest level for 20 years, and so forth. All that is good news. The aspect of it which I want to emphasise is what happens next. The economic history of Britain in the post-war years shows that after every recovery we have gone back into recession. Therefore the wise action to take at the start of this recovery is to consider what we need to do to prevent history repeating itself. In other words, what can we do to get out of the boom and bust cycle?
Let us consider what are the indicators of moving from boom to bust. The first indicator is that businesses grow short of skilled labour. I have seen it happen time and time again. We are not training up a sufficient reserve of skilled labour and therefore businesses, as their order books start lengthening, frantically look around for skilled labour. That immediately pushes up wages and we have a wage spiral created by that shortage of skilled labour. That obviously has an inflationary effect. It is something that could be avoided if we had adequate reserves of skilled labour.
The next thing that happens—this links in with the, remarks made by the noble Lord, Lord Eatwell, in relation to the industrial base—is that our imports start to increase excessively. That is already happening. The balance of payments position indicates that we are: importing substantially more than we are exporing. even though our exports have been increasing. That reveals where another weakness lies.
We must see how we can obviate these difficulties. We must look at the matter very much as the noble Lord. Lord Eatwell, did; that is, in terms of what investment requirements are needed. It is shortage of current. investment which creates future problems. Let us consider the public sector, where there are some important capital assets which need to be maintained and refurbished. In the unified Budget, for the first time we had a division between current and capital expenditure. That is to be welcomed. However, the figures show an unfortunate trend. They show that the total public asset creation will average about 12 per cent. less over the coming three years compared with the past three years. We are apparently being committed to continued under-investment in essential public sector assets. In other words, the Treasury building syndrome.
I shall give two examples. The first is the London Underground, frequently mentioned by the noble Lord, Lord Jay, and the noble Lord, Lord Boyd-Carpenter. Two years ago the Government agreed to support London Transport in its objective of creating a "Decently Modern Metro". It required funding of £900 million per annum with an increasing proportion of self-finance as the project developed. But the funding for this year—virtually the first year of progress towards the decently modern metro—is no more than £475

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million. In other words, the whole proposal has been cut in half. We do not know when the improved metro system that London so urgently needs will come about. Is that a wise step to take? Will we not find ourselves in the same situation as the Treasury building—cutting back until the time comes when putting it right will be virtually an impossibility?
Housing is another illustration. The English House Condition Survey of 1991, published in 1993, showed that over 2.5 million dwellings in this country are statutorily unfit or in need of substantial repair. The repair costs of putting right that 13 per cent. part of our housing stock is £8 billion. Those houses are largely inhabited by people on low incomes who cannot do much about the repairs themselves. However, in spite of that urgent need revealed by the government survey, the funding for renovation grants was cut from £1,300 million in 1984–85 to £435 million in 1991–92, and there is a proposed cut to £250 million in 1995–96. There is no way that type of expenditure can prevent further deterioration in the housing stock. It means that more people will live in worse housing conditions. Is that a sensible policy for us to pursue? We are replicating throughout the country the mistakes the Treasury made in its own building.
I turn to the private sector. I support entirely what the noble Lord, Lord Eatwell, said. He was quite right to go back to the report of the Select Committee on Overseas Trade of 1985, in which I had a part to play. I have not yet obtained a copy of the Select Committee report of another place to which he referred but I am interested that the Select Committee virtually repeated what was said then. So, after a period of eight years, we seem to have made very little progress in the essentials of a forward strategy.
Our tax system has a bias against business investment. It takes a long time to recover the cost of investment and many of us have been pressing over the years for the time to be shortened by increased capital allowances. The Government introduced increased capital allowances, but for a very short period, and now they have removed them. The CBI and others have repeatedly drawn attention to this bias against manufacturing and other business investment. What we need to do therefore is work out ways in which the fiscal instrument can be used to stimulate business investment. The private investment initiative which the Government have launched in order to bring private capital into public projects is a wholly desirable measure. Unfortunately, so far very few projects with substantial private funding have emerged. The reason for that is the continuing argument about how the risk is to be shared. Obviously, if a much greater risk is to be put on the private money, the private sector will be reluctant to come in. That needs to be looked at if it is to be made to work.
Finally, there is the question of education and training, which comes back to what I was saying about skilled labour. Unless we look very seriously at ways in which we can increase our reservoir of skilled personnel, we shall find ourselves back in the same
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situation we have had on previous occasions. As a result of a boom we become so short of skilled personnel that it has a serious inflationary effect.
The conclusion to which all this leads—I am entirely with the noble Lord, Lord Eatwell, on this point—is that we really must have a statement of longer term policy from the Government than is inherent in the present Bill. They might say that a Bill of this kind is not a proper vehicle for a long term policy. But it should, in my opinion, represent a step towards the achievement of a long-term policy. The short-term measures we take should reflect what we are trying to do in the longer term. I do not get that impression from the Bill. Therefore I hope that before long the Government will, in an appropriate vehicle—perhaps in the long-awaited White Paper on competitiveness—indicate what their long-term economic policy is so that we can see whether the short-term steps taken from time to time, as in Finance Bills, fit in with the longer term objective. Unless and until we pursue an approach of that kind I fear that we shall continue as we have done in the past with recoveries and recessions. That will do much harm to the fabric of the nation unless we change it.
12.14 p.m.
Lord Simon of Glaisdale: My Lords, perhaps I may first take up one or two points which are supplementary to our discussion last Wednesday and which bear on our discussion today. I then enumerated the number of classes of your Lordships who bring to bear on the problems of finance and economics a very wide range and depth of knowledge. I did not enumerate all the classes of persons to whom I am referring and it is indeed remarkable that today there is an added galaxy to those that I did enumerate. Your Lordships will, I think, be particularly grateful that two trained economists—I was going to say three but I only now see two—are addressing your Lordships.
Secondly, there was a good deal of confusion last Wednesday between a Finance Bill, a Money Bill and a Supply Bill. For your Lordships to play a proper part in the discussion of these matters it is essential that the confusion should be worked out before next year. The answer is that a Supply Bill is not a technical term but that many Bills do deal with supply. As a matter of convention and not of statute, your Lordships do not interfere with supply because your Lordships do not have the machinery or the responsibility.
Thirdly, four of your Lordships who are to speak today have had to introduce a Finance Bill. We would all have been horrified to think that it was a Bill of this dimension. The noble Lord, Lord Cockfield, used the word "monstrous", and he is one of those who have had to do it. It is indeed monstrous. One of the faults is that it conflates supply with tax management. I suggest as strongly as I can that there should be a separate tax management Bill and that your Lordships can do a great deal to improve such a Bill.
Having said that, perhaps I may say a few words of apology. First, although I was able to rearrange my plans for today, I still have to catch a train later. If the debate goes on substantially longer than estimated, I

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hope your Lordships will acquit me of discourtesy if I leave before the end. That particularly applies to the three noble Lords who are to reply to the debate.
My second words of apology must be for intervening at all in this debate when it is many, many years since I was a Treasury Minister. I felt my inadequacy and my out-of-dateness particularly in listening to the speeches of the noble Lords, Lord Eatwell and Lord Ezra. My excuse for doing so is that when I was at the Treasury I served with two remarkable men whose characters and methods have a lesson for us today. The first was the Chancellor, Derick Heathcoat-Amory, and the second was the economic adviser, Sir Robert Hall. Their backgrounds were entirely different, Sir Robert Hall being an eminent academic economist. What they had in common was an instinctive sense, an intuition, as to the way the economy was moving.
We have not really heard much today about trade cycles. Indeed, a good deal of the arguments that have been addressed to your Lordships so far were in complete disregard of the fact that trade has a cyclical motion. I hope that when the noble Lord, Lord Peston, replies, he will tell us what is the current dominant theory about trade cycles. When we were a largely agrarian economy in the world we were told that it was due to sun spots. But I suppose that that has gone the way of children being born under gooseberry bushes. That is very important to know. In the meantime it is the intuitive feeling of those who are responsible and who know the way the economy is moving to make very slight adjustments. In January 1993 there was much talk of a kick-start to the economy. Like most jargon, that was extremely dangerous. The Chancellor cut basic rates by one full point per cent. That caused great consternation in the City, whose opinion must be regarded. They thought that the Government could not be really serious about bringing down inflation.
The policy and practice of the present Chancellor are unexceptional in that respect. There are very slight adjustments. I take it that inflation is now considered to be largely under control so that we can move to the two major problems which face us, the first of which is fiscal —namely, the public sector borrowing requirement—and, secondly, social economic unemployment, which is particularly intractable because the solution of one is almost bound to exacerbate the other.
I cannot remember a Chancellor ever facing a more difficult task than the present Chancellor had at the time of the Autumn Budget. There were conflicting accounts and indications of the way the economy was moving. Your Lordships have heard from the noble Lord, Lord Henley, a series of statistics which are very encouraging and from the noble Lords, Lord Eatwell and Lord Ezra, a series of statistics which are rather less encouraging. They are not necessarily incompatible because practically every economic obverse has its reverse.
I mentioned the two major problems. I take first the amount which we are borrowing. That is really dishonest because we are asking our children to pay for our living expenses. Moreover, not only is it immoral in that sense, but it is extremely dangerous. Famous empires have gone bankrupt. The great Spanish empire, at the very height of its power, went bankrupt on several
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occasions and that led to its long, slow decline. Today perhaps we do not go bankrupt, but we have to go, as we saw, to the International Monetary Fund. There was much talk of sovereignty during the Maastricht debates, without any very clear definition of what that meant, except perhaps from the noble and learned Lord, Lord Howe of Aberavon.
When one is in the hands of the International Monetary Fund it is perfectly idle to speak as though we had complete economic independence. The difficulty about giving priority, as I believe it should be given, in order to reduce public sector borrowing is that it is deflationary and bound to have an adverse effect on the already alarming figure for unemployment. It is true that the tendency has been marginally encouraging recently. But nevertheless your Lordships will wish to face the fact that a good deal of that unemployment is structural —in other words, it is not cyclical and it is not affected in the end to any great extent by a favourable movement in the economy. Indeed, every time there is an upturn there is a residue of unemployment which is largely clue to the technical improvements in manufacturing industry.
How is that to be dealt with? I can think of no way of dealing with cyclical unemployment except by taking a substantial body of workers out of the labour market. It can be done at either end—by raising the: school-leaving age or by reducing the retirement age. The recent decision has been to equalise the retirement age at 65 years rather than by reducing it equally to 60. That is understandable when one considers the cost to the Exchequer of following the second course and also because of the fact that raising the retirement age to 64 or 65 years preserves a fairer balance between the present and those who have to pay for it in future.
That seems to me to be the major problem socially which must be faced in connection with the economy. As I said, it is difficult to reconcile action to reduce the public sector borrowing requirement with reducing the size of structural unemployment. The answer will be that one should approach the matter in both ways, feeling the way gradually.
I have one suggestion I wish to make. With the economy moving comparatively rapidly, as it does these days, there seems to be a big advantage in considering expenditure at the stage of appropriation. I am very anxious to hear what the noble Lords, Lord Jay and Lord Peston, and the noble Lords on my left have to say about that because they have great experience of these matters. The economy can change substantially between the Budget resolution, the Finance Bill and the Consolidated Fund Bill, when appropriation is made. We have no machinery for appropriation in this country now. It is not our business to tell the other place how it should manage. But, for example, America deals very seriously with the stage of appropriation. I venture to suggest that that might be something which your Lordships would wish to consider.
I come to the theme which the noble Lord, Lord Ezra, has mentioned in the past and which he raised again today; namely, the necessity for simplification of our fiscal system. I have no doubt that the noble Lord, Lord Cockfield, will shortly be saying this it is a horror and

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it is chaos. In the end, a really simple fiscal system would have one direct tax only, progressive only in the sense that the more that is earned, the more that is paid, and one all-embracing indirect tax extending to all expenditure. We are unlikely to get that because excise duties bring in too much revenue. But we can move in both directions.
I should have thought—this is a matter on which the noble Lord, Lord Cockfield, will be able to help us—that the schedules of the Income Tax Act could now be conflated. They go back to the very revival of income tax under Sir Robert Peel. I fancy that they are not conflated because the Inland Revenue is deeply devoted to the test of allowable expenditure, which has to be wholly, necessarily and exclusively for earning a source of income. The last Royal Commission on Taxation proposed a more relaxed test, but the Inland Revenue obviously was uneasy at any relaxation there. We should consider whether that should stand in the way of an extensive simplification.
I finally, very shortly and summarily refer to a suggestion that I made when the noble Lord, Lord Ezra, originally raised the question of simplification; namely, that our tax avoidance provisions could be enormously simplified if we adopted the American and the former Australian system under which there is an injunction whereby any transaction, the dominant purpose of which is the avoidance of tax, shall be void for that purpose, although in view of a letter that I have received from the noble Lord, Lord Henley, I repeat that it would be valid for all other purposes. Your Lordships might wish to look at Clause 165 and the few subsequent clauses which deal with tax avoidance to see how extremely complicated this has become—and those provisions are simple compared to many in the fiscal code.
My last suggestion is more controversial, I know. It is that we should go to the American system of general fiscal equity, whereas the Inland Revenue is deeply attached to complete fiscal equity. In other words, however complicated an anti-avoidance provision is, it must not give rise even in remote circumstances to a double charge of tax. As I said, that is more controversial because complete fiscal equity is very deeply entrenched in our system. However, I suggest that we should consider simplifying the anti-avoidance provisions.
I hope that that will do and I end as I began: I hope that your Lordships will acquit me of discourtesy if I cannot stay until the end of the debate.
12.34 p.m.
Lord Cockfield: My Lords, as I indicated in our exchanges on Wednesday, as this is a debate on the Finance Bill, I propose departing from tradition by talking about the Finance Bill. I am only too prepared to leave the economy to other noble Lords.
We have a Government who are committed to deregulation. I have always been somewhat sceptical of some of these political catchphrases because they are sometimes little more than cover for special interest groups trying to remove provisions of the law designed
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to protect the citizen against the special interest concerned. However, what shook me beyond anything that has happened in your Lordships' House for many a long day was to find the leading philosophical Members on the Benches opposite coming out as the most vigorous supporters of deregulation in our debates on the Sunday Trading Bill. Indeed, apart from my noble friend Lord Boyd-Carpenter, there was nobody on these Benches who was as vigorous in demanding deregulation as the leading Members of the Opposition. I do not know whether that can be described as "political conversion" or whether to use some other phrase. It is no doubt a matter that we shall consider when we come to the Deregulation and Contracting Out Bill. There is of course a place for deregulation and I do not want to say anything else on that, but there is also a case for ensuring that the citizen is properly protected.
Having said that, it is monstrous and unintelligible that a Government who are committed to deregulation should produce a Finance Bill of 462 pages. Perhaps I may put that into perspective. When I joined the Inland Revenue, our Bible was the Income Tax Act 1918 which consolidated the whole corpus of income taxation: on companies as well as individuals, on invested income as well as earned income. The whole corpus, extending from 1799 when Mr. William Pitt introduced taxation, right through to 1918, occupied exactly 180 pages. Those 180 pages covered the consolidation of the whole corpus of taxation over a period extending beyond 100 years and compares with the 462 pages in this year's Finance Bill. What is most worrying, however, is not merely the inflation in the quantity of paper, but the fact that it is accelerating. If one considers successive periods, the growth is exponential; it is not arithmetical. Where we will end up if this goes on, I do not know and I certainly hesitate to think.
If we are going to do anything about this, we need to go back and to ask ourselves: How did it happen? I propose identifying five points by way of illustration. I am particularly glad that the noble Lord, Lord Jay, is participating in the debate. Stafford Cripps was not the first Chancellor I served, but I had a very high regard indeed for him. Every year Stafford used to ask whether I could suggest to him a tax that he could abolish. Indeed, in his second Budget he abolished not one tax but two taxes. What do we find today ? Chancellors of the Exchequer do not abolish two taxes, one tax or even no taxes, but introduce two brand new taxes. That is my first point.
My second point is this: over the desk of every Treasury Minister every day in the run-up of many months before the Budget there comes a great flood of paper from the revenue departments, putting forward the most difficult, complex and arcane proposals for legislation. Unless you are a fiscal expert, it is beyond the wit of man to understand those documents, let alone to take sensible or reasonable decisions on them. I was talking to Mr. Harold Macmillan about this and he looked at me in the way that he always used to look at people and said that he had a simple way of dealing with it. He rationed them to one a year. He did not mind all that much which one it was. I have always thought that that is how we got the Premium Bonds. Now, however,

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the habit of rationing the revenue departments to a minimum number of proposals has long since disappeared, and that underlies much of the complication of recent Finance Bills.
Thirdly, in the Government led by Mr. Edward Heath in 1970–74, we launched and carried through most of a major programme to restructure the whole tax system. I am very glad that my noble friend Lord Clark of Kempston is present today to participate in the debate. He was one of the people who greatly contributed to drawing up the plans, which of course was done under the leadership of lain Macleod. But other noble Lords, for example, my noble friends Lord Joseph and Lord Lawson, also participated in the work. My own participation was limited to the humble task of actually doing the work involved—the rhetoric of course was left to the other participants.
That great work of tax reform was, I should say, coupled with massive tax reductions. I was never quite certain why the Opposition took such great exception to it; indeed, I never quite discovered whether they objected to tax reform or whether they merely objected to lax reduction. However, that work came to an end as a result of the unfortunate events of February 1974. I shall briefly pass over the intervening periods. The work was then taken up again by Sir Geoffrey Howe, as he then was, when he became Chancellor of the Exchequer, and was pushed ahead under his leadership and in the early years of the chancellorship of Mr. Nigel Lawson, now my noble friend Lord Lawson. But that impetus to clean up the tax system has not only been totally lost, but what we have now seen are measures to make the tax system more difficult, complex and unintelligible.
My next point goes back to what Mr. Harold Lever, one of the greatest of the Financial Secretaries to the Treasury, described as "ripping little wheezes". They are special schemes introduced by Chancellors of the Exchequer in the hope that they will catch the public eye and no doubt reap plaudits for them. They go under all sorts of peculiar names likes PEPs, TESSAs and SERPS. I never know which of them are tax schemes and which are the names of dog foods, but no doubt most noble Lords will be able to identify them.
However, there is one point which runs through every one of those schemes: the benefit, ultimately, does not end up in the pockets of the taxpayer concerned; it ends up elsewhere. We learnt that bitter lesson over the capital allowances for industry. Those allowances did not end up in the pockets of manufacturers of goods; they ended up in the pockets of banks which manufactured schemes for assisting industry on the basis that the benefit of the tax reliefs ended up in the deserving pockets of the banks. Anyone who studies the present debate over SERPS will notice—although no one has drawn attention to it—what has happened to the tax relief in that respect. It has ended up in the deserving pockets of the financial sector of British industry, or whatever else one likes to call it.
But the position is worse than that. It is not just that the tax relief ends up in the wrong pocket; it is that the rest of the tax paying community has to face the bill because the Government are raising a given amount of revenue. Much may be given away in those generous
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schemes —and they have been invented by every political party and by people who belong to no political party. Indeed, as soon as you allow a long enough period of time to elapse, every absurdity is trundled forward by some fundamental thinker as the latest gimmick that he wants to see introduced into the tax system.
Every government have to raise a given amount of revenue. If they do not raise it from one group of taxpayers, they have to raise it from the general body of taxpayers. That is why, with Mr. Edward Heath, as he then was, later with Sir Geoffrey Howe (now my noble and learned friend Lord Howe) and then, with my noble friend Lord Lawson, we tried to get rid of those complications and bring down the general rate of taxation imposed on the body of taxpayers generally.
My next point is one that was raised very properly by the noble and learned Lord, Lord Simon of Glaisdale. I am provoked to raise it today because my noble friend Lord Henley said that what was being done was the most radical overhaul since the introduction of PAYE I was personally involved in the introduction of PAYE. Therefore, I propose to tell my noble friend something about it. It was the most important step ever taken in income tax since the days of Mr. William Pitt. But, more. than that, it is the bedrock on which the whole of the tax. system of this country rests.
If one looks at the Act which introduced it—namely, the Income Tax (Employments) Act 1943—in will be seen that it extends to six pages, plus six pages of schedule. The following year there was another Act called the Income Tax (Offices and Employments) Act 1944 which extended the system a little further. However, the part that actually dealt with PAYE consisted of one clause running to half a page. Therefore, we have the most important development in the whole field of taxation in this country which took 10 or, at the most, 15 pages of legislation. But here today we have my noble friend on the Front Bench telling us that we have the introduction of self-assessment on businesses—a very good thing; indeed, I do not dispute it at all, because I am dealing with the question of style of legislation—occupying no less than 75 pages. That is only the beginning. It will be amended next year, the year after and so on ad infinitum.
The noble Lord, Lord Eatwell, seemed to base his philosophy on the words of Miss Mandy Rice-Davies, I mean Rhys-Davies—
Noble Lords: Rice!
Lord Cockfield: My Lords, I am most grateful. It was, indeed, Rice because it is spelt R-I-C-E. support of his argument, the noble Lord quoted Miss Ran—I mean, Mandy Rice-Davies. However, I propose, if I may, to quote a somewhat higher authority, with the following words:
"There was never any thing by the wit of man so well devised,. or so sure established, which in continuance of time hath not been corrupted".
Those words come from the preface to The Book of Common Prayer. A more apt description of the state of our tax system could not be found anywhere.
The function of a tax system is twofold: it is to raise revenue to meet the expenditure of government and it is

