Finance Bill

HL Deb 29 April 1994 vol 554 cc927-74

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 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 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 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 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 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 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 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 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. 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 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 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 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 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 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 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, 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 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 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.

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 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 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.

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 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.

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 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 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 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 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 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, 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. 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 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 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 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 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 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 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 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. 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 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 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 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 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 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 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 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.