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to ensure that that revenue is raised in a manner which is fair to the citizens who contribute towards it. In so doing, it is essential that the system should be simple, straightforward, clear, transparent and "understanded of the people". Our present system has none of those virtues. Sooner or later, someone else will have to take up the baton and run in order to clean up, to reform and to revise the whole system. It will not be done by the present Government because they have other considerations on their mind. However, it will have to be done. Until it is done, we have nothing to do but to hope and pray that never again do we see the like of this year's Finance Bill extending to 462 pages. That is why I base my argument on The Book of Common Prayer.
12.50 p.m.
Lord Bruce of Donington: My Lords, your Lordships will be grateful to the noble Lord, Lord Cockfield, for referring us once again to the introduction of PAYE. He did so in most modest terms. If my memory serve me correctly, the Bill concerned could be purchased from Her Majesty's Stationery Office for the equivalent of 12½ pence. Today's Bill will cost £30 for those who are under the impression that ignorance of the law is no excuse. Times move on !
I do not propose to go as far back in time as did the noble Lord. I wish to deal with the period relating to the Labour Government which was displaced in 1979. I refer in particular to the years 1976, 1977 and 1978. When I was not in the European Parliament or elsewhere, I sat on the government Benches opposite. I recall that the basic attacks which were made against the Government were two-fold. First, there was the adverse balance of payments. I well recall the time when we had an adverse balance of payments of some £300 million. That was reckoned to be catastrophic. The figure was announced before an election but afterwards it was discovered that the figure was in surplus and a correction was announced. The balance of payments which existed then was minuscule compared with that which we have today. The attacks made upon the then Labour Government by both the Conservative Party, which was in opposition, and by the press then supporting it, were laid large in black type as being a national catastrophe.
I mention the matter purely because, apart from my noble friend Lord Eatwell, no one has mentioned the present balance of payments and balance of trade position. It is a time bomb on which the country is now sitting. During the past 10 years alone the adverse balance of payments on visible account has been £142 billion. That is after taking into account excess exports, which is not a pleasant but a descriptive term to use, arising from a bonus in North Sea oil. In balance of payment terms, that gave us an additional credit of some £50 billion. After 10 years, we are now sitting on an accumulative deficit of some £142 billion on visible trade, or £80 billion taking into account invisible earnings. Today, if there is a monthly adverse balance in visible trade of less than £1 billion it is reckoned to be almost heaven-like.
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I must warn the House that this cannot go on indefinitely. It may be the great unmentionable but someone had to mention it sooner or later. I say to those who have certain affections for the European Community and the benefits that we derive from it that our adverse visible balance of trade with the Community during the same 10 years has been no less than £72 billion. But that is not a matter for debate this afternoon.
That massive deficit in our overseas trade is reflected in a number of ways in our domestic economy. Indeed, the import penetration, in particular in the field of manufacturing, has deteriorated sharply during the past 10 or 15 years. We are now in a position where, in balance of payment and trade terms, we are in so much debt that the only reason why a crisis has not eventuated is that if our creditors tried to exert undue pressure they would probably fall themselves. That is not a pleasant position for this country to be in. It rests on the confidence of our creditors in the abilities of this country to be able to extricate itself from the admitted mess in which it has been for the past two or three years.
How is that confidence to be restored? One of the objectives that was mentioned by the noble Lord, Lord Henley, was the maintenance of sound finance. If sound finance means anything at all it certainly means that all wasteful expenditure should be avoided. I am sure that in that I shall have the support of the noble Lord, Lord Boyd-Carpenter. Obviously, he would prefer to have the levels of public expenditure brought down, but that is another matter. However, I am sure that he and most Members of the House will agree that waste in government spending must be drastically reduced. What will our overseas creditors say when they see that, in terms of expenditure or loss of revenue, we are spending more than £20 billion on maintaining unemployment at its existing level ? I shall have a little more to say about that.
In turning to the second of the basic attacks, I remember the time when my party sat on the Benches opposite. My Government were called "the party of unemployment" when unemployment was at 1,300,000. In all the past 15 years of Conservative Government, which was elected on the basis of the slogan "Labour Isn't Working" and pictures of a queue of unemployed, the unemployment figure has never come within shouting distance of the one that they inherited. Even their own figure has been manipulated downwards, as Mr. Alan Clark reminded us in his memoirs.
I shall not bother to remind your Lordships of the various fiddles which took place. Mr. Clark enumerated them and if the Minister wants further particulars he can find them in the research section of the Library in another place. They are revealed in some detail in graphical form. But there is waste there. Steps taken to reduce unemployment could help to restore public finances and the whole atmosphere which should pervade this country in its everyday economic life. Unemployment is a great waste indeed.
However, there are other items that are rarely mentioned at all—the actual waste which is almost deliberately caused in Whitehall or by Ministers not exercising the proper degree of control which they

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should exercise. There is the example of the £40 million that has been wasted in the National Health Service by, in some cases, corrupt practices within the new quangos. For example, there are the write-offs that have been made on the privatisation of nationally owned industries—sound financial practice by means of sweeteners—meaning write-offs of indebtedness to the tune of some £7 billion. Under the auspices of the Auditor General we have been given several instances of assets being sold to private interests at well below their ordinary market value.
In another field, there is a tolerance of waste of the money which comes directly out of the pockets of the British taxpayer. For example, there is a supine assent by the Government to grossly excessive expenditure by the European Parliament in Strasbourg and in Brussels, where some £500 million has been spent quite unnecessarily with a rental charge, which is part borne by the British taxpayer, of some £40 million per year.
There is a continued tolerance to a situation in which the United Kingdom is required to provide, out of the funds provided by taxpayers, an average of £2.2 billion into Community funds after all receipts. And yet we simper in the Council of Europe, trying to hang on by our fingernails to the lower reaches of the top table on the supposition that we must remain at the heart of Europe. All those are matters of waste which amount cumulatively to billions of pounds.
If proper economies were made undoubtedly there could be a saving in public expenditure and a reduction in the public sector borrowing requirement. I am being kind to the noble Lord and I shall not refer to today's report from the Auditor General about the excessive expenditure and over-runs of cost in the Ministry of Defence amounting to £955 million. Perhaps that can be the subject of debate at a later stage.
However, I am bound to refer to the most extraordinary expenditure of all, which is not really guaranteed to enhance our standing in the world of business outside. We learn that the Government spent some £575 million on the employment of consultants from which, according to the Financial Times, a benefit was received of £7.7 million.
One can understand that, in certain specialist spheres, it is wise to take outside advice, consider it, bring it forward, debate it and so on. There is nothing inherently wrong in that. But management consultants were employed. Why is that? The Government want to find out where there is inefficiency in the Civil Service machinery which they control. What are Ministers for? They should be leaders of men. Whether they be male or female, they should know exactly how their departments function. Instead of that, the Government have been so obsessed in terms of time with concocting new ideologies that they do not have the time to do what they are there for; that is, to manage.
We had an example of that at Question Time yesterday when my noble friend Lady Castle of Blackburn asked a Question about the Transport Research Laboratory. What was the Government's reply? They took the advice of KPMG Peat Marwick and they took the advice that ownership did not matter very much. That is why they decided to change it. That
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addiction to calling in consultants to advise on every aspect of internal government affairs betrays an intellectual laziness and a. leadership incompetence by those who should know very much better.
The country knows, by and large, that at the moment we have no government at all with a central purpose. We have a government composed of Ministers who do their jobs but there is no central direction, no sense of purpose and no projection of a message which will inspire the country towards greater efforts. Instead of that, there is a miserable clique which is bent by taxation by other means, to divide the British people even more by giving to those who have and even taking away from the poor some of the little that they have. This Government demand some confidence in them, but there is no government at all. The quicker that the present shadow of a government give way to people who have it in their power, intellect and purpose to govern in the interests of the whole country, then so much the better it will be.
1.7 p.m.
Lord Boyd-Carpenter: My Lords, the noble Lord, Lord Bruce of Donington, obviously enjoyed himself. The House always, in a light-hearted way, I think, enjoys his speeches. But his attempt to turn the debate into a straight party political contest is a pity. Whether one agrees or disagrees with parts of the Finance Bill —and I disagree with quite a lot of it—it should be discussed as a policy matter generally, and not as a great conflict between government and opposition.
I listened to the noble Lord with interest. I express the hope that my noble friend Lord Henley, in his reply, will answer the specific points which the noble Lord, Lord Bruce of Donington, made as regards alleged extravagance. Certainly, two or three of the points he made suggest excessive expenditure, and unless they are contradicted I believe that public opinion outside may well accept that. Therefore, I hope that my noble friend will deal fully and effectively, as he always does, with those points.
I hope—I say this with all humility—that when my noble friend Lord Henley replies, he will do what he did not do when he opened the debate; that is, express some small measure of regret as regards the arrangements made for the debate. I hope he will give an indication that in future the Government will see to it that the Finance Bill is debated in a convenient and easy manner and that we are not subjected, when we wish to debate it, to the problems to which we have been subjected today.
To take this immense Bill—both in importance and bulk—on a Friday immediately before a Bank Holiday is an unfortunate choice. But what is really indefensible is to expect your Lordships to discuss so enormous a Bill when it is made available only a day and a half before the debate. That is really not good parliamentary practice and it is not fair to the House. I hope that my noble friend will say something about the Government's intentions for the future. I hope that he may even express a measure of regret that your Lordships have been exposed to the very real difficulties that have occurred in relation to this debate.

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Apart from that, the debate has been of very great interest. I am particularly happy to be followed by the noble Lord, Lord Jay, because he will remember—as hardly anyone else in the House will remember—that a very long time ago, in the year of grace 1951, I succeeded him as Financial Secretary to the Treasury. The noble Lord, Lord Jay, is, I believe, the senior ex-Treasury Minister here this afternoon. He has had great experience over a very long period of time of the handling of national finances and of the operation of the Treasury.
The Bill, I am afraid, involves increases in taxation. That was inevitable because of the difficulties of the balance of payments and the heavy charges we still have to pay by way of the borrowings that have taken place, but also—if your Lordships will allow me to say so —because the Government have not been as strict on public expenditure as many of us think they could be. In particular, the waste of money on legal aid is very difficult to defend. Despite what I know have been gallant efforts by the noble and learned Lord the Lord Chancellor, the cost of legal aid has steadily risen. There are suggestions that the collapse of the prosecution over drugs the other day will add substantially to what was already a quite substantial figure. It really is up to the Government to take a grip on expenditure of that kind which, however meritorious it may be in some degree, has never been an essential part of our social structure and is in the present situation, I am sure, excessive.
There are a number of areas—the noble Lord, Lord Bruce of Donington, to whom I listened with interest referred to them —where expenditure has been allowed to go too high. That compels, unfortunately, increases in the rate of tax in order to keep within limits the borrowing which the state has to undertake. The increases in tax are, I think, unhappy ones. I do not like at all the increases that are being made. They are the result of the failure to restrain expenditure. It is a great pity, it seems to me, that they have occurred.
The air passenger duty seems a most unhappy tax to impose. First of all, it seems to discriminate against air travel. One does not pay tax on a ticket by boat, by train or by coach but one will, in future, if the flight originates in this country, pay a small, but appreciable, tax on one's air passenger fare. That seems a dangerous precedent because air travel—I have some experience as a former chairman of the Civil Aviation Authority—is (I deliberately put it this way) a volatile affair. If airlines are discouraged from using British airports they can quickly divert to France, Holland, Belgium or Germany. It will be dangerous if this tax, which at the moment is relatively small, is allowed to continue. I am sure that in future years some Chancellor will say, "We will put a bit more on this". Noble Lords who have served at the Treasury will know that that is the way things happen. It is a great pity that we should initiate a tax of this sort. I hope that I shall be given some reassurance on the matter.
Then there are the increases in VAT, particularly on domestic fuel. The effect on quite a number of people will be harsh. It is significant perhaps that the coming into force of VAT on fuel almost immediately coincided
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with cold weather. That imposes a good deal of hardship on people of limited means who find difficulty raising sufficient money to pay a quite substantial tax. It is an unhappy tax. I say that although in general I very much agree with the Government's approach, which is that if one has to raise taxes at all one should raise indirect rather than direct taxes.
Then there is the curious little tax—the insurance premium tax. Again, it looks to me like an insidious start to what may be a growing tax. It adds, of course, to the cost of insurance and is a discouragement to those who may wish, for good, prudential reasons, to have a good insurance policy.
The increases in tax are, it seems to me, unhappy. I am not at all happy that we should be enacting them. I am the more disappointed because the general economic picture, which one normally discusses at the time of the Finance Bill, is so encouraging. There is no question that our economy is much the most effective in Europe. There is a considerable contrast between the way unemployment here is falling and the way prices are being kept under control, and what is happening to our European friends. We have the lowest number of industrial disputes in this country that we have ever had since records were started in 1891. Our economy is working smoothly and effectively. The Government have so much to their credit and there is so much being done that is encouraging that I, for one, am sorry about having to add a measure of criticism because of what seem to me rather unnecessary increases and innovating of taxes.
If the Government had been able to pursue slightly stricter controls over expenditure—in the direction which I mentioned and in other directions—it does not seem to me that it would have been necessary to introduce these additional taxes. If that had been so, people of my kind of view would have been absolutely wholehearted in enthusiasm for what the Government are doing. As it is we very much admire the improvements which are being effected in the economy and profoundly hope that the increases in taxes will not adversely affect them. I support the Government in general in what they are doing. But I say to them, "Please, in future, do not start adding new taxes. If you feel the balance requires it, please take it out the other way by cutting the less important expenditure."
1.19 p.m.
Lord Jay: My Lords, I think the noble Lord, Lord Boyd-Carpenter, and I can at least agree that neither of us ever introduced a Finance Bill of either 400 pages or even 400 clauses. This Finance Bill, however long it is, and Budget come before us in a year in which the Government have inflicted on the country a £46 billion budget deficit, a £10 billion or so balance of payments deficit and 2.75 million unemployed all at the same time.
There are two causes of that budget deficit. One is our deplorably high unemployment. The Red Book shows total social security spending at £62 billion this year, of which about one-third is due to unemployment. One cannot eliminate the budget deficit until one has reduced unemployment to tolerable levels.

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The second cause, seldom mentioned and not mentioned yet in this debate, is the reckless tax cuts for the benefit of the very rich made by the noble Lord, Lord Lawson, in the Budgets of 1988 and 1989. In his candid and in many ways excellent book, the noble Lord, Lord Lawson, admits giving away £6.5 billion of revenue in those two Budgets, which in terms of present money values would be approximately £8 billion. If those cuts had not been made and if the economy were running at full capacity, there would now be no budget deficit and no PSBR. That is a solemn thought.
Why is it that we still have 2.75 million unemployed? The first reason is the over-valued exchange rate imposed on us in order to join the disastrous ERM in 1990 and, secondly and more generally, the excessively deflationary interest rate policies which have been followed since. In the mere two years during which we were members of the ERM, unemployment increased by 1.25 million. Within three months of liberation from the ERM in 1992 unemployment began to fall, although very slowly, as the exchange rate became more competitive. But in recent months the exchange rate has been creeping up again. That, together with higher taxes and, in my opinion, excessively high interest rates, is holding back recovery to the present painfully slow rate of falling unemployment. At the present rate it will take something like five years for unemployment to fall even below 1 million.
Meanwhile our GNP is running at about £100 billion a year below what full capacity would provide. We are still losing capacity for lack of demand and cutting crucial public services because of alleged lack of resources. In those circumstances a Bank of England interest rate of 5.25 per cent. is, in my view, much too high. It was only as recently as the late 1950s that a then Governor of the Bank of England described a 5.5 per cent. rate as a crisis rate, that is to say, one which was exceptionally high. Indeed, some of us forget that from 1932 to 1952 the bank rate stood consistently at 2 per cent. Those were all years of recovery. For those who believe in Victorian values, like perhaps the noble and learned Lord, Lord Simon, and for those who believe in trade cycles it is worth recalling that the Victorian trade cycle never started to recover when the bank rate was above 3 per cent., yet now we have come to regard 5.25 per cent. as a very low figure.
Of course lower interest rates would tend to lower the sterling exchange rate, but that is precisely what we need. Indeed, here at last is a virtuous circle which works in our favour. Not merely the ERM fiasco, however, but the whole UK economic story since 1945 show that a competitive exchange rate is the prime necessity for success in the UK economy. That is not surprising since the exchange rate affects directly every firm which exports and every firm which competes with imports. A competitive exchange rate is also the only way in any short period of time to correct our alarmingly large balance of payments deficits.
We are also told that our troubles are due to a world recession, resurrecting the belief of the 1920s and earlier that recessions are mysterious, inexorable visitations from heaven. But there is not a world recession. There is at present only a European recession. The United
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States, with low interest rates, is growing rapidly, and so are most of the countries of eastern Asia. But western Europe has become a pool of stagnant depression, with ever rising unemployment at home. I am delighted to see that the noble Lord, Lord Young, has grasped that point. It is a real pleasure to find oneself in agreement with the noble Lord.
Yet 1992 and 1993, according to the propaganda, were to be the great years of the single market and unprecedented prosperity. Some noble Lords may remember the notorious Cecchini. Report which emanated from Brussels and said that the single market would deliver 5 million extra jobs in western Europe. In fact, in the years so far of the single market and the ERM there has been an increase throughout the so-called European Union area of 5 million, not in employment but in unemployment, in just those years. The total is now approaching 20 million.
Unemployment is now around 12 per cent. and rising in Germany, France, Spain and Italy. In Germany it is over 4 million, and if the absurd monetary rules laid down in the Maastricht Treaty were really imposed it would soon rise to 5 million. It is perhaps worth recording that in January 1933 it took an unemployment rate of 6 million to bring Hitler to power. Indeed, a combination of manhood suffrage and modern mass elections and extreme deflationary policies tend to bring extremist governments to power. We have seen that happen in the past two years in both Italy and Russia.
The so-called recession which the West has suffered in the past few years is not a mysterious economic phenomenon visited upon us; it is the consequence of the revival since the 1960s of all the old deflationary dogmas of the pre-1929 world, now popularly labelled monetarism. The effect of those ideas is graphically illustrated by the UK experience since 1945. If one takes the years from 1945 to 1970, when at least attempts were being made to ensure adequate demand for our economy, real growth in the UK averaged 2.8 per cent. a year. Since 1970, with high interest rates and monetary and budgetary squeezes, real growth has averaged 1 9 per cent. a year. It follows that if we had had the same growth since 1970 as we had from 1945 to 1970 our real GDP now would be 18 per cent. higher than it is. That represents something like an extra £125 billion a year in national income.
The full absurdity of those deflationary dogmas has reached its zenith in two interesting documents. The first is the detailed financial rules in the Maastricht Treaty on deficits, the price level and so on. The second is a sentence in the Government's own Red Book this year which says with a kind of sublime simplicity:
"It is the role of monetary policy to deliver low inflation'".
That is page 15 of the Red Book. That implies that there is some magic trick by which a central bank can achieve low inflation without affecting any of the other sections of the economy—production, employment, investment and the rest. Unfortunately, in the real world, unless production is increasing as fast as pay rates, there must be a dilemma—we should not try to assume it away —between higher unemployment and higher prices. A narrow concentration on the price level alone would

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wreak havoc in the real economy. Indeed, zero inflation —we sometimes hear it talked about in this country—would probably require 5 million unemployed.
Central bankers are able and devoted. Many are extremely clever individuals. But they are particularly prone to a rather narrow vision, partly because it thrives among those whose working lives consist of juggling with money figures on paper, seldom encountering the real world of production and employment, and partly because central bankers have been unfortunately led to believe that high inflation would be blamed on them whereas unemployment can be conveniently blamed on someone else. Hence they are almost always opposed to lower interest rates and feel bound to issue frequent warnings about the perils of inflation—in particular at times like the present when there are none. Our own plain-speaking Mr. Eddie George is not altogether immune from that contagion.
What is needed now, especially in the UK, is a more balanced and more moderate economic strategy. The object of economic policy, after all, is the highest possible use of capacity in producing goods and services which people want, not the enforcement of some arbitrary, selected value of the currency. In the UK, now wobbling between stagnation and revival, in addition to the supply side measures—they are necessary but they are not enough in themselves if the demand is not there —we need a decisive cut in interest rates, a free movement of the exchange rate to competitive levels, a release of funds for public investment, particularly in house building, and no more tax increases until recovery is in full swing.
1.33 p.m.
Lord Clark of Kempston: My Lords, I am sure that we all agree that economic pundits from all sections of the financial world got the recession wrong. The depth of the recession was not realised and, like other countries, we are suffering the effects of it.
Perhaps I may remind noble Lords that in 1979 we had overseas debts to the IMF. When my noble and learned friend Lord Howe was Chancellor he had to increase taxes. That was very unpopular at the time but successive Conservative Governments reduced those taxes. Today we are in a similar position, not through overseas debts but through the recession. We are stuck with what was projected—a £50 billion PSBR, which is roughly 8 per cent. of GDP. That is far too high to be sustained. The sum has now been readjusted and is about £46 billion. But £46 billion is still far too high.
What will be the effects of the Finance Bill? What is the state of the economy at present? We all know that unemployment is down; inflation is down at 2.3 per cent. or thereabouts; interest rates are sustainable with a 5.25 per cent. base rate down from 15 per cent; and the PSBR is down a little. Of the £46 billion PSBR, we should not overlook the fact that some £22 billion of that is capital expenditure. It is not all revenue expenditure. If one looks at earnings, the unit labour cost went up by only 0.2 per cent. That is good. As my noble friend Lord
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Boyd-Carpenter said, we have had the lowest strike record since 1891, when records were commenced. The CBI and the Institute of Directors are optimistic.
Much play has been made on manufacturing industry, and quite rightly so. Production has gone up 2.4 per cent. or 2.5 per cent. over the past year. Our exports outside the European Community—I shall return to that—compared with a year ago are up some 15 per cent.
When considering the manufacturing base of our economy, it is a mistake to ignore the achievements of the City. In 1992 the City of London produced nearly £19 billion of overseas earnings towards our balance of payments. In 1982 the contribution was £4.6 billion. Everyone knows that as a financial centre the City of London leads the world. We should laud and applaud that; we should not think that it does not matter.
The noble Lord, Lord Jay, said that there is not a recession throughout the world. I agree with him. But there is certainly a recession in Europe; and that quite obviously will affect our exports to Europe. Without labouring the point, much of the trouble in Europe arose through the reunification of East and West Germany with the exchange rate between the Ostmark and the Deutschmark. Perhaps I may remind noble Lords that at the time of reunification, if one could find a buyer for an Ostmark, the exchange rate would probably have been 14 Ostmarks to one Deutschmark. The Chancellor of Germany announced a rate of 1:1 for up to 5,000 and then 1:2 for over 5,000. The East Germans with Ostmarks in their pockets (or under their mattresses, where many of them kept them) soon swapped them.
One factor I like about this Budget and previous Budgets is the emphasis on helping small businesses. Corporation tax, for example, has been reduced from 52 per cent. to 33 per cent. It is one of the lowest rates in the European Community. Small businesses corporation tax has gone down from 40 per cent. to 25 per cent. The limit for the small business relief has been increased to a profitability level of £300,000. There is a tapering relief for a level of up to £3 million profit. That is the lowest tax rate for small businesses not only in the European Community but also in the countries of the G7.
Advance corporation tax is a benefit to small businesses. A reduction from 25 per cent. to 20 per cent. gives that extra cash flow to the small business. As I am sure noble Lords will agree, many small businesses are profitable but are in dire trouble through their cash flow position because people do not pay their bills on time. I am delighted with the rumour I hear—and I put it no higher than a rumour—that the Treasury is considering how the Government can assist in making firms pay their debts to small businesses. For some time I have advocated that we should have to introduce mandatory interest on debts after the credit limit had expired. In the Budget small businesses have been helped by the reduction in the national insurance contribution.
Perhaps I may remind noble Lords that since 1979 there has been an increase of 600,000 small businesses, and they are the job creators. They are the firms which will create the jobs. I know a bit about small businesses. I happen to be chairman of a company which one of my

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sons has set up over the past five years. We have created over 400 new jobs. That can be done. But the cash flow position of some of those firms is so tight that they cannot expand. If they could obtain their money, they could expand.
Let us consider manufacturing, and perhaps we may take the car industry as an example. At Cowley in 1991 one production worker produced 10.4 cars in a year. I have never seen 0.4 of a car, but that is the figure. In 1993 one production worker produced the equivalent of 34 cars; Germany's rate is 30.8. That must help our competitive position.
I was interested to hear the noble Lord, Lord Eatwell, say that we must do something about our competitiveness. He went on to talk about workers' rights and no doubt the Social Chapter. If the Social Chapter were ever introduced, our unit costs in production would have to go up and we would lose some of our competitive position. The noble Lord, Lord Eatwell, also said that it is the rich who get all the benefit. I remind him that in 1979 the top 1 per cent. of taxpayers paid 11 per cent. of the total income tax revenue to the Exchequer. Today, the top 1 per cent. contributes 17 per cent. It is unfair to make comparisons that do not stand up.
Lord Eatwell: My Lords, does the noble Lord think that the increase in tax revenues which come from the top 1 per cent. is due to an increase in their productive activity or an increase in their share of pre-tax national income?
Lord Clark of Kempston: My Lords, I think that the noble Lord has overlooked one fact. In that top 1 per cent. one must take the revenue that the Exchequer receives from dividends. Dividends have certainly increased since 1979 simply because we have privatised so much. If we lake the privatised industries, for example, at one time most taxpayers were subsidising them. Today, through the corporation tax and ACT on dividends, the Chancellor of the Exchequer is collecting money, not paying it out. So we must be careful when we ask who are the people receiving the money. It is tremendous to see the thousands—indeed, millions—of small investors, particularly in the former nationalised industries, and they help the economy.
Perhaps we should also consider the privatised gas industry. In real terms, prices have decreased by 23 per cent. In the electricity industry, they are down by 6 per cent. Consumer spending is increasing slightly. I am delighted that it is not escalating too quickly, because that is the start of a boom; but it is increasing slightly, and that is good.
For the future, the public sector borrowing requirement is bound to decrease because of increased profitability and the deficit between income and expenditure is bound to diminish. Nevertheless, public expenditure must still he kept under control. I urge the Minister to persuade my right honourable friend the Chancellor of the Exchequer that, if and when public sector borrowing comes down, public expenditure should not go up in proportion but taxation should decrease.
I am delighted that the Government are considering the various extravagances in welfare payments. We read
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practically daily of people taking money quite illegally out of the welfare budget. They are not taking it from the Government; they are taking it from you and me, the taxpayer. We may soon have to consider the question of national identity cards in order to obviate that kind of racket. In addition, with welfare we must look at the child allowance. I shall not prolong the discussion, but in my view it seems quite illogical to pay someone who is rich a child allowance tax free when they do not need it and in many cases do not want it. However, I do not think that many people send it back.
In conclusion, many noble Lords travel and this country is the envy of our partners in Europe. They see that we have low inflation, falling unemployment and increased production. Consequently, I urge noble Lords not to be too gloomy. Let us not talk Britain down. We have a bright economic future if we stick to our policies with rigid control of public expenditure. In that way we shall improve our position not only in the world but in this country.
1.47 p.m.
Lord Monson: My Lords, as I am the last of the Back-Bench speakers, and I am certain that both your Lordships and the officers and staff of the House are anxious to set off for their holiday weekend as soon as possible, I shall dispense with my preliminary observations—the overview as it were—and confine myself to two specific matters arising from the Bill.
The first is air passenger duty. I think it is a deplorable innovation, not made any less so by the almost farcical wording of Clauses 29 to 34 inclusive, among others, which read as though they were invented by a satirist intent upon poking fun at bureaucracy. That is not the fault of parliamentary draftsmen, I am sure, but it is inherent in the complexity and the quirky nature of the proposals.
Where is the logic, where is the justice, of taxing one form of travel but not another? Here I find myself in wholehearted agreement with the noble Lord, Lord Boyd-Carpenter. How can one defend taxing people of modest means who have saved up for a hard-earned holiday in Benidorm or the Greek islands, while exempting from taxation wealthy individuals travelling in executive jets which hold fewer than 20 passengers?
I now turn to another matter. On 19th March 198.5, the then Chancellor of the Exchequer, Mr. Nigel Lawson, in delivering his Budget speech, spoke about capital gains tax. At cols. 791 and 792 of the Official Report for the other place, he referred to the "acknowledged defects" of the tax, notably,
"its combination of unfairness and complexity".
He agreed that the latter had been somewhat mitigated by his predecessor three years earlier who had introduced indexation relief, but continued by pointing out:
"That relief, valuable though it is … suffers from three serious limitations".
One of them was that indexation does not at present extend to losses. He went on to announce:
"I propose to remove this restriction".
He concluded his remarks on capital gains tax by saying that,

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"reform of capital gains tax will produce a fairer tax … help the efficient working of the capital markets, relieve the burden on family businesses and encourage risk-taking and enterprise".— [Official Report, Commons, 19/3/85; col. 792.]
I emphasise the "risk-taking and enterprise".
The following day, Mr. Peter Rees, as he then was, the Chief Secretary to the Treasury, argued that Labour policies would,
"reproduce here the rigidities and failures of the east European economies".
He went on to claim, referring to the Conservative Government:
"We are trying to fashion a tax system in harmony with the needs of the 20th century, the needs of a more effective economy and the needs of a more mobile and enterprising society".— [Official Report, Commons, 20/3/85; col. 890.]
On 29th April 1985—exactly nine years ago today, as it happens—Mr. John Moore, as he then was, the Financial Secretary to the Treasury, argued that,
"The proposal to apply indexation to losses as well as gains will mean another longstanding criticism.
The changes will make the tax much fairer".—[Official Report, Commons, 29/4/85; col. 104.]
Finally, at Third Reading on 10th July 1985, Mr. Peter Rees once more claimed:
"We are people of warm hearts who are endeavouring to do justice in a complex matter".—[Official Report, Commons, 10/7/85; col. 1199.]
How curious then that the present Chancellor has decided to reverse that excellent reform—presumably taking the view that cold hearts are better than warm ones; that injustice is as meritorious as the justice commended by Mr. Peter Rees; and that unfairness is as acceptable as the fairness extolled by Mr. John Moore nine years ago today.
The excuse for that is that a handful of companies have found loopholes in the system and are abusing it. If that is the case, then let us by all means plug those loopholes. But let us leave blameless private individuals and trustees alone. The proposal is rather like using a blunderbuss to kill a fly, as the French would say, wounding thousands of innocent people in the process.
It is true that under pressure from the Back-Benchers in another place the Government have agreed to transitional relief for private individuals and trustees. We must be thankful for small mercies. But the long-term effects of this measure will still be malign. They will be bad for the country as a whole, as well as unfair.
The British are constantly accused by economic commentators —with some justice—of short-termism, in contrast with the allegedly virtuous Germans and Japanese, among others, who, we are told, stick with companies through thick and thin, taking a five-year, seven-year or 10-year view in the hope that the company in question will eventually flourish mightily.
But what could be more precisely designed to reinforce the British tendency towards short-termism than the removal of indexation from capital losses? Many first-class engineering firms which are very successful exporters and have greatly helped the British balance of payments nevertheless often go through very sticky patches, and often through no fault of their own. Most will survive and thrive, but some will go under.
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What incentive is there now to back these firms in preference, let us say, to dull and stolid supermarket chains, if this measure is not reversed?
Many splendid, small emerging companies, bristling with new ideas and new technology need Stock Market backing. Of every 10 such companies it is quite possible that six will thrive but four will go under. So long as one can obtain full relief in real terms on the money lost on the four that go under, one is happy to invest in the struggling, innovative firms, because the real gains that are made on the other six, although taxable, should more than compensate for the losses. But the provisions in this Bill upset that equation and make investing in the techniques and the industries of the future very much less attractive.
If the Government really want to stop tax avoidance, I can suggest a perfect candidate for them. There has been a pernicious proliferation over the past year or so of the phenomenon known as enhanced share dividends. These deprive the Exchequer of vast amounts of tax revenue. They are a nightmare for trustees, who by law are obliged to keep capital and income separate and must balance the conflicting claims of life tenants and remaindermen; and are extremely unfair on people who happen to be temporarily overseas or who are otherwise incapacitated and therefore cannot sign the forms without which they cannot receive the dividends. Furthermore, whatever the gullible may imagine, they are of no long-term benefit whatever to shareholders, who are effectively being paid the enhanced dividends out of their own capital. Let that abuse be dealt with at the earliest possible opportunity, and let full indexation relief on capital losses be restored—at least for individuals and trustees—for the sake of fairness and for the sake of Britain's industrial future.
1.55 p.m.
Lord Rodgers of Quarry Bank: My Lords, one of the pleasures of the debate, for me at least, has been to hear the reminiscences of the noble Lord, Lord Cockfield, about his time at the Inland Revenue and the early days of PAYE. Perhaps I may ingratiate myself with him and become an ally—at least in the matter of the size and complexity of this Bill—by modestly claiming once upon a time to have been a tax reformer. When I was a junior Minister in the Treasury a long time ago, I was convinced of the case for getting rid of stamp duty on cheques. Most of us have now forgotten that there ever was one. I found in my noble friend Lord Jenkins of Hillhead a receptive Chancellor. There were, however, great hesitations within the Treasury; certainly, the overwhelming official opinion was against any such dangerous change. As I recall, I was able to work out that the total cost to the Exchequer over a full year would be £12.5 million at 1970 prices. So the stamp duty on cheques was got rid of. On that basis, I claim some authority in the matters with which this Bill is concerned.
We were a pretty disciplined lot in the Treasury at that time. Apart from my noble friend Lord Jenkins of Hillhead, there was the noble Lord, Lord Diamond. We kept in line. It is very different today. Perhaps I may congratulate the noble Lord, Lord Henley, on not

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making any speech that I know of outside this House about what the future of his Government ought or ought not to be. We assume, having received this Bill, that there is a harmonious Treasury from time to time. But certainly outside Parliament there is a discordant one. We are always aware of the very natural ambitions of Chancellors; and this Chancellor is not short of an ability to make speeches advocating his case for succeeding John Major at the earliest possible stage—although he does not put it quite that way.
We knew until recently that we had in the Chief Secretary to the Treasury a man quite unlike any other Chief Secretary I remember. He also makes speeches, often saying very different things to the Chancellor, because he too wants to succeed John Major, or if not John Major then some other leader of the Conservative Party.
The other day I was surprised to hear the Financial Secretary, Stephen Dorrell, speaking up. The Daily Telegraph said:
"Dorrell sets out his stall in the battle of ideology".
So not only do we have the Chancellor and the Chief Secretary having views about the future of the Government. We also have the Financial Secretary having views. The congratulations that I give to the noble Lord, Lord Henley, are therefore very well deserved in that respect. I must say—although I am not surprised—that the tone of the noble Lord's speech was, if not euphoric, then at least very complacent. I wondered how that speech would go down if it were made, for example, on the streets of Westminster; in the Landon borough of Lambeth; in the London borough of Camden; in Eastleigh, if he would like to show his face there; in Rotherham; or in any other part of our country. I do not believe that there would be a strong sense among the people that things are getting better.
In the end, although they sometimes make mistakes, or so we think, the voters have a very shrewd sense of what is actually happening to their country. The feel-good factor is certainly missing now. Listening to the noble Lord and others on the Government Benches, nobody would think that the two-year recovery to which they frequently refer has seen this Government's standing in the country slip to its lowest possible level. There is deep scepticism about the capacity of the Government to pursue a course that is acceptable to the country. We should get our intimate debate into perspective. The intimacy and perhaps the self-congratulation that we feel are not widely shared outside.
I was very interested in the reception given, I am sure as a result of suggestions made by the Treasury, to the publication on 25th April of the preliminary estimates of GDP for the first quarter of this year. They were accompanied by a quite extraordinary boast—repeated certainly on all the news bulletins I heard—that the recovery had now spread over eight quarters and had lasted longer even than the recession itself. That was the boast. It is a most remarkable recovery which goes on and on, even longer than the recession. I do not believe that a medical doctor would find such a statement very satisfactory. Would he say, "I am telling you, my patient, that although you were in hospital for only three
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days, it is taking you three months to recover and it may take even longer?" That would not be a cause for congratulation at all. But that is the kernel of the argument which accompanied the preliminary figures for GDP in the first quarter of 1994. The fact is that if we are recovering, we are recovering very slowly from a situation into which this Government plunged us. We must not lose sight of that.
Are we recovering? The phrase I like is one used by the Financial Times. It referred to a "genteel" recovery. By and large that is what we are experiencing. But gentility is fragile. For all the optimism referred to by the noble Lord, Lord Clark of Kempston, among others, the recovery has been fluctuating for most of the eight quarters to which we now refer and certainly for the past six months. There is a great deal of uncertainty. People hope that things are getting better—indeed we all do —but there is a great deal of uncertainty about whether the recovery is a steady one and where it will get us in the end.
I referred to the preliminary figures for the first quarter's GDP. Other noble Lords have made a distinction between the total figure (and the size of recovery that it suggests) and the figures for manufacturing. We do not have the figures for manufacturing for the first quarter of this year. We shall not have them until 25th May. But if we take the last quarter for which figures are firmly available —the last quarter of 1993—the figure for manufacturing was 2.3 points above the worst quarter but still 4.9 points below the best quarter, which was in 1990. So in manufacturing terms, on the basis of the last complete set of figures, we are only one-third on the way to the complete recovery we want to see. The figures for the construction industry show that the last quarter of 1993 was 15.1 points below the peak of 1990.
There is still a long way to go. We should not exaggerate the optimism. We should not be overconfident about whether the recovery will be completed. And we should bear in mind the feeling in the country where the sense of recovery that the figures seem to show is not widely felt.
There are many other comments that one might have made about the Bill and indeed about the Budget. We could have referred to VAT on domestic fuel. I am not in favour of market pricing if that is the way to reduce the consumption of domestic fuel. given the complications of avoiding the worst burden falling on those who can least afford to pay. It is a very great pity —I think of the Bill which the Government killed in another place—that we are not prepared to spend more. I have in mind what my noble friend Lord Ezra said about the condition of our housing stock. It is a very great pity that out of the total sum of public expenditure we cannot find at least a little more to try to improve energy conservation, particularly in the domestic area. I am not in favour of it but if there is to be VAT on domestic fuel, at least there should be a twin-track. The other part of the track should be expenditure to deal with the problem of energy saving where that expenditure is most needed.
There are other aspects of the Bill which surprise me. There has been no reference I have heard, except in

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passing by the noble Lord, Lord Henley, if I did not misunderstand him, to the new airport tax. I hope that my remarks will have the full support of the noble Lord, Lord Cockfield. Why do we have an airport tax? I thought that we had got rid of airport taxes and that they remained a third world phenomenon. But in this large Bill we are back to having an airport tax. The Bill states that the tax will be paid by the operator of the aircraft. But we all know that in practice it will fall on the passenger. Certainly the airlines should point out that it is a consequence of this Budget and this Bill.
Before every finance Bill and every Budget there is a time when options are taken. Those options are not simply questions of finding the best way to raise taxation, determining what its incidence will be, and deciding whether it will be direct or indirect and setting its level. It is not only a matter of such questions but of the role and purpose of taxation altogether.
In the first place, a transfer from direct to indirect taxation is inevitably regressive. It has a social consequence. Do we want to move to a more regressive system of taxation in this country? I would very much regret it if that were the established direction in which we were to go. In that respect a regressive taxation system, with more and more transferred to indirect taxation, is evidence of what the noble Lord, Lord Eatwell, said is a Government dedicated to the principle of inequality. That is the underlying ideology—whether of the Chancellor, the Treasury, the Chief Secretary or the Financial Secretary—of this legislation and of the Budget.
I read this morning of a study by Newcastle University. It told an extraordinary story. It said that the life expectancy of some groups of people in Britain had worsened over the past 50 years. It is a startling and depressing story and also a shaming one that the life expectancy of people in this country should fall. Most of the time we have looked back to the early stages of the welfare state and said that life expectancy is rising. Now it is falling. Nobody has ever sought to deny the link between poverty and health. We are now seeing in some parts of the country developments more characteristic of the 1930s than of the 1990s. What does the Finance Bill do for those people? How does the Budget bear on those whose conditions we should be ashamed of? In so far as the ideology can be discerned, we are seeing a turning back of the clock by two generations.
The ultimate test of the Bill will not be the views expressed by your Lordships in this place in three hours today; I can even say that it is not the view that will be taken by those who go to the polls on 5th May and 9th June, although it will be interesting to know what they say about the Bill and the Budget and the Government who inspired them. The test for this and every finance Bill is whether it will improve the condition of our people. Will it improve the condition of Britain? My answer is simple: it will not.
2.10 p.m.
Lord Peston: My Lords, as always this is an interesting—certainly for me—and fascinating debate. I start my intervention by responding to a remark of the
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noble Lord, Lord Ezra. I agree with what he said on investment. But with regard to the Treasury building, I must say to him that it has always been a dump. To join those going down memory lane, I remember when I was a young man working in the Treasury that it was widely believed that one member of staff was hired solely to go round all the other departments to see what furniture they were throwing out and to rescue it for the Treasury. Therefore the fact that the Treasury building is falling down does not surprise me at all.
I am glad that the noble and learned Lord, Lord Simon of Glaisdale, made his peace with me by adding to his list" of distinguished people the academic economists present in your Lordships' House. I cannot tell him how deeply hurt I was by the list he gave on Wednesday which omitted us.
The noble and learned Lord referred to the trade cycle. I was wondering when I had last heard that expression. I was taught such a course as a student, but nowadays young people refer to "stochastic fluctuations" and "non-linear dynamics". I shall not waste your Lordships' time by explaining what they are—if I know.
I want to comment briefly on what the noble and learned Lord, Lord Simon, said on Wednesday. It was not appropriate for me to intervene then. But I too hold views on how we conduct our proceedings on financial and economic matters. My judgment is that the problem has little or nothing to do with Fridays per se. I regard Friday as part of the normal working week and am perfectly happy to come to your Lordships' House and work on a Friday, as everybody else works on Fridays. The problem is a rather different one. It concerns finding enough time generally to debate these matters and not being pressurised to rush them through.
When I mention the topics that I feel we should be discussing within this whole area, it will be realised that we cannot do it. That is what is so upsetting. For example, we have a unified Budget for the first time and should be debating—because that is part of our responsibility—whether it is worth while and what its consequences are. We have not done that. Has it been to the good? We should be discussing taxation and government expenditure per se. But we need separate occasions to deal with those topics. One could go through all sorts of other matters. I should like to discuss specific taxes in detail. But I cannot do that if I want to discuss other matters as well. That is why I am very much on the noble and learned Lord's side. There are other topics—the whole question of the relationship between the Bank of England and the Treasury which has been emerging recently with the publication of those minutes. All those are matters which I believe your Lordships should be able to debate within this general ambit.
We ought not to be put in a position where in order to discuss one topic—in my case I mostly want to talk about macro-economic matters—one cannot then discuss the tax structure, the detail of public expenditure and so on. I believe that the noble and learned Lord, Lord Simon, has guided us into an area which we ought to pursue further and within which the specific matter of the Finance Bill is neither here nor there. I am willing to nod the Bill through just like that. What I want to do

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is to contribute to the discussion on the content of the Finance Bill and on the content of the Red Book. We need several days for that and we should not just be pressurised into doing it in a short period of time today. I hope that the noble Lord the Lord Privy Seal will read the various remarks made and that the usual channels will at some time do something about it.
One or two noble Lords have mentioned economic aspects of European Union. That, too, is a matter which I feel it is about time we debated again, including the economic consequences of the social chapter. But because I have to ration myself, I cannot respond to that either today, much as I wish I could.
I start with the Red Book itself which is in a sense the counterpart to the Finance Bill. The vital point about the Red Book is more what it says on taxation than what it says on public expenditure. I know noble Lords opposite are saying that we ought not to raise taxation—that is what they would like—but if they look at the Red Book they will see that it is all about massive increases in taxation, let alone the structure of taxation. It includes the two new taxes. The insurance premium tax will in a couple of years' time be raising £840 million. It will certainly be an important tax. The air passenger duty will raise £350 million, and that figure will presumably rise.
I was horrified when the noble Lord, Lord Rodgers, mentioned stamp duty. It was a great triumph on his part to get rid of it. But the Treasury, listening to what he said, will say, "Next year's Red Book could have the re-introduction of stamp duty. We can get a couple of hundred million there just to start with. If we could also have a similar duty on credit card transactions, what limit would there be to the amount we could get in?" So I really was sorry that the noble Lord mentioned that, much as I am envious of him for having achieved the getting rid of it.
The important thing to bear in mind about the Red Book and taxation is that the Government claim that over the next four or five years they will move from the existing budget deficit to about balance. That is what they claim. But what noble Lords should realise is that the current budget deficit is about 8 per cent. of GDP. I choose easy round numbers. The Government are proposing to do that essentially by knocking 4 per cent. off the public expenditure side. But what noble Lords ought to realise is that they are proposing to add another 4 per cent. on the tax side. Whatever else one says—I do not do this solely to pull the legs of noble Lords opposite —this is clearly not merely a tax-raising Budget but a Budget with a view to taxes as a share of GDP rising for the foreseeable future, defined as the future that the Red Book looks at. Therefore, that is a most important aspect of what is happening in terms of government policy. Those noble Lords who believe that the budget deficit has to be got rid of either have to look at something quite different on the public expenditure side or realise that we are entering a new era of permanently even higher taxation.
I wish to make a few remarks about the recession and the cost that it imposed on us. My noble friend Lord Eatwell started on it but the scale of the loss from the recession is prodigious. One should not ignore that. If
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we accept that output at present is back to where it was at the previous peak—I am willing to accept that the statistics show that—that is not the relevant comparison. The relevant comparison is to choose a base year—whether it is 1989 or some such year—extrapolate from that base year on the underlying rate of growth of the economy—2.5 per cent. per annum—and say that the minimum test of economic success would be, "When will we get back on to that track?"
Let us again take easy numbers and express the hope that we get back on track by the end of the century. That is back to where we would have been if we had not got into the mess in the first place. The economy would have to grow from now on at 4.5 to 5 per cent. per annum to get back on the track that we would have been on if the Government had not got the thing wrong in the first place. That actually underestimates the catastrophe because throughout the period until we get back on track we are, by definition, below track, so all the lost output in the intervening period will never be recovered.
That is the price we have paid essentially for government economic folly. It is of the Government' s own making. Noble Lords will be aware that I am the least political person in your Lordships' House, but it is impossible not at least to note that there seems to be some connection between that economic folly and the desire to create a pre-election boom. It is an hypothesis. One could set it as an exam question to students and ask them to discuss it. The lesson to learn is, "If you are serious about sustained growth, do not engage in that kind of pre-electoral activity".
Another topic I wish to refer to was raised by my noble friend Lord Bruce of Donington. It is a matter which worries me even more. I refer to the position as regards the balance of payments. I believe that my noble friend referred largely to the balance of trade. I shall look similarly at the balance of payments and the current account. The cumulative deficit since this Government came to power is about £70 billion. There were early years of surplus followed by a considerable number of years of deficit.
That £70 billion very much biases the argument in the Government's favour because that sum includes the surplus on oil account. But since oil is a wasting asset, strictly speaking it should be left out of the calculation or, alternatively, we ought to add a figure to the deficit to finance the replacement of oil in the future when it runs out. Nonetheless, even with the £70 billion deficit, that implies a most serious problem for the future because essentially it is a run-down in our net overseas assets. Even if it were financed at an interest rate as low as 5 per cent.—which I regard as a ludicrously low figure to take, but I do so because I find it easier to divide by 20 than by some other number—we are talking about a permanent worsening of the invisible part of the current account of £3.5 billion; namely, one half per cent. of current GDP.
That too underestimates the problem because the deficit is still there and the position is deteriorating. If anyone were to believe that we could get back on track at 4.5 per cent. per annum per growth, then we would al l know that the balance of payments would deteriorate further. In other words, one of the consequences of the

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profligacy of this Government which is not unconnected with the rise in consumer spending in our economy, has been to reverse what we all thought we were going to get; namely, the abolition of the balance of payments constraint on growth. We thought that we were going to get rid of that because of North Sea oil. The consequences of the Government's activities are that they have made the position even worse than when they started.
Noble Lords can see that I have already thrown away about half the number of pieces of paper that I had. I now make my final, but not too short, comments. I wish to say a few words about full employment as a policy objective. For most of my time as an economist it was taken for granted that full employment was both desirable and feasible. It was also thought to be of necessity a policy aim because the free market, left to itself, would lead to chronic unemployment. Certainly the experience of the economy under this Government has provided ample confirmation of this last proposition.
No better evidence can be cited than the fact that since 1979—and this is a point which my noble friend Lord Bruce pointed out—the lowest level of unemployment reached has been 1.7 million. The fall from 2.9 million to 2.7 million this year, with a possible further fall to 2.5 million in 1995, has been portrayed by the noble Lord, Lord Henley, as a triumph. My Lords, to come down from 2.9 million to 2.5 million is a triumph? Nothing could more clarify how we have failed in terms of economic policy than to say that that is a triumph.
I said that full employment is the right objective. My views have not changed. It is of course easier to destroy jobs than it is to create them and that again we have seen. But what is interesting is that some of the experience of this Government over the past few years shows that an expansionary policy does work. This Government have bungled things, but even on their experience it is apparent that the economy does work in a straightforward Keynsian manner and would continue to do so if "cycles"—if I may use that word—were not added to the economy by an unscrupulous desire to win elections at any cost.
What is essential is, first, a commitment to the objective —that is the first thing—and secondly, an approach to it which is gradual and not over-hasty by way of expansion. As we have experienced, a too rapid boom has to be reversed; but a carefully controlled expansion can be sustained almost indefinitely. I hasten to add that I do not disagree with those who say—one or two noble Lords have said this—that in an era of rapid structural change, a macro-economic policy of full employment must be supplemented by a micro one based on investment in human capital, such as training and education. The point is that they are complementary, not substitutes.
The benefits of such policies are obvious. Several noble Lords—not merely on this side of the House—have pointed out how much the budget deficit would improve if it were not financing unemployment benefit and if the unemployed were working and paying taxes.
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That is the rather cynical view of why we want to get rid of unemployment. There is also the straight view that the unemployed would be producing some output.
There are two other aspects of the unemployment problem which I cannot leave aside even though this is an economics debate. First, there is the social side. The Government persist in denying common sense when they reject the proposition that unemployment is conducive to crime and social unrest. Idle hands do make light work for the devil, and I fail to understand how noble Lords on the Government side reject that view. Of course, it may well be that some people are more prone to crime than others, but what they do must be dependent on the circumstances in which they find themselves. I do not say that to justify criminal activity. I stand second to none in my condemnation of it; I say it as an explanation of why we see so much criminal activity in our society.
Finally, I come to unemployment as a moral question. I cannot disguise my distaste at the Chief Secretary to the Treasury allegedly representing the opinions of the quiet majority last week. I think that he is mistaken in what he said and I do not think that he represents the views of many people in our society. In particular, he is mistaken in his assessment of his fellow citizens: that they would rather be on social security than have jobs. He simply cannot know such people or have any direct experience of the anguish that unemployment causes to the unemployed.
If I may repeat a point that I made last week: the Second World War was not fought to enable Ministers to make such snide comments today. Those who died thought that their colleagues were going back to a more decent world in which there would be jobs for all. I should add that the Tories of those days were as much of that opinion as the Labour Party and the Liberal Party. I conclude by saying that if there is one thing above all that needs to be done in this country (which I do not see this Bill doing anything for) it is the restoration of full employment.
2.27 p.m.
Lord Henley: My Lords, as I hoped, I think we have had a very full and interesting debate; and as the noble and learned Lord, Lord Simon, made quite clear, we have been assisted on this occasion—I failed to mention them on Wednesday—by the two trained economists, both of whom were signatories of that famous letter to The Times back in 1981.
Lord Simon of Glaisdale: My Lords, I mentioned three.
Lord Henley: My Lords, I note what the noble and learned Lord said. I am not sure if I spotted the name of the third distinguished economist among those who signed that letter, but I notice that the Opposition Front Bench are pointing to the noble Lord, Lord Jay, so I presume that the noble Lord, Lord Jay, was a signatory of that letter.
Lord Jay: My Lords, I did not sign any such letter; but I wholly agreed with it.
Lord Peston: My Lords, I was simply pointing out that my noble friend Lord Jay is a very distinguished economist as well as being a distinguished figure in the world of politics.
Lord Henley: My Lords, I notice that he was wise not to sign the letter.
As I have said, I think we have had a very good debate. There are a number of matters to which I should like to reply in due course. Obviously, bearing in mind the lime and the hour, it will be difficult for me to reply to all the points that have been put. Many of those points deserve a much fuller and more detailed reply than is necessarily advisable in a debate of this sort. Certainly, I shall offer to write to any noble Lord on some of the more detailed points that have been raised.
I shall start with a point raised by my noble friend Lord Boyd-Carpenter, by other speakers, and especially by the noble Lord, Lord Peston, about the arrangements for today's debate and those as regards discussing the Second Reading of the Finance Bill. Obviously, the matter was discussed at some length on Wednesday when my noble friend the Leader of the House moved his Business Motion. On that occasion, my noble friend made it clear—as indeed, did the noble Lord, Lord Peston—that this is the first year in which we are being asked to consider the Finance Bill in the Spring, following a unified Budget in November. I can repeat the assurances that I think my noble friend gave on that occasion; namely, that we will review the whole unified process later this year.
I believe that most noble Lords, and most commentators, welcome the creation of a unified Budget. However, the actual process deserves review. I shall certainly repeat the comments made by my noble friend Lord Boyd-Carpenter and other speakers. Those comments can certainly be taken on board by my noble friend the Leader of the House, and others, when we consider the arrangements for discussing the Bill in the House.
I believe that I should, like my noble friend the Leader of the House, remind my noble friend Lord Boyd-Carpenter that we have discussed such Bills on a Friday on many other occasions. Again, we have discussed them at relatively short notice. As the noble Lord, Lord Peston, made quite clear, it is not that onerous a burden to be here discussing a Bill on a Friday. I certainly have no great objection to doing so. I see that my noble friend wishes to respond. I give way.
Lord Boyd-Carpenter: My Lords, I was not so much concerned with the Friday aspect as with discussing a Bill—in this case, a massive Bill—which one has had for less than 48 hours.
Lord Henley: My Lords, again, I appreciate my noble friend's anxieties. However, as my noble friend the Leader of the House made clear on Wednesday, there have been many other occasions when we have had to discuss a Finance Bill at relatively short notice; indeed, we have done so quite often, with only one or two days' notice. I can only apologise to my noble friend for the fact that he has had so little notice on this
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occasion. However, the mere fact that the debate is being held on a Friday should not be of any great anxiety.
I shall, first, deal with a few more detailed points made by the noble and learned Lord, Lord Simon of Glaisdale, who, I understand, would like to leave the House early. The noble and learned Lord made two particular points. The first dealt with the question of whether we should split the Bill and have a separate tax management Bill. I must say that I am not completely convinced that that would have any significant advantage; indeed, it would obviously require a second slot in the parliamentary timetable. I see that the noble and learned Lord wishes to intervene. I give way.
Lord Simon of Glaisdale: My Lords, I am much obliged. Does the Minister accept that a good deal of the Bill deals with tax management—in fact, whole schedules—and that, if it was separated into a supply Bill and a tax management Bill, your Lordships could contribute significantly to the improvement of the tax management part?
Lord Henley: My Lords, I note the point made by the noble and learned Lord. However, I was trying to say that I am not persuaded by those advantages. As I said, it would require a second slot in the parliamentary timetable of both Houses. We are not persuaded that Parliament would wish to scrutinise more technical tax proposals at the possible expense of other legislation. Moreover, it is not easy to distinguish between major tax issues and minor technical ones. I also believe that the case for splitting the Finance Bill rests very much on the view that the present procedures do not allow sufficient time for consideration of tax matters. We believe that there is time at present.
The noble and learned Lord also raised the question of tax avoidance and repeated a call that he made to me on another occasion—I believe it was during a Question Time. On that occasion, I wrote to the noble and learned Lord saying, again, why I was not completely happy with his ideas—
Lord Simon of Glaisdale: My Lords, if I did not mention the Minister's courtesy in replying to me, I was very much remiss. I should like to make good that omission now.
Lord Henley: My Lords, the noble and learned Lord certainly did mention it. I was about to say that I cannot remember whether I offered to put a copy of the letter in the Library. However, I shall certainly make it available to other noble Lords by doing so now, rather than replying in detail at the Dispatch Box.
My noble friend Lord Cockfield, and other speakers, referred to the length and complexity of the Bill. My noble friend referred to the Act which introduced PAYE in 1943 with a mere six pages and referred to the present Bill as being "monstrous" in a government dedicated to deregulation. I must accept that the Bill is, as I put it in my opening speech, somewhat lengthy. The tax system must necessarily address the increasing complexities of the modern world. In recent years, the tax system has gone through a process of modernisation in order to keep pace with rapid changes, in particular in the

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commercial world. I referred, for example, to the payment of people in gold bullion. It was not used in 1943 as a method of avoiding national insurance contributions. What has crept in since is the kind of situation that one might look at. The measures in the Bill which put in place a new and coherent regime for taxing financial instruments of that kind are one example of that necessary process of modernisation.
I assure my noble friend that wherever possible we shall continue to abolish taxes. Indeed, he referred to our noble friend Lord Lawson and our noble and learned friend Lord Howe who abolished many taxes. One thinks of car tax, capital transfer tax, development land tax, investment income surcharge and so forth. I am sure that, where possible, my right honourable friend will take those matters on board.
With reference to these particular tax matters, I wish to make one or two points on the proposals referred to by the noble Lord, Lord Monson, relating to the restriction of indexation of capital losses. It is worth remembering that the United Kingdom was the only major economy to allow indexation to create or to increase a capital loss. I understand that other countries which considered doing so were deterred by our experience. In practice, indexation of losses gave rise to widespread avoidance of capital gains tax. It is in this context that my right honourable friend believes that a proposal of this kind is justified. Indeed, that avoidance went wider than companies. An example relating to individual investors is the type of security which produces an income stream but is guaranteed not to rise in capital value. These securities were marketed partly on the basis of the allowable loss to which they gave rise. We hope that ultimately it will prevent an expensive form of abuse, protecting something of the order of £3 billion-worth of tax revenue by the end of the decade. It will certainly contribute to the reduction in the public sector borrowing requirement.
I now turn to the economy. The Government's overall economic objective is to promote sustained economic growth and rising living standards. We certainly do not wish to see the boom and bust to which the noble Lord, Lord Ezra, referred. I refer the noble Lord to the words used in explaining our economic policy over the medium term in the Red Book, which refers to the undesirability of the sharp fluctuations in economic activity. We believe that the tight control of inflation and sound public finances are essential preconditions for this. I certainly beg to differ with the views of the noble Lord, Lord Jay, on inflation.
It is a measure of our success that we have had the longest period with headline retail price inflation below 3 per cent. since the start of the 1960s. Underlying inflation is at its lowest level since 1967 and well within the 1 to 4 per cent. target range. That testifies to the success of the Government's new monetary framework. It also shows that, as the economy continues to recover, inflationary pressures must remain subdued. It would not be right to suggest that they might be dead, as the noble and learned Lord, Lord Simon, implied.
The other vital element to sustained economic recovery is sound public finances. In November my
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right honourable friend the Chancellor took the view that the size of the Government's borrowing requirement had become the biggest threat to recovery. The budget measures that we have debated this morning were designed to tackle just that. The November Budget acted on both sides of the account, cutting spending as well as raising taxes.
Perhaps I may say a few words about taxes. I believe that it was the noble Lord, Lord Eatwell, who said that our tax system is unfair. He implied that it penalises the poor and benefits the rich. We have cut the high marginalised rates of personal tax which discouraged hard work and enterprise under the last Labour Government. The noble Lord will be aware that the basic rate has come down from 33 per cent. to 25 per cent. and the top rate has come down from 83 per cent., with 98 per cent. on investment income, to 40 per cent. As a result of those reforms, which were consistently opposed by the party opposite, people now keep more of every pound which they earn or save.
Further, in 1992, the Government introduced a new income tax band of 20p in the pound and the March 1993 Budget widened that band by £500 in both 1993–94 and 1994–95, increasing it to £2,500 and £3,000 respectively. That will take the number of taxpayers paying income tax at only 20p in the pound to almost 5 million or nearly one-fifth of all taxpayers. The benefits of that tax have been very much concentrated on the lower paid.
As regards the cuts—and to refer to them as cuts is wrong when all that one is doing is allowing people to keep more of their own income—and what the noble Lord, Lord Jay, referred to as the reckless tax cuts, as my noble friend Lord Clark of Kempston made perfectly clear, those reforms resulted in the top 1 per cent. of income taxpayers currently contributing some 17 per cent. to total revenue from income tax compared with some 11 per cent. in 1979. Further, real incomes have risen significantly. Even now, at the end of a long recession, the real net income, after direct taxation and child benefit, of an average married man with two children is over 40 per cent. higher than in 1979, which is the equivalent of some £83 per week in today's terms. Under the last Labour Government, real take-home pay rose by 0.6 per cent. in five years.
Lord Eatwell: My Lords, would the noble Lord agree that the real take-home income of the bottom 10 per cent. of families in this country is now lower than it was in 1979? Indeed, he must agree because it is on his own Government's figures that that proposition can be made. How does he square that with the fact that someone on an average income—and an average income is up to at least the 70th percentile within the distribution of income—has received the gains which he described?
Lord Henley: My Lords, the noble Lord either misunderstands or misinterprets the household below average income statistics. As the noble Lord will know, most of those on income-related benefits are not in the lowest decile of the HBAI figures but in the decile above that. As the noble Lord will know, all those on income-related benefits have seen their incomes

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increase, and increase by marginally more than inflation. Those who are in the bottom decile tend to be people like the self-employed—a number that has grown quite dramatically—whose expenditure is very much greater than their income; for example, someone who is self-employed and setting up a new business who, for the first year or two, will have a negative or zero income. To argue that the people in that bottom 10 per cent. are necessarily the poorest in the country, when they have an expenditure greater than the second bottom 10 per cent., and when they are a vastly fluctuating body, is very misleading. If the noble Lord wishes to define "the poor" as those on income-related benefits, he will find that their incomes have increased and have increased by more than inflation.
Further, the standard of living for all groups—this is particularly true of the lower deciles—has improved dramatically over the past 14 years. I could elaborate in great detail about the increased numbers of household goods and consumer goods from which such people now benefit. Moreover, as I have made quite clear, the benefit system protects those on low incomes much more effectively, and we have seen their incomes increase by more than inflation.
Perhaps I may say a few words about two of the taxes that have been introduced; namely, the air passenger duty and the increases in VAT, to which one or two noble Lords referred. I think it was my noble friend Lord Boyd-Carpenter and the noble Lord, Lord Monson, who both objected to the air passenger duty. The noble Lord, Lord Rodgers, referred to it as a third world tax, which I found rather odd since it is a tax that in fact the United States, Belgium and Denmark all levy, and to dismiss our colleagues in the United States, Belgium and Denmark as third world countries is somewhat unfair. It is a tax that many other countries have and we do not believe that it creates unfairness between one form of transport or another. Certainly I do not agree—as the noble Lord, Lord Monson, implied—that it favours the owners of executive jets since the executive jets are already taxed when they are bought and many flights are subject to VAT, which domestic flights are not. I think he will find that there is no unfairness there. But I note the points that various noble Lords made about those and other taxes.
We remain the party which is committed to low taxation. As my right honourable friend the Prime Minister made perfectly clear in February, we remain by instinct a tax-cutting party —the only tax-cutting party —and when it is possible to cut taxes again we will.
Turning now to spending, because obviously that is the other side of the account, my right honourable friend took some £10 billion off spending plans for the next three years and launched the next round of the fundamental expenditure reviews to examine closely every area of government spending. As a result, government borrowing should be eliminated altogether by the end of the decade. I appreciate the points made by the noble Lord, Lord Bruce of Donington, on waste. We all object to waste in government. I think the noble Lord raised two particular points. One referred to consultants, which my right honourable friend the Prime Minister dealt with at Question Time only the other day but I will
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write to the noble Lord in greater detail. He also raised the question of defence expenditure. Again, I would prefer to write to the noble Lord but I do agree with him that there is an absolute need to reduce unnecessary government expenditure and that is why my right honourable friend the Chief Secretary has initiated that series of fundamental reviews of departmental spending.
Lord Bruce of Donington: My Lords, I am most grateful to the noble Lord for giving way. I merely mentioned the defence expenditure; I did not go into any detail. I said I was going to spare him that. What the noble Lord has not dealt with is the wasteful expenditure incurred, with the Government's approval, over the whole of the European Community. Will he please answer that?
Lord Peston: Preferably not today !
Lord Henley: My Lords, I think I will take some note of the advice from the noble Lord, Lord Peston. What I should do is refer the noble Lord, Lord Bruce, to the Edinburgh Summit and the agreements reached at that summit that impose certain ceilings on expenditure. Those ceilings might not be as great as the noble Lord would like, but they certainly are ceilings, and ceilings beyond which we cannot go. I very much doubt whether, if the colleagues of the noble Lord, Lord Bruce of Donington, had been in power, he would have got quite such tight ceilings negotiated at the Edinburgh Summit. I can say to the noble Lord that we will continue to keep all government expenditure under review. We will continue to take a fundamental look at every single department and those reviews, as they come on board, will obviously assist my right honourable and honourable friends in the Treasury when they make their decisions in time for next year's unified Budget.
I think I also ought to say just a word or two about capital expenditure, because that subject was raised by the noble Lord, Lord Ezra, who implied that we had underspent on capital matters over the past few years and were going to underspend in the future. I think the noble Lord welcomed the fact that the Red Book now distinguished between both capital and current account expenditure. However, I can tell the noble Lord—as I think my noble friend Lord Clark of Kempston made quite clear—that total public sector capital spending will be around £22 billion a year over the next three years. It is now 20 per cent. higher in real terms than the average in the 1980s—that is, discounting those institutions which have now been privatised. Public sector capital spending takes no account of the investment of those programmes of former nationalised industries, which are all now thriving in the private sector. The nationalised transport industries are investing some 40 per cent. more in real terms than the average over the past 10 years. As a. result, the completion of the Jubilee Line extension and the: Channel Tunnel rail link will proceed as planned. The national roads programme has risen by some 60 per

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cent. in recent years, and support for the Housing Corporation has increased by nearly 90 per cent. in real terms over the past five years.
Before I leave the subject of government spending and government borrowing, I want to address one final remark to the noble Lord, Lord Eatwell. I totally reject his allegation that Ministers massaged figures before the last election as regards the PSBR. The £32 billion estimate at the time of the 1992 Budget represented the Government's best views of the likely PSBR in the coming year.
The economic recovery is now firmly established. Output has risen for eight consecutive quarters and has now returned to its pre-recession peak. The clear message from business surveys and forecasters is that they expect recovery to continue. Only this week the CBI published its latest quarterly survey showing business confidence continuing to rise. Last week a survey by the British chambers of commerce showed rising output, investment and confidence across both manufacturing and services, with most indicators of economic activity at their highest level for four years.
The noble Lord, Lord Eatwell, was quite right to refer to the need for greater competitiveness, although why signing up to the Social Chapter should ever increase our competitiveness I have never quite understood. I ought to point out to the noble Lord just how well we are doing in terms of attracting both Japanese and United States inward investments. Some 40 per cent. of all Japanese inward investment in the European Community comes to this country, and the figure is roughly the same for United States inward investment. I recommend that the noble Lord should go and look, say, at the Nissan factory in Sunderland or the Toyota factory near Derby, as I have done.
Those companies are not putting their factories there because there is a low wage, low skill workforce. They go there because there is a highly skilled workforce. It is a highly cost-effective workforce, but with low labour costs. The noble Lord must distinguish between low wages and low labour costs. The fact that we can offer low labour costs, in addition to the fact that we have such a skilled workforce, is one of the principal reasons why inward investment is still coming here and why manufacturing output fell under the last Labour Government by some 0.5 per cent. per annum and rose by 0.5 per cent. from 1979 to 1984.
I shall also say a word or two about the adverse visible trade balance, or current account balance, raised by the noble Lord, Lord Bruce of Donington, and others. It might have helped if the noble Lord had given the figures as a percentage of GDP—I do not have them here—rather than in money terms. That might have kept the picture in greater perspective. I believe that our prudent fiscal and monetary policy should enable the current account deficit to be financed reasonably comfortably. Again, I have mentioned our outstanding record in attracting foreign direct investment, which shows that overseas investors certainly have confidence in the United Kingdom.
In the end it is that competitiveness and our export performance which will be most important. I point out
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that our export performance has been strong, particularly to countries outside the EC, and is up by some 8.5 per cent. on a year ago. Again, my noble friend Lord Clark of Kempston was right to stress the importance of City of London invisibles in assisting here. Our share of world trade in manufactures has ceased to decline, as it did throughout the 1960s and 1970s, and by the 1980s had stabilised.
I turn now to unemployment. One of the best pieces of news that we have is that unemployment has fallen by some quarter of a million since the end of 1992. It started falling far sooner than almost any of the pundits expected and at a much earlier phase of recovery than was previously experienced, as my noble friend Lord Boyd-Carpenter pointed out. After the recession of the early 1980s, unemployment continued to rise for some five years after the turning point in output, but this time unemployment began to fall less than a year after output started to rise. I believe that improved labour market performance is evidence of greater flexibility in the labour market—the results of the Government's supply side reforms of the 1980s.
The noble Lord, Lord Eatwell, asked what lessons we had learnt. I believe that one of the most important lessons that we have learnt is that those labour market reforms that we made, which were opposed at every step by the party opposite, have led to that much earlier decline in unemployment. We have also learnt that economic growth is generated by business and employees and not by government. Governments have a responsibility for ensuring that markets work properly and that the regulatory tax burden is kept to a minimum.
I do not believe that we can afford to jeopardise recovery by letting government borrowing spiral out of control. Every family and every business in Britain has had to take steps to bring spending and income into line during the difficult years of recession. It would not be right for the Government alone to plan to live year after year beyond their means. To bring borrowing under control has required some politically unpopular decisions. But our willingness to do unpopular things has been proof of our determination to sort out the public finances once and for all.
On Question, Bill read a second time; Committee negatived.
Then, Standing Order No. 44 having been dispensed with (pursuant to Resolution of 27th April), Bill read a third time, and passed.

Immigration (European Economic Area) Order 1994
2.57 p.m.
Lord Annaly Lord Annaly rose to move, That the draft order laid before the House on 21st March be approved [15th Report from the Joint Committee].
The noble Lord said: My Lords, this draft Order in Council —the Immigration (European Economic Area) Order 1994—which is now before your Lordships' House makes provision for the entry and residence of European Economic Area nationals in the United Kingdom. The order is necessary in order to incorporate

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formally into United Kingdom immigration law those European Community directives which deal with freedom of movement and rights of residence for European Economic Area nationals. We already apply those directives. The earlier directives have been implemented through the United Kingdom immigration rules and the most recent ones administratively.
The order is thus largely a technical measure. It confirms our current immigration practice in relation to European Economic Area nationals and their family members. It enables us to meet our obligation to incorporate all these European Community directives into United Kingdom law.
It may be of help if I explain at this point the reason why the order refers throughout to European Economic Area (shortened to EEA) nationals rather than to European Community nationals or even to citizens of the European Union. The reason is that on 1st January 1994 the European Economic Area Agreement came into force. That agreement extends most of the provisions of the European single market, including the provisions relating to free movement and residence, to five countries of the European Free Trade Association (EFTA)—Austria. Finland, Iceland, Norway and Sweden—in addition to the 12 European Community member states. Of the remaining two EFTA states, Liechtenstein has signed the EEA Agreement but the EEA does not yet extend to Liechtenstein. Switzerland has decided not to join the EEA.
The European Community directives on free movement and residence therefore now apply to nationals of all EEA states right across the European Economic Area.
While we are concerned in the order only with EEA nationals coming to the United Kingdom, the rights of residents are reciprocal. They apply also to British citizens who wish to reside in any other EEA country. Thus we now all have the right, if we wish to do so, not only to work hut, provided we are financially self-supporting, to study and even to retire in any EEA country.
The order deals with the different circumstances in which EEA nationals may wish to reside here. The main categories are workers, the self-employed, those in business and providers or recipients of services, students, retired persons, and other financially self-sufficient persons.
I shall try to explain the effects of the order by outlining how its provisions apply to an EEA national coming here. On arrival at the United Kingdom port or airport, the EEA national needs to show a valid EEA passport or identity card. At most major ports and airports we already have a separate EEA channel for arriving passengers where EEA nationals need simply show their passport to an immigration officer. No stamp or endorsement is placed in the EEA national's passport. He or she is then free to enter the United Kingdom in much the same way as a returning British citizen.
Having entered this country, an EEA national is free to work in an employed or self-employed capacity, to carry out business, to stay here as a student, to retire here or to reside in any other capacity. Students, retired persons and others wishing to reside without working
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need to be financially self-supporting and to have sufficient resources to avoid becoming a burden on our social security system.
The order sets out the procedures for granting residence permits to EEA nationals. This is a facility which we are required to provide under EC law. However, we do not insist on EEA nationals obtaining a residence permit.
The spouse and other family members are able to accompany or join an EEA national here. However, if family members are not themselves EEA nationals arid are either visa nationals or coming to install themselves here on a permanent or long-term basis they need to obtain a visa or an EEA family permit before travelling to the United Kingdom. An EEA family permit is an entry clearance issued at a British post overseas. It confirms the eligibility for entry of the family member to join an EEA national. Your Lordships will notice that at Article 2 of the order, we have excluded parties to a marriage of convenience who we consider have no, right to be treated as family members under EC law.
In conformity with EC law the Government also retain the right to remove an EEA national or family member of an EEA national on grounds of public policy, public security or public health. For example, the immigration department reviews the cases of EEA nationals who have committed serious criminal offences with a view to their deportation.
I should say for the record what is not covered by the order. It does not cover EC Regulations Nos. 1612/68 and 1251/70 which have a bearing on rights of residence but already have direct effect in United Kingdom law. Nor does the order deal with our current practice in relation to the permanent residence of EEA nationals. This will continue to apply under the United Kingdom immigration rules. Finally, I should acid that in parallel with this order we will be bringing into force Section 7(1) of the Immigration Act 1988 which removes the requirement on EEA nationals to obtain leave to enter the United Kingdom.
This draft order is of necessity rather complex as fit has to cover the provisions of nine separate EC directives. Nevertheless I hope I have reassured your Lordships that the order is largely technical in nature, confirming our current practice in relation to EEA nationals. I commend the order to your Lordships. I beg to move.
Moved, That the draft order laid before the House on 21st March be approved [15th Report from the Joint Committee]—(Lord Annaly.)
3.5 p.m.
Lord McIntosh of Haringey: My Lords, I understand that this is the first business, other than a Starred Question, which the noble Lord has presented at the Dispatch Box. I welcome him to the fray. If he thinks that he will get away with describing it as "a largely technical measure", he has another think coming.
This is a thoroughly unsatisfactory order. It is self-contradictory. It is badly worded; it is in conflict in

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many respects with European Community directives and regulations; and it does not deserve the approval of the House.
I have already given the noble Lord the headings under which I propose to criticise the order, so I hope that he will be able to respond to the specific questions that I shall ask him when he responds to the debate.
My first question is about the definition of a "family member" in Clause 2. It is defined there as being the spouse, or,
"a descendant … who is under 21 years of age or is their dependant".
The noble Lord has just told us that Regulation 16.12 of 1988 is not covered by this order because it is already part of United Kingdom law. But I remind him that Title III, Article 10 of that regulation extends the definition of family members to include brothers and sisters and nephews and nieces who are dependent. Will the noble Lord tell the House in what way United Kingdom law covers those who are defined by the European Community as being family members but are not covered as being family members in this order? Unless he can give us that information, I am afraid that the charge of conflict between European legislation and the order that is before us must stand.
My second question is about the issue of an European Economic Area family permit. I am interested to hear from the noble Lord the explanation. It is not in the order, nor indeed in the Explanatory Note, that an EEA family permit will be issued at a post overseas. How does the Minister explain the difference between this reference to an EEA family permit in paragraph 3(3) with the reference in paragraph 5(2) (c) to,
"proof that he is a family member of a qualified person"?
There does not seem to be any particular reason for that. There is no reference to family permits in European legislation, and the difference between the two references needs a firmer explanation.
The whole question of relationships between the national and other family members again needs further explanation. Directive 68/3/60/EEC says that,
"a relationship is proved by a document issued by a competent authority".
How does that square with the provision in paragraph 2(2) that a spouse
"does not include a party to a marriage of convenience".
There is no reference in European legislation to a marriage of convenience. The whole concept of the primary purpose rule which is unique to this country does not appear in European legislation, and does not appear to be justified in an order of this kind which purports to implement European legislation. I shall not continue on this point because I know that the noble Lord, Lord Bonham-Carter, wants to say something on it. But I cannot forbear from referring to the immigration Act which we passed last year—unwisely, in my view. There is reference in this order to the rights of appeal. But of course the right of appeal under the 1993 Act does not exist if, in Section 10 of the 1993 Act, the ground of refusal is that the document required under the immigration rules is lacking. So the references which appear to apply here to the right of appeal to a refusal do not in fact apply to those who come without
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an EEA family permit. I wonder whether the Minister can explain that contradiction between the wording of the order and the provisions of the 1993 Act.
The third issue is that of internal frontiers. We spent a long time last year on the Maastricht Treaty, and we are very well aware that the Government have publicly insisted on the continuation of the right of control at internal frontiers. But Article 7A of the European Communities treaty, as amended by Maastricht, does not give us the right to maintain controls at internal frontiers for citizens of member states. The issue is still in doubt because there has been an application for judicial review ex parte Flynn. Can the Minister tell us what will happen if the judicial review goes against the Government? Will there have to be an amendment to this order? How will the matter be dealt with? The Government certainly cannot claim that they have obtained the agreement of the legal authorities or the European Courts at any rate to the claim to maintain internal frontiers.
I turn to the right of family members to remain. Paragraph 4(2) states that:
"A family member of a qualified person shall be entitled to reside … for as long as he remains the family member of a qualified person".
Under the definition of "family member" that we have already discussed, a family member is only a descendant who is under 21 and/or dependent on the qualified person. What happens if that family member reaches the age of 21 or ceases to be dependent? Does he no longer have the right to reside in this country? How does that square with European legislation? Or, does it mean—because the wording of the order is ambiguous—that there could be a change in the status of the qualified person rather than the status of the family member? Which one does it mean? Unless the Minister can give an answer to that question, the order will remain unclear.
I turn to the definition of "qualified person", which is very complicated and takes up the whole of paragraph 6 of the order. The Joint Committee on Statutory Instruments raised a query on a specific definition, namely, the definition of "student", and his having:
"sufficient resources to avoid becoming a burden on the social assistance system",
of the United Kingdom. In response to a letter from the clerk to the joint committee, the Home Office replied —I use the words of the joint committee—
"attempting to justify the choice of words",
used in this order. But the committee said that it believed that it was doubtful whether the order did, in that respect, implement the directive. Therefore:
"there is doubt whether [the order] is infra vires".
How can that be resolved? This is an order which has not been recommended as being without problems by the Joint Committee on Statutory Instruments. In his opening statement the Minister made no reference to the report of the Joint Committee on Statutory Instruments. I suggest that he should have done so and that we need a better answer than that which failed to convince the joint committee when it was given by the Home Office.
Apart from anything else, I have a genuine problem with the definition of "a student". In the order "a student" is defined as:

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"a person who … is enrolled at a recognised educational establishment in the United Kingdom for the principal purpose of following a vocational training course".
A vocational training course, my Lords! Are students taking only vocational training courses? Surely students are students, whether they are studying Latin, mathematics or engineering. Is it seriously claimed that citizens of member states of the European Union cannot come here as students—they have to be qualified persons in order to pursue economic activity in this country—unless they are pursuing a vocational training course? Again, I suggest that the wording of the order is seriously defective and is in conflict with European directives and regulations.
As I am on the point of the wording of paragraph 6, perhaps I may ask the Minister to tell us the difference between "social assistance" and "social security". In paragraph 6(1) (f) "a self-sufficient person":
"has sufficient resources to avoid his becoming a burden on the social assistance system of the United Kingdom".
In the very next sub-paragraph, paragraph 6(1) (g), "a retired person",
"means a person who … is in receipt of [moneys] … sufficient to avoid his becoming a burden on the social security system of the United Kingdom".
What is the difference between a social assistance system and a social security system? Why are the words used as though they were interchangeable?
There is then the issue of the third country nationals with residence rights in this country. There are binding agreements between a number of member states of the European Community—I do not know about other members of the European Economic Association—which give rights of residence, for example, to Turkish citizens in Germany. Are they covered by the order? There is no reference to those agreements which are part of the European immigration legislation and should be dealt with in the order.
The order is thoroughly unsatisfactory. If it were not for the firm convention in this House that we do not overturn orders, and in view of the fact that we cannot amend them, I would be recommending to your Lordships that the order be sent back to be thoroughly revised. I shall certainly recommend to my right honourable and honourable friends in another place that when the order comes before them it should be rejected out of hand.
3.16 p.m.
Lord Bonham-Carter: My Lords, I agree with almost every word the noble Lord, Lord McIntosh, uttered in a devastating destruction of the order. I join him in welcoming the noble Lord to the Dispatch Box and only commiserate with him on his maiden appearance in having to introduce an order which is so difficult to accept on any ground whatever. I suspect that none of his colleagues wanted to introduce it and that is why he is landed with it. It reminds me of the passage in Peter Pan when Captain Hook says, "They always make the baby Hook". That is what happened on this occasion.
'The noble Lord says it is a technical measure. It is highly technical but that does not mean it does not raise matters of important principle. It does. As the noble
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Lord, Lord McIntosh, said, it is thoroughly bad, devious —as I will show—and of course late. The Government constantly congratulate themselves on British compliance with European Union legislation and directives. In this case we cannot congratulate ourselves on progress. The order is late. I believe that it is no less than six years late, and that is taking leisure rather seriously.
I will attempt to show that again and again throughout the order we attempt to qualify European Union law by means of domestic law, and that we cannot do. Those attempts will fail in respect of the three issues I propose to raise—the right of residence, marriages of conveniences and the question of passports or identity cards when arriving in this country. I shall begin with the rights of residence. As the noble Lord said in his introduction, the order brings into force Section 7(1) of the Immigration Act 1988. On 1st November 1993 all nationals of the European Union become citizens of the Union. On that date we shall all have dual citizenship and as citizens of the European Union we are endowed with certain rights, one of which is the right of residence in any part of the European Union. That is embodied in Article 8A EC.
By virtue of that article citizens of the Union are entitled to reside wherever they wish within the Union, without hindrance, and subject to exclusion only on the three grounds mentioned by the noble Lord of public policy, public security and public health. However, paragraph 6 of the order states that citizens of the Union only enjoy residence rights in the United Kingdom when they can establish entitlement under some other provision of European Union law. That is a matter of some importance because what is at issue is the burden of proof. Is there a presumption in favour of European Union citizens, or must they, when they come to this country, provide some other proof in order to be entitled to residence? This is not a trifling matter. It is a matter of real significance and importance. I should like to have the Government's answer to that question.
Secondly, I should like to look at marriages of convenience. Paragraph 2(2) of the order reads:
"'spouse' does not include a party to a marriage of convenience".
As the noble Lord, Lord McIntosh, said, there is no definition of "a marriage of convenience" and I am advised that there is no legal basis for that exclusion. It is what I described earlier as an attempt to place a restriction on European Union law which is not countenanced by European Union law. There is no domestic power to restrict rights under European law.
Thirdly, I should like to look at investigation. In. addition, that provision in the order might appear to give the state the right to investigate marriages between citizens of the Union and third country nationals. As we know, inquiries into the primary purpose of a marriage can take months and indeed years. They are extremely intrusive and during the investigation in most cases the spouse is excluded from entry into this country. Is that proposed in the case of European Union citizens?
It has been said of this provision:
"European Union law will not interfere with our national decisions on how we wish to treat ourselves. However, it will prevent us from subjecting citizens of the Union to the humiliation which we may consider appropriate for ourselves".

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The Minister must tell us what is the consequence of introducing this concept of marriage of convenience, which has no definition and no place in European Union law. How will that affect the issues which I have just mentioned.
Paragraph 3(1) of the order requires an EEA national to provide a passport or identity card on entry into this country. As your Lordships will be aware, this has been the subject of legal debate as to the compatibility of passport checks on entry into this country with Article 7A EC of the treaty. The matter will probably have to be settled in the European Court of Justice. The United Kingdom Government believe that they have such a power. The Commission has set out its position, arguing that no such power exists. It seems very odd for the Government to legislate in favour of their own view when there is a strong likelihood that a decision will be made by the European Court of Justice that will make the Government look foolish and they will then have to go back on the law which they have just passed, bearing in mind also that decisions of the European Court of Justice cannot be rendered ineffective by domestic law.
The haste which the Government have shown in this matter is in marked contrast to the dilatory way in which they have approached those other European Union regulations, laws and directives which give rights to European Union citizens. Where there is restriction on the rights of European citizens, the Government act immediately; where they are provided with rights which are for their benefit, the Government take six years before they take action as regards this very flawed measure.
Lord Annaly: My Lords, I begin by thanking noble Lords opposite for the welcome which they have given me at the Dispatch Box. In the circumstances, and given the powerful speeches which both noble Lords have made, it is my intention, following my response, to adjourn further debate on the order rather than to invite your Lordships to agree to the Motion today.
I am grateful to your Lordships for the comments which you have made about the order and the way in which it transposes into United Kingdom law EC rights of free movement and residence. I shall now attempt to answer as many as possible of the questions raised on the order, but if there are any points which I have missed I shall endeavour to write to the noble Lord concerned.
As I explained at the outset, this is a necessary order so that the United Kingdom can demonstrate the formal implementation of the EC directives relating to the rights of residence of EEA nationals. It is not intended that the order should in practice make any significant change in our procedures. These are designed to make it as easy as possible for EEA nationals to exercise their rights to reside here with their families. At the same time, the Government's policy is to maintain firm but fair immigration control. We need therefore to maintain immigration checks at our frontiers on travellers arriving from both inside and outside the European Economic Area. We are also bound to ensure that the procedures relating to non-EEA dependants of EEA
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nationals do not allow spurious applications to succeed or persons who are not genuine family members to circumvent immigration controls.
I now turn to the points which had been raised. I begin with the noble Lord, Lord McIntosh. First, the definition of "family member": Regulation 1612/68, which I referred to in my opening speech, already has direct effect so the references in that regulation to favouring the admission of other dependent relatives does not need to be implemented in this order.
I now turn to the point made by the noble Lord about EEA family permits. Non-EEA family members of EEA nationals who are visa nationals already require a visa to come to the United Kingdom. Under that order, if accompanying or joining the EEA national here, a visa national will require an EEA family permit. Non-EEA family members of EEA nationals who are not visa nationals already need an entry clearance if coming here for settlement under the immigration rules. Under the order they will require an EEA family permit if coming to install themselves with the EEA national—in other words, on a permanent or semi-permanent basis.
If coming for a temporary purpose such as a short visit, a non-EEA family member who is not a visa national does not require an EEA family permit. If once here such a person decides that they wish to stay longer, they may apply for a residence document in line with the residence permit issued to the EEA national.
The EEA family permit reflects the provision of Article 3(2) of EC Directive 68/360 EEC which states:
"No entry visa or equivalent document may be demanded save from members of the family who are not nationals of the member states".
The EEA family permit requirement puts non-EEA family members coming here in a similar position to the non-EEA family members of a British citizen who requires an entry clearance under the rules to settle here.
Turning to the questions raised about rights of appeal, the noble Lord, Lord McIntosh, rightly recalls that the Asylum and Immigration Appeals Act 1993 excludes an appeal in certain cases where there is no document which is required by the immigration rules. However, the requirement of an EEA family permit is imposed by this order so it is not affected by the 1993 Act, and the right of appeal is available.
Turning to the points concerning frontier controls in Article 7A, the noble Lord, Lord McIntosh, will know that the Government do not accept that Article 7A of the EC treaty prevents immigration controls continuing at United Kingdom ports and airports on non-EEA nationals supported by a light passport/identity card check on those EEA nationals. The United Kingdom's island geography makes it the most sensible and least intrusive system for our immigration controls to be primarily frontier-based, and the Government are determined that those controls will continue. Immigration controls at our frontiers do not interfere with the rights of free movement and residence of EEA nationals as set out in the order.
Article 3 of the order confirms that EEA nationals should produce on arriving here a valid passport or

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identity card. That is in line with Article 3 of EC Directive 68/360/EEC which states that member states shall allow EEA nationals to enter their territory,
"simply on production of a valid identity card or passport".
That provision has been repeated in the more recent directives, including Directive 93/96/EEC on the right of residence to students which came into force on 31st December 1993, some 12 months after the completion of the single market. The case in the name of Flynn, mentioned by the noble Lord, Lord McIntosh, does not bear on Directive 68/360/EEC.
Turning to the question that was raised about social assistance, the terms "social assistance" and "social security", which have been used separately in the order, simply reflect the separate wording used in the relevant EC directives.
On the points raised about the definition of "student", the order refers to students on vocational courses because this is the requirement of the relevant EC directive.
Lord McIntosh of Haringey: My Lords, if the noble Lord will permit me, the order says —and I said—"vocational", not "vacational".
Lord Annaly: My Lords, my apologies.
The noble Lord criticised us for failing adequately to implement EC law, a charge which we reject. The noble Lord, Lord McIntosh, cannot, with respect, have it both ways. We cannot implement an obligation in relation to students which does not exist. That is why the order refers only to vocational students.
Lord McIntosh of Haringey: My Lords, I intervene only to be helpful. I am very much involved in vocational education and training and attended a significant conference on this matter in Brussels in November last. The whole question of the use of the word 'vocational" was debated at some length by the relevant directorate-general. The problem appears to arise in translation from the French. I suggest that perhaps the Home Office might look into other occasions on which such a problem has arisen before finally reaching a conclusion on the wording to be used in such an order.
Lord Annaly: My Lords, I thank the noble Lord for bringing that point to our attention. We shall look into it and follow up what he has said.
I turn now to the point about association agreements. The noble Lord, Lord McIntosh, referred to those association agreements which the European Community concluded with states outside the EEA, especially Turkey. As the noble Lord may know, such agreements do not confer rights of free movement on individuals. Therefore, the provisions fall outside the scope of the order.
The noble Lord, Lord Bonham-Carter, spoke about the delays in implementing the directives. Although there has been a delay in implementing the three most recent directives, the earlier ones are all catered for in the immigration rules. The provisions of all the directives have been implemented administratively since they came into force, and no EEA national has been treated against the spirit of the directives.
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The order is a complex piece of legislation and has been some time in its preparation. The Implementation was also delayed to take into account the entry into force of the European Economic Area Agreement on 1st January 1994.
My Lords, I beg to move that the debate on the Motion for the approval of the order be now adjourned.
Moved, That the debate on the Motion for the approval of the order be now adjourned.—(Lord Annaly.)
Lord McIntosh of Haringey: My Lords, before the noble Lord sits down, perhaps I may express my appreciation for the responsible way in which he has responded to the remarks made by the noble Lord, Lord Bonham-Carter, and myself. I am most grateful to him. I hope that we shall have an opportunity to consider the matter in more detail at a later stage.
Lord Bonham-Carter: My Lords, I should like to associate myself with those remarks.
On Question, Motion agreed to, and debate on the Motion for the approval of the order adjourned accordingly sine die.

Apple Growers
3.36 p.m.
Lord Carter Lord Carter rose to ask Her Majesty's Government whether apple growers in the United Kingdom are making substantial losses; if so, how extensive those losses are; and what proposals they have to prevent a surplus of apples in the European Union.
The noble Lord said: My Lords, the Question standing in my name on the Order Paper seeks to draw attention to a very serious situation in the UK dessert apple industry and to ask the Government what proposals they have to deal with the problem.
The first point to consider is whether the current problem which we shall be discussing in the debate is merely a feature of the normal seasonal surplus and deficit that we all face in agriculture and horticulture —for example, one good year, followed by several bad years and, to some extent, a. self-correcting mechanism —or whether what we are seeing is the result of a deep-seated structural problem in apple production in this country, the European Union and the non-member countries who supply the European market. I strongly believe that it is the latter; namely, a structural problem. I shall attempt to show the House why and to suggest means of dealing with the problem. I shall also seek the Government's views on what proposals they have to deal with such a serious situation.
Perhaps I may put the matter into context. The UK produces annually about 210,000 tonnes of dessert apples, and about 140,000 tonnes of cooking apples, with seasonal variations in the yield. That represents about 30 per cent. of the total UK apple consumption. So, obviously, we are a major importer of dessert apples. Ours is about 4 per cent. of the total European Union production of some 8 million to 9 million tonnes per annum. In recent years, the UK has been responsible for rather less than 2 per cent. of EU intervention. The

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current forward projections of the EU apple production suggest a total production in the order of 10 million tonnes per annum by 1996 with a range of 8.5 million to 11 million tonnes. The same forecast suggests a world surplus of 3 million to 4 million tonnes per annum. If that is not a structural surplus, I do not know what is.
Some figures produced by industry sources (including home-grown fruits) indicate the range of packhouse prices to the grower now of about 3 pence to 5 pence a pound, with slightly higher figures for cox apples, against growing costs of 8 pence to 12 pence a pound. That situation has proved to be the norm over the past two years and is likely to continue into the next season unless action is taken.
Substantial efficient growers have experienced losses in the past two years which have wiped out previous profits. They are now facing a third successive year of heavy loss, unless something is done and done quickly. The industry employs in total about 100,000 people. That includes those in the orchards both upstream and downstream, those in the packing houses and also part-time employees. A serious problem which will have to be dealt with as regards apple orchards is top fruit. As we know, top fruit is not part of the arable aid system. There are no alternative arable crops which can be grown on the land as a part of the arable aid system and it is not eligible for set-aside. That means that if growers are forced to take the land out of apple production, it is extremely hard for them to know what they can do with it. That has resulted in a situation where land with apple orchards is now virtually unsaleable.
What has happened with the EU apple regime to create such a situation? First, I believe, it is the failure of intervention. Intervention was intended to deal with the occasional seasonal surplus so as to take such surplus off the market. Instead, it has become a permanent feature of the regime. Indeed, some growers in other member states deliberately grow for intervention. The system is rife for fraud. Secondly, there is also the comparative failure of the previous schemes for grubbing up. A substantial proportion of the funds available on the most recent scheme went to East Germany (which was not considered as a recipient when the scheme was set up) and has obviously distorted the whole picture. Thirdly, there is the predatory pricing by some member states of the EU, especially Holland; and, finally, the problem of low-priced imports from the southern hemisphere.
What proposals does the European Commission have to deal with the problem? Does the Commission recognise the urgency of the situation? Apparently not. The Secretary-General of the COPA/COGECA wrote to the Director-General of DG VI of the Commission on 6th December 1993 describing the seriousness of the situation. That followed a deputation in July 1993 which also described the very urgent problem. There was no reply to the letter sent in December for two-and-a-half months. Mr. Christopher Jackson, a Member of the European Parliament, then wrote and, finally, on 7th April—that is, nine months after the problem was first described by the deputation to the Commission—Mr.
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Steichen, the Commissioner, replied, very unhelpfully. He said that he regretted the failure of the previous grubbing-up schemes and that he looked forward, "with some apprehension", to the results of the increased planting—he was certainly entitled to do so—and then referred vaguely to,
"measures for the reform of the common organisation of the market in fruit and vegetables which is now under active consideration".
The letter completely failed to distinguish between the problems which face the British grower and those which face growers in other member states. That was either deliberate or it was the result of some very careless drafting. But we all know what it means for the horticultural sector to wait for the review; it is a further delay while apple growers get into deeper trouble. There are times when I believe that the speed of response of the European Commission makes the average tortoise look like a gazelle.
The proposals made by COPA/COGECA in advance of the horticultural review being undertaken by the Commission have two main features. The first relates to grubbing up grants for an area of the European Union. The original area suggested was 33,000 hectares. That has since been increased to 50,000 hectares because the situation has worsened. There have been substantial changes in the intervention system to penalise the varieties which are consistently intervened. I was not surprised to learn that Golden Delicious is consistently intervened. If ever a variety were misnamed, that one was!
As regards the proposals for grubbing-up grants, the important point is that the one-off capital costs could be met within three years by savings in intervention. That is an important point with regard to the effects on the European budget.
As part of the COPA/COGECA proposals, there has been an imaginative set of proposals from the National Farmers' Union, supported by the apple industry. It has proposed a policy package comprising changes to the intervention system with a reduction in the intervention price and its eventual phasing out; effective use of the reference price system to prevent the dumping of apples by third countries; improvements in the marketing and promotion of British fruit (a good deal has been done by the industry itself in that respect); means of pressing the UK Government to ensure that other member states of the European Union do not unfairly aid their growers and that there is the level playing field with which we are all familiar; and other proposals regarding production, marketing and plant health. Clearly, there is no shortage of policy proposals.
A further problem arises from the GATT settlement. Already the European Commission has formulated a draft agreement with Chile which goes beyond the GATT settlement. Will the Minister say whether that agreement is a proposal from the Commission or an agreement by the Council of Ministers? Under GATT rules it opens a door for other countries to seek identical agreements. New Zealand has made clear that it will seek identical terms. Such agreements could substantially increase the volume of low-priced imports from non-member states which in recent years have increased

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their productive capacity without any consideration of the market available. It is extremely unfair on the European Union grower if the increase in capacity in the non-member states is dealt with by agreements such as that with Chile, which gets it out of a problem it has created itself. I ask the Minister what stance the Government are taking as regards the proposed agreement with Chile and other similar agreements which may be reached in the future. Have the Government expressed a view? If so, it would be extremely helpful to the House to know what it is.
The proposals for grubbing-up grants and changes to the intervention system that I have described are now on the table. They are urgently required to deal with the problem for the coming season. What view do the Government take? Do they support the proposals? Do they agree with the description that I have given as regards the seriousness of the situation? In the light of that, what concrete proposals do the Government have for action before the 1994–95 season and beyond?
What alternative use of the land, now used for apples, do the Government envisage, if we bear in mind the problems to which I have already referred, because that land is not a part of the arable aid system? I sympathise with those who are having to grapple with the problem because they are entitled to ask what will happen to the land if the orchards are grubbed-up. It seems to me that there will have to be an attempt to bring such land into the system of support or set-aside or that alternative use will have to be allowed, for example, as woodland or as a source of crops for industrial fuel or whatever. All those matters need to be considered but they will have to be thought through extremely carefully. What will happen to the land if grubbing up, which I believe is essential, is undertaken?
Although in recent years the industry has had a good record of self-help, it is essential that the Government should now step in. This morning I received a press release from the Ministry regarding the Agricultural Council held earlier this week. We hoped that help for the apple industry would be discussed by Ministers at the meeting but that apparently was not the case or, at least, it is not mentioned in the press release. Will the Minister say whether or not the problem was discussed at the Council, and if so, what conclusions were reached?
I know that other speakers in the debate will cover a number of aspects of this matter. I understand that following the Napoleonic wars, excessive imports from France caused a desperate situation for English apples, which moved Lord Torrington to observe:
"The sooner Kent is without an apple tree, the better".
We must all hope that Lord Torrington's fears for Kent in the 19th century do not become the actual experience of apple growers throughout the United Kingdom as a result of inaction by the European Commission, abetted by our own Government.
3.50 p.m.
Lord Cornwallis: My Lords, I am very grateful to the noble Lord, Lord Carter, for tabling this Unstarred Question. Perhaps I may add some background to the questions which he asked so pertinently.
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For 46 years I have been involved in the top fruit. industry. I was a grower, a co-operative founder and director, chairman of a co-ordinating organisation and, perhaps more importantly in the context of the Question, for 12 years until 1986 I was the horticultural co-operative's representative in Brussels. I am therefore: very well aware of the dilatoriness and prevarications of the Commission, and the frustrations of trying to get it to do anything—that is, anything you want. I most sincerely hope that we are not going to suffer the same frustrations from our own Ministry.
In all my 46 years I have not known a crisis among fruit growers of anything like the present situation; nor have I known such unity of purpose. For once that unity of purpose is the same across the whole of the EC. There is now an unrivalled opportunity to achieve some progress in sorting out the European apple surplus.
Let us be clear about the magnitude of the problem. The European surplus this year was in excess of 1 million tonnes. But that is only Europe. The worldwide surplus was probably over 2 million, and growing. Much of this world wide production is targeted at us here. There is nowhere else for it to go. While there is a surplus on the Continent, it should be remembered that there is no surplus in the United Kingdom. We supply only 30 per cent. of our market, but the United Kingdom Treasury is paying its percentage of the millions paid to continental producers for intervention.
As long ago as 13th October I led a deputation of the fruit industry to meet the Minister of State. We put forward a united plan to help ameliorate the overall problems both of our own and the Community. This plan was later agreed in principle by the Minister in writing, and has since been confirmed. Most, but not all, of this plan is acceptable to our European fruit growing colleagues. There is need—urgent need—for some of the things to be implemented as soon as possible. The Commission is conducting an overall review of horticulture. So, we are told, we must wait for this. Waiting for the Commission's reviews is a fine way of doing nothing. They take years and are always late.
Part of the package put to the Minister of State was for a grubbing grant; a grubbing grant with a replanting prohibition for 15 years. Our European colleagues are lobbying for this to the tune of removing 50,000 hectares of apples from the market. If this were done, our contribution to the cost of intervention would drop considerably because the Treasury is paying for French and Italian intervention, not British. We hardly use it and would like it to go. The cost to the Treasury of their share of the grant would equate to approximately one-and-a-half years' saving in payments to intervention—money which is not benefiting this country. May I ask the Minister whether he knows if anyone in the Treasury understands investment and expenditure to bring forth future rewards? I do not really expect him to answer.
However, the Minister of State has accepted our whole plan. We have told our European colleagues this. They have informed their own governments. But, firstly, apparently our Government will only support the whole plan—and that awaits the never never land of the Commission's review—and, secondly, because of that,

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they will not support the united call at the Council of Ministers for an urgent part of it. Our European colleagues do not understand how we are able to say that our Ministry is right behind us when they see no visible signs of it across the water.
I cannot over-emphasise the urgency of this matter. Fruit growers have had two disastrous years, not of their making. The banks have a red alert on the fruit growing enterprises, with a similar view taken by estate agents. This is not an industry crying in its soup for a great rescue hand out. It is an industry that has done more to help itself than any other in the country. It survived and reorganised in the 70s, losing 50 per cent. of its hectarage to become leaner and fitter to compete with Europe's new challenges.
The industry has organised its marketing and is continuing to change and develop. It has raised £1.5 million per annum to promote its product; half of the total promotion money raised by the whole of horticulture. Additionally, it has extracted £1.25 million from European schemes over the past three years, the only horticultural industry to do so. It receives practically no financial support from the Government or Europe. Compare that with the millions paid to livestock and cereal farmers. It is disadvantaged over IACS—a point which the Minister may care to address. Horticulture as a whole costs only 5 per cent. of the total cost of the CAP.
I therefore ask the Minister for an assurance that at the next Council of Ministers the United Kingdom will support the European request for the urgent introduction of a grubbing grant. There are growers anxious to retire from the industry altogether who are seeing their hard-earned gains disappear and the value of their holdings rapidly diminish. At present they can only retire by being put out of business by the banks—a prospect that comes nearer with every day of inactivity.
We hear a great deal from the Ministry about consumer choice. If some action is not taken soon one choice which consumers will not have is to buy English apples. Over the past two years producers have received back about half the cost of producing fruit in spite of the splendid co-operation that we have had from all the supermarkets.
We also hear that the last grubbing grants did not achieve their expected result. That may be a Treasury argument, but the Ministry of Agriculture knows full well that the first grubbing grant coincided with the unexpected collapse of the Berlin Wall, to which the noble Lord, Lord Carter, referred, and mostly went to East Germany. The second coincided with a freak short year which was therefore relatively profitable for those few who happened to have a crop.
Our request is backed not only by growers and their organisations but also by the Fresh Fruit and Vegetable Information Bureau and by wholesalers both here and in Europe. They have committed their support to paper.
Our European friends—and they are indeed friends —do not understand what is going on. For years our representatives have been calling for this type of action and been frustrated by French, Italian and other opposition. Now, when everyone is agreed and seeking
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part of that which the British have always wanted, our Government have failed to give us public—and I emphasise "public"—support. No wonder they think that we are mad.
I also ask the Minister for an assurance that when —and I shall show confidence by not saying "if"—the Government and the Commission act to assist themselves—yes, themselves—and us, whether in grants, schemes or through GATT, the Ministry will use its best endeavours to make sure that the Commission enforces its own regulation. We are worried particularly by GATT. The Commission has a very bad record on either acting in time or for that matter acting at all. Our worst fears have already been fuelled by the recent compromise draft agreement with Chile.
There is no point in doing anything at all if the only result of our combined efforts is to make a hole in the European market for a further flood of imported fruit from third countries. Perhaps it was not very encouraging at a recent meeting with the Secretary of State to hear him say at the conclusion that inflation and cheap food were our top priorities. In the context of cheap food, I question the value of the help that we may think we are giving to eastern Europe by purchasing its produce when we are paying its producers substantially less than the cost of production.
It may be thought that the advent of the GATT agreement will alleviate the import problem, but I seriously doubt whether that will be so. The Commission, by its dithering and indecision in the face of mounting protests over the years at the quantity of imports, has in fact already sold the pass. That cannot be laid at the door of our own Ministry. But the truth is that the basic import quotas, above which GATT duties would be leviable, have been allowed to establish themselves at a very high level due to the Commission's past inactivity.
To demonstrate the overall change in supply the following figures may serve to emphasise both the dimensions of the problem and its seriousness. Over the past six years imports into the United Kingdom have doubled, rising from 95,000 tonnes to 190,000 tonnes. Imports here are increasing at a rate faster than the overall rate of increase into the Community as a whole. If my memory is right—and it is my memory upon which I call—when I first went to Brussels we were fighting the Commission over a figure of about 200,000 tonnes of imports a year and trying to reduce that figure to about 180,000 tonnes. Today we are fighting over 650,000 tonnes of imports.
To conclude, perhaps I may ask the Minister to review the IACS situation in order to make it easier for growers to use their land for other than fruit growing. Perhaps I may also ask that the discussions currently in hand to provide a unified information service throughout the industry be pushed on urgently so that that service is in place for the coming season. Purchasers, packers, growers and storers all need reliable crop and stock figures. At present there are conflicting sources of information collected by four different criteria and causing confusion as to the state of the market, both present and future.

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But, most importantly, I must return to the urgent call for a grubbing grant to remove hectarage across the Community. In the UK we would aim to remove some 2,500 hectares of fruit—5 per cent. of the figure for which our European colleagues are calling. My information is that we use 2 per cent. of the Community's intervention and the Treasury pays for 12 per cent. of the total European costs. Therefore, 85 per cent. of our money goes to pay for Continental apples to be thrown away. Investment—yes, investment—in a grubbing grant would recoup that expenditure within two years and bring that money home to the British taxpayer. Surely even the dead hand of the Treasury must understand the benefit of doing that—or can they see no further than next Budget day?
For once we have unity of purpose between the whole of the top fruit growers of the Community in seeking part, if not all, of that which we have agreed and for which we have been working for years. Please do not now let our Government's voice be either silent or dissenting.
I ask again therefore for an assurance from the Minister that the British voice will be heard loud, clear and forcefully in support of our industry and of our European colleagues who, in some places, are worse hit than ourselves. I hope that the four voices here this afternoon are not just crying in the wilderness, a wilderness that our fruit growing industry may well become—perhaps comparable to the desert that is your Lordships' House on a bank holiday Friday afternoon.
4.4 p.m.
The Earl of Selborne:My Lords, perhaps I may say a word in this desert. I begin by saying how grateful I am to the noble Lord, Lord Carter, for drawing attention to the dilemma in which the top fruit growing industry in this country and throughout Europe finds itself. I should declare my involvement in the industry. I am a fruit grower. I chair the Strathclyde Marketing Initiative for the tree fruit sector. I wish to return to that subject in a moment. I also farm arable and dairy crops. However, I have always said that I feel much happier in the long term in the unsupported sector of horticulture. It means that we have to live in the real world with market pressures, but at least to a certain extent we are masters of our own fortunes.
'Therefore, it would be hypocritical of me, to say the least, if I were to say now that we require subventions and payments from the Government. I do not think that that is the long-term solution. We must do what we always said we wanted to do and live on our own resources.
However, the problem arises that in the misguided policies of the European Community over the past 20 years or more, under the common agricultural policy the Government have intervened massively in the form of interventions and have prevented market forces operating. As has been pointed out so clearly by both the noble Lord, Lord Carter, and the noble Lord, Lord Cornwallis, we now have a situation of chronic surplus, positively encouraged by the procedure of intervention and buying in products which do not meet market prices. We know well that the lower cost production
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systems, particularly in southern Europe, are able to meet their marginal costs. There is no inducement to remove surplus production, and intervention has therefore accentuated the problem. That is why we have a problem which is immediate and which is driving a large number of producers, both in this country and in Europe, into bankruptcy. I think that that is not in dispute. The figures are clear and we have heard enough already today to understand the nature of the problem.
Having said all that, I believe that it is very much for the United Kingdom apple industry to demonstrate what it can do itself to help resolve the problems it finds itself in. That does not mean that Government do not have a role. But the Government are entitled to hear from the industry just what measures it proposes to take in order to meet some of the difficulties.
The first and foremost requirement is for the industry to protect its brands. Its great success, probably unique in all agricultural and horticultural marketing, has been to promote its brands. The average UK consumer knows very well about the English Cox and the English Bramley. They are held in high regard. It is probably a classic story of the promotion of a brand which is owned by a large number of different people.
But it is a vulnerable situation. Things go wrong— and let us admit it, the past year was not the easiest for us growers, and early in the season at least we produced some Coxes which damaged the brand. That is not to say that it continued throughout the season, nor that it was universal throughout the season. Nevertheless, we have a responsibility to ensure that we try, as we clearly must, to sell apples at a premium and we must make sure that we produce a premium product.
The way in which we do that is to ensure that we keep our costs as low as possible, but not at the expense of packaging, promotion or the links with the marketing chain. We need to develop alternative markets for apple juice, again branded by Coxes and Bramleys. There is an enormous market for single strength apple juices, but it needs all the links in the chain—the producer, the processor, marketing and retailers—to collaborate. That is precisely where the Strathclyde Marketing Initiative, and other marketing initiatives can and will make a contribution.
I know that the Ministry of Agriculture's marketing task force is also looking carefully at the problem, as is, the president of the NFU, David Naish, with a marketing group reporting to the Prime Minister. They and others are looking at the opportunities and they all agree that the United Kingdom top fruit industry has had more successes than failures in the past. It dealt with the Golden Delicious onslaught of 1979–1980; it established a premium in the market. What we are now seeing is that premium being eroded, mainly because of the chronic surpluses throughout the world. Those surpluses arose not just with the commodity price but the premium prices which are required by UK apple growers.
If anyone is in any doubt—and with this select number of noble Lords present no one can be in any doubt—about why United Kingdom apple producers need a premium price, it is simply because they will never grow the yields of southern Europe. The closer

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you are to the limit of apple growing, the lower your yields and the higher the flavour. It is a simple correlation. We must make it quite clear that we must always look for high value, almost niche varieties, of which Cox is the best known in the country.
So much for the role of the industry. I do not think that anyone who has spoken so far would deny that it is for the United Kingdom industry to contribute to resolving this great problem before the haemorrhage drives a large part of the industry out of business. But there is a role for government. It is important to stress, as did two previous speakers, the serious concerns caused by the IACS regulations that growers have no collateral when they come to sell, which of course acts as little inducement to grub. That is a serious concern.
Above all, there is a simple and urgent necessity to resolve the EC's own follies. The EC has been encouraging the retention of structural surpluses by misguided intervention schemes. That must be resolved immediately by a grubbing scheme allied to an effective ban on replanting. The two must go together. And there must ultimately be elimination of the intervention scheme. I would like to see that happen sooner rather than later. I am told that that is unrealistic. There would be too many howls of protest from other member states. Well, so be it. But let us be quite clear that intervention has served this country to no purpose whatsoever. As I do not belong to a co-operative I do not qualify for the scheme anyway. That is why I have little regard for intervention.
Turning to the role of government, if government accept, as I am sure my noble friend the Minister does, that growers are prepared to help themselves—indeed, I know that the Minister of State is taking a great deal of interest in this matter and has consulted, and will continue to consult, growers—we could ask the Ministry of Agriculture if it would look at the opportunities that exist, which MAFF particularly is able to implement, to promote the industry.
One of the great strengths of the industry is the national fruit collections at Brogdale. It is the largest collection of top fruit in the world. It is a unique resource, and it demonstrates just what an enormous diversity of varieties there is in this country. It is owned by the Ministry of Agriculture and is managed by the Brogdale Horticultural Trust, of which I must declare that I am the chairman, along with Wye College, which looks after the scientific remit. But that will not solve the immediate problems, though if we are looking at the long term we have to exploit that resource more successfully. I believe that the Ministry of Agriculture could consider sponsoring a demonstration orchard with a number of other varieties—a number of different russet varieties, not necessarily the ones that are known at the moment, but a number of the old-fashioned varieties, a number of traditional regional varieties. Let us put those into a demonstration orchard and get them sponsored also by other sectors of industry. I am sure that some of the multiples which have been so supportive, as the noble Lord, Lord Cornwallis, reminded us, would also help.
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That is the sort of way in which we shall be able to demonstrate to the English public that an English apple is so different from the competition apples from overseas. It is not a commodity article. It is something that they will recognise as unique. There is no way that the English consumer, if he were aware of the predicament and the danger of the loss of English apples, would tolerate the loss of this valuable asset. It is part of the shopping basket. Perhaps in my capacity as chairman of the trust I might write to the Minister later about that idea.
I should like to end on the note that the industry is not finished. It is clearly having an extremely hard time. It has had a hard time before and has been resilient. It will remain positive. It has ideas as to how it can improve its position in the market. But there is a short-term crisis, and that crisis is, I believe, for the Council of Ministers to resolve.
4.14 p.m.
Lord Wise: My Lords, I am in no way involved with the apple-growing industry. I do not have to declare an interest because I have only four apple trees in my garden and, alas, the deer that come over the fence have barked those completely. It looks as though they are going to die and will have to be grubbed up anyway. However, I have friends within the industry and I have a great deal of concern for its future.
As the noble Lord, Lord Carter, said, we in this country produce only some 30 per cent. of our consumption. The imports that we need are shared in approximately equal proportions between those from North America, the southern hemisphere and the European Community. Although it is obvious from that that the United Kingdom industry itself is not in structural surplus, it is indeed part of a structural surplus within the United Kingdom. The resultant overproduction of that surplus seriously affects our growers owing to the on-going supplies of under-priced fruit in the home market, both from the European Union and the southern hemisphere.
One worrying aspect of the situation is that in 1982–84 the average incomes for fruit farmers were higher than those for 1989–93. Over that decade market share was lost to imports from other European states and third countries. The result has been that the returns of the United Kingdom dessert apple growers have been well short of production costs for the past two years or so. The seriousness of the situation facing apple growers cannot be overemphasised. They are facing major cumulative losses from which many, including the most efficient, may not be able to recover.
How do we address the problem? What policies do we adopt? Unless some action is taken quickly, the consequences for the United Kingdom's industry could be catastrophic.
Following the two years of surplus in the European Union, there are reports of significant plantings shortly to come on stream on the Continent. That must exacerbate the unfavourable supply situation because the demand probably remains fairly static.
The view of the National Farmers Union is that the intervention payment system, as has already been

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explained, is to a large extent responsible for the structural surplus. The system has moved away from its original objective of intervening when there is the occasional surplus to become a permanent feature, breeding dependency. The National Farmers Union would like to improve the intervention system by making it unattractive to produce uncommercial varieties and to reduce intervention prices for all varieties below the cost of production, making them unattractive to growers for intervention.
The British Government appear to support the National Farmers Union on that issue. But we should like them to take a more forceful position. I shall be happy to hear the observations of my noble friend the Minister on that matter. Persistently intervened varieties must be penalised by a reduction in their intervention prices.
But the most pressing policy that all farming organisations in the European Union have advocated is the grubbing up scheme. COPA/COGECA proposed that growers should be grant-aided to grub up orchards in order to reduce the apple area within the European Union to bring production capacity into line with demand. If that policy is implemented, steps need to be taken to ensure that the land taken out of apple production is not utilised in such a way as to increase surpluses in other products that may already be in over-supply. As the noble Lord, Lord Carter, said, it would be worth while if it could be incorporated into the set-aside system or something similar.
As has already been stated, and I can only endorse what has been said, the policy on third country imports is a major concern. The industry is alarmed about the recent agreement between the European Union and Chile in which the European Union made significant concessions beyond those agreed in the GATT. As has been said, the New Zealanders say that they will seek identical terms to those obtained by the Chilians. And why not? They have a powerful argument. GATT specifies that bilateral agreements between GATT signatories must not prejudice trade between the signatories of the bilateral agreement and other GATT signatories. Therefore we urge the British Government to object strongly to the agreement between the EU and Chile.
There are other means of encouraging the production and marketing of our apples. But that is not for me to discuss because I am not an expert. However, I look forward to hearing what the Minister says in that respect, and I thank the noble Lord, Lord Carter, for raising what is a vitally important issue for our home producers.
4.21 p.m.
The Parliamentary Secretary, Ministry of Agriculture, Fisheries and Food (Earl Howe): My Lords, like other noble Lords who have spoken, I am most grateful to the noble Lord, Lord Carter, for initiating what has been a stimulating discussion on this most important issue. The apple sector is a major employer and occupies a special position in the rural economy in certain parts of the country.
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I regret that we do not have economic information on the profits or losses of apple growers per se. Our data are collected on a more aggregated basis. In part that is because it is unlikely that many growers' incomes would be dependent solely on apples. Most grow a range of fruit and even other crops as well. But the information I do have for specialist fruit growers indicates that, following substantial increases in income for each year from 1988–89 to 1991–92, there was a marked decrease in 1992.93. Figures for 1993–94 are not yet available.
What I can say is that my right honourable friend the Minister and my honourable friend the Minister of State met apple growers regularly throughout the season and know from their discussions that the last two years have been difficult ones for them. We recognise that growers are very worried and that there is deep concern about the market and indeed about the future of apple growing in this country. Although incomes on all other major faun types increased, average farm incomes on specialist fruit and other horticultural holdings fell in 1992–93. The value of apple output marketed in the UK is estimated to have decreased by 6 per cent. in the calendar year 1993 compared with increases for fruit as a whole and almost all other major agricultural outputs except pigs. That is not to say that all individual apple growers necessarily made losses in those years. Their trading performance will have depended on the quality of their product and their marketing skills. Those who can offer both will have done substantially better than those who cannot.
Of course the apple sector, like all parts of the industry which are reliant on weather conditions., is highly volatile and a certain amount of price fluctuation year on year is to be expected. Looking back to 1991 our apple growers enjoyed an excellent season when freak weather conditions, especially in France in the spring, led to a short crop in Europe. Even last year when prices were generally very depressed for dessert apples, shortages of Bramley apples in Northern Ireland meant that Bramley growers in England did rather better than their dessert growing colleagues. But that is not in any way to trivialise the difficulties of the sector, nor to suggest that these problems are entirely weather related.
The principal cause of the low prices in 1992 and 1993 was the very large crop in Europe which led to considerable oversupply within the Community. We believe that that oversupply is exacerbated by the Community's regime for fruit and vegetables. That regime provides for intervention arrangements which encourage some growers to ignore market signals and to continue producing apples for which there is no market in the sure knowledge that they will have an outlet for their surplus.
This regime is overdue for reform and the Government have consistently been pressing the Commission to come forward with proposals. These were promised for the late spring, and I hope we will see proposals very soon. I sympathise with the frustration of growers at the Commission's delay. In the meantime, I can assure the noble Lords, Lord Carter and Lord Cornwallis, that the Government have taken every opportunity to make clear to the Commission the shape

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of the revised regime which we would wish to see and to impress upon it the importance of early reform. We have done so in the Council of Ministers, in direct bilaterals and in management committee.
We are determined that this reform should bring supply and demand on the EC market into better balance. As my noble friend Lord Selborne emphasised, a radical overhaul of the intervention system will need to be at the heart of this. That view is entirely supported by the growers. Such a reform will benefit both growers and in the longer term consumers as well, as they will continue to have available the excellent home-grown product which we all so much enjoy. Ideally, we should like to see intervention abolished altogether, which would allow a truly market driven sector. However, we recognise that this will not be achievable immediately because the social and political consequences of an abrupt end to the existing support system would be unacceptable.
As a first step, picking up a point made by my noble friend Lord Wise, we are looking for changes which will target those varieties which are currently withdrawn the most. In the apple sector, for example, it is notable that certain varieties form the bulk of withdrawn produce and we should like to see prices set to discourage this. We should also like to see a tightening up of the stabiliser mechanism which reduces levels of aid when a certain threshold has been breached. This mechanism is designed to limit the level of expenditure on intervention but it clearly is not working as effectively as it should. We shall also seek to ensure that any measures introduced are not over-regulatory or burdensome on business. The last thing the apple industry needs is more red tape.
I know that some growers would also like to see the immediate introduction of an orchard grubbing scheme for apple growers. All speakers today have advocated such a scheme. This is something which needs to be considered very carefully. Some member states, particularly the Netherlands, have asked at recent Councils for a scheme to be introduced ahead of the wider reform package. But we have to remember that the earlier scheme was not successful in reducing surplus production. We would not want to see another costly and ineffective scheme introduced in isolation.
However, we have indicated to the Commission that we accept that there may well have to be certain compensating measures to go along with reduction in the levels of support for intervention. No grower can be expected to cope with a sudden reduction in a long-standing form of support. That is certainly true for growers in the UK, where in 1992–93 around 6 per cent. of the apple crop was withdrawn from the market. It is even more true in France, where withdrawals apply to 35 per cent. of the apple crop. In Greece the situation was even more dramatic—in 1992–93, 76 per cent. of the nectarine crop and 61 per cent. of the peach crop were withdrawn.
We have therefore told the Commission that we could accept an apple grubbing scheme with the proviso that it is firmly linked to an overhaul of the intervention arrangements. This is a line which we have made clear
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in the Agriculture Council. My honourable friend the Minister of State agreed with key growers during his visit to Brogdale on Tuesday that early discussions would be appropriate to consider what form the scheme should take. We need to avoid the problems associated with earlier schemes. For example, we need to consider very carefully how to prevent grubbed up apple trees being replaced by production on other holdings.
We have also indicated to the Commission that we could accept other measures such as schemes designed to encourage consumption which will benefit not just our growers but also consumers. On average the UK has one of the lowest levels of consumption of fruit and vegetables in the whole of Europe. The Health Education Authority's campaign for healthy eating is a useful step in this respect, but I am sure we could do more to encourage greater consumption of fruit and vegetables. As my right honourable friend the Minister said in another place recently, if every consumer ate only one more of our excellent Cox apples each week, our growers would be in a much stronger position. I commend her advice to your Lordships.
Furthermore, we have told the Commission that we are prepared to consider grants to improve the facilities for storage of apples provided these could be shown to be cost effective.
I hope I have made it clear that there are a number of ways the reform of the fruit and vegetable régime could improve the structure of the industry. But we must get the balance of the package right, and this has to be based in the first instance on reducing intervention.
Lord Carter: My Lords, what the Minister is saying is extremely helpful and encouraging. But it is not clear whether the measures which the Government are proposing will be in advance of the review which is taking place in the Commission of the whole fruit and vegetable sector. Do the Government see the proposals which they are pressing as being dealt with in advance of the review or do we have to wait for the whole review?
Earl Howe: We are pressing for these measures to be brought in as speedily as possible and, if possible, in advance of the wider review, but realistically they may coincide. The noble Lord, Lord Cornwallis, pointed to the over-supply of apples in Europe and said that the United Kingdom, taken on its own, is not in surplus. That latter statement, though true, misses one of the key points of concern; namely, the fact that the consumer wants more than one variety of apple to choose from. He wants choice. The success of South Africa and New Zealand in marketing apples is based on high quality, on branding and on a great deal of variety. Even France offers a range of varieties. To replicate that kind of marketing success requires better organisation within the industry itself. I shall come to that area in a moment.
The noble Lords, Lord Carter and Lord Cornwallis, and my noble friend Lord Wise also referred to the world supply. The impact of world surpluses should not of course be discounted, especially when we look at countries such as Chile which have substantially increased their plantings and whose market organisation is weak. I believe that, subject to Commission

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proposals, the GATT should prove helpful in this context. But to a degree it is for our trade to persuade others of the merits of orderly marketing. It is not helpful to think of import bans. The Government support liberalised trade.
The noble Lord, Lord Carter, mentioned that the NFU was pressing for effective use of the reference price system. The GATT will of course replace that system by a more transparent one which should avoid the anomalies of the existing arrangements.
The noble Lord also referred to the agreement between the Community and Chile. Chile has agreed to drop its GATT panel on the Community's third country trade arrangements. That is good news because the effects of an unfavourable panel, as my noble friend the Minister made clear in the recent Council, could have been very damaging. In return, the Commission has agreed, subject to approval by the Council, to make certain amendments to the existing trade arrangements and to the Community's GATT offer. That will enable third countries to have somewhat easier access to Community markets. It is difficult to say whether that will lead to greater levels of imports from third countries.
The noble Lord, Lord Carter, asked about realistic alternatives for land which has been grubbed up. I do not know what terms and conditions might be applied to any grubbing-up scheme, but I agree that this is an area which needs very careful thought. However, the last scheme had no restrictions other than a ban on the replanting of apple trees. In those circumstances growers would be free to choose alternative uses. As the noble Lord mentioned, one possible solution would be crops for non-food use such as short-rotation coppice.
I have so far talked only about the difficulties of the sector, but there is much that is positive as well. We have a wealth of interesting and flavoursome varieties of applies. Coxes orange, our premier variety, is second to none. Properly marketed, they should still command a premium from consumers. I wholly agree with my noble friend Lord Selborne about the crucial importance of protecting the brand.
The apple industry has worked very hard at promoting its product through television advertising and other media campaigns and through several other events designed to raise public awareness of British apples. I am thinking here particularly of Apple Day and Bramley Week and the publicity linked to those events. In addition there were several shows and exhibitions which demonstrated the fine quality of our apples. Ministers are always pleased to support such events where possible: for example, my honourable friend the Minister of State launched the main English apple season in October last year.
Organisations such as English Apples and Pears have made remarkable efforts in promoting the product. Here I would like to pay tribute to the noble Lord, Lord Cornwallis, who has just completed such an excellent job as its chairman. But I recognise that there is still a great deal which needs to be done. As I said a moment ago, I am told that we feature towards the bottom of the Euro-league for consumption of fresh fruit. I find this very difficult to believe given the high quality of our
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home produce, but clearly this is an area where progress needs to be made. Even within the low consumption figures, during the home season only about half that demand is sourced from this country. There must be market opportunities here to be grasped.
The industry has not of course been stagnant; it has been moving ahead with new ideas and developments. Varietal apple juices based on varieties such as Cox, Bramley and Russet are now finding their way on to the market. These make a delicious soft drink as I know myself and I would certainly commend them to the House. The export potential of the Bramley apple is another area which is only starting to be explored. The Bramley really is unrivalled as a cooking apple; it remains for us to draw this fact more to the attention of our EC partners.
Retailers too are doing their bit to help. Some of the multiples have made a point of stocking some of the lesser known traditional varieties of apples such as Blenheim Orange, Beauty of Bath and Ribston Pippin; and many, I know, made considerable efforts over the last season to market the unexpectedly high volume of English Coxes which were available.
Additionally, my honourable friend the Minister of State has been leading a horticultural project to investigate ways in which the whole horticultural industry might address some of the problems that it is facing. This project is nearing completion. I know that my honourable friend has made a particular point of talking to as many apple growers as possible in the course of his research. Indeed, only last. Tuesday, as I said earlier, he was at Brogdale Horticultural Trust where he met a number of growers.
One of the initiatives which has grown out of the project is a seminar for growers themselves to discuss the future of the English apple industry. This will take place on 12th May and will bring together some of the key growers and apple marketing groups to discuss the problems which the industry is facing. This will give key members of the industry the chance to have a frank discussion in an informal atmosphere, and to identify the ways forward for the industry. This is a format which we have found to work well in other sectors. My honourable friend the Minister of State will be opening the seminar and leading the discussion.
I know that many growers feel that their competitors in other member states are given unfair support and that this must be illegal. I must stress that there is nothing illegal about national aids provided they are approved by the Commission. Indeed, we have been offering national aids in the UK for many years. For example, over a five-year period between May 1989 and March this year we offered substantial grants for replanting orchards with more marketable varieties. A recent evaluation indicated that these grants were taken up by virtually all of our target population.
One area of concern to the Government is that British growers remain in marketing terms poorly organised and fragmented. This leads to high marketing costs and potential difficulties with supply. We have, therefore, introduced first the group marketing grants and will shortly be launching the marketing development scheme

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which will offer grants of up to £150,000 to improve marketing and marketing structures in horticulture and agriculture.
We are also spending nearly £2 million every year on apple research and development. We are targeting our research specifically at improving the industry's ability to meet the key market demands for better quality and flavour, reduced energy and chemical inputs, improved storage and shelf life as well as producing new commercially desirable varieties. Part of our new investment in a new molecular biology programme is devoted to using those innovative techniques to bring about important improvements in British dessert apples.
A sound and healthy scientific research and development base is one of the essential elements of ensuring the future viability of the UK top fruit industry. The £2 million that we are spending in this area underpins the applied research worth £300,000 per annum undertaken by the industry's levy funded body, the Apple and Pear Research Council. Together, we ensure that the necessary R&D is provided for the UK top fruit industry. Earlier this week my honourable friend the Minister of State met the chairman of the Apple and Pear Research Council, Professor Sir Colin Spedding, to discuss these joint research and development programmes and how best they can help the industry to success in the future.
I know that some growers, as well as my noble friend Lord Selborne, have ideas for developing the role of Brogdale. My colleagues and I will be very happy to listen to what they have in mind and I look forward to hearing from my noble friend in that respect.
Perhaps I may qualify a remark that I made earlier about grubbing grants and the timing of such a measure. I intended to say that any such measure would have to be part of a package, but it could be implemented before the rest of the package.
Lord Carter: My Lords, I am extremely pleased to hear the Minister say that. I have never before experienced a policy that was stated and changed within four minutes—but there we are.
Earl Howe: My Lords, in summary, there is no doubt that the current position of the apple sector is a difficult one. But the industry itself recognises that action must be taken and is organising itself to face the challenges. This is done with every encouragement and assistance from the Government, who fully appreciate the need for a strong and viable British apple sector.
Lord Cornwallis: My Lords, before the Minister sits down, I wish to ask him to deal with the subject of information, which I raised. At present, there are four different acreage criteria for measurement and several different schemes for assessing information. It is desperately important for the coming season that the Ministry, which I am sure is willing, the organisations and the growers, should come together to produce one source of reliable information for the industry, the consumers and the purchasers.
Earl Howe: My Lords, the noble Lord may like to note that MAFF and representatives of the industry—English Apples and Pears and the NFU—are meeting on 16th May to determine an improved information flow within the industry. I hope that that meeting will yield positive results.
Lord Wise: My Lords, are there any top fruit-producing countries which are placing restrictions on imports of top fruit? If so, that is restricting our European export capabilities. Should not some retaliatory measures be implemented against those countries?
Earl Howe: My Lords, I must reflect on my noble friend's question. Perhaps it is appropriate to mention the plant health requirements imposed by the United States. Their impact has long been a matter of concern to the EC Commission. In 1992 the Commission started a series of bilateral discussions with the United States aimed at proposing modifications to the US requirements. There is still a considerable way to go on this issue but we shall continue to press the Commission to maintain progress with the US authorities.
House adjourned at seventeen minutes before five o'clock.