HL Deb 08 December 1994 vol 559 cc1019-34

3.36 p.m.

Lord Henley

My Lords, with the leave of the House, I shall now repeat a Statement being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

"With permission, Madam Speaker, I should like to make a Statement. Following the vote on Tuesday night, I told the House that the Government remained committed to taking all the necessary measures to put the public finances on a sound footing. The reductions in the public sector borrowing requirement I announced in my Budget were welcomed at the time by the business community, by the financial markets and by this House. During the course of the Budget debate few right honourable and honourable Members questioned that judgment. To keep these borrowing plans intact, I said I would be bringing forward measures to make good the gap in the public finances from holding the rate of VAT on domestic fuel and power at 8 per cent.

"I can now tell the House what those measures will be. A press note filling out the details of my proposals will be available from the Vote Office as soon as I have sat down.

"Holding the rate of VAT at 8 per cent. will reduce revenue by about £1 billion in 1995–96 and, reflecting the quarterly profile of payments, £1.5 billion in subsequent years. These are the amounts that I have sought to recover.

"Since VAT on fuel will remain at 8 per cent., it would be quite wrong to increase social security expenditure by providing the full compensation package previously announced to help people with VAT at 17.5 per cent. We will adjust the amount that would have been paid if VAT on fuel had been increased, saving around £200 million in 1995–96 and subsequent years. We will of course keep in place the help already given for 8 per cent. VAT on domestic fuel and power. We will increase benefits fully in line with the relevant cost-of-living index, including the component reflecting the impact of last year's VAT increase.

"After these adjustments pensioner couples will receive help of at least £1.05 a week from next April. This will be more than the average weekly cost to pensioners of paying 8 per cent. VAT on fuel. I am also keeping unchanged the increases in cold weather payments and spending on the Home Energy Efficiency Scheme which I announced in the Budget and in last Tuesday's debate.

"This small change in the previously announced pension rates has a knock-on effect to the national insurance system, since the lower earnings limit is automatically linked to the single pension. National insurance contributions will therefore start at £58 rather than £59 a week from April 1995. The upper earnings limit will be unchanged. This will have the effect of raising receipts from national insurance contributions by some £50 million next year.

"The remaining gap for 1995–96 amounts to some £800 million. My first step was to look at public spending. In my last two Budgets I have been able to find savings of £43 billion in public spending over the four survey years. This is much larger than the increases in taxation that we have found it necessary to make to restore healthy public finances after the recession.

"We have managed to find these savings while increasing spending in real terms on key public services such as the National Health Service and the police. My objective remains to reduce government spending to below 40 per cent. of total national output. Both of my Budgets have made that objective much more achievable.

"The details of this year's extremely tight public spending settlement have already been announced by the relevant Secretaries of State. I do not consider it practicable or sensible to reopen those settlements today. At the time of my Budget, I struck a balance between spending and revenue designed to ensure that the economy remains on track for steady and sustainable growth. Nothing that has happened since then has led me to change that judgment for this year's settlement.

"The next area I considered to recover the shortfall in revenue was direct taxation. Since 1979, this Government have reduced the basic rate of taxation from 33 pence in the pound to 25 pence. and we also introduced the new lower rate of 20 pence. One-fifth of all taxpayers now pay tax only at this lower rate.

"When seeking to raise revenue in the 1993 Budgets my right honourable friend and I considered it necessary to freeze personal allowances and to reduce the married couple's allowance and the mortgage income relief allowance. I considered then that these increases in direct taxation were a sufficient and reasonable contribution to our revenue needs. That remains my view today. I do not intend to reverse my decisions to index the personal allowances and to over-index above inflation the elderly person's allowance and the 20 pence band.

"I also considered raising additional revenue from business taxation. In my Budget I provided as much help as I could for the business community. The reason was simple. Strong and thriving businesses are essential for a strong and thriving economy.

"I also listened during last week's debate to the Labour Party's proposals for closing loopholes and introducing a windfall tax on utilities and I have done some work on studying them. They are not serious options for revenue raising. This Government have never been a friend to the tax avoidance industry and Conservative Chancellors have changed loopholes year after year. The last two Budgets speak for themselves. I raised nearly £3.5 billion between 1994–95 and 1997–98 by closing loopholes. The honourable gentleman's proposals on loopholes are undesirable changes in taxation on legitimate business.

"I have looked many times at his proposal on executive share options. The policy behind tax relief for executive share options is geared to encouraging companies to motivate key employees and benefit all shareholders. Executives are liable to capital gains tax once they sell their shares. The right honourable gentleman exaggerates the cost of the scheme. He has claimed that I could raise £200 million by 'reforming' it. The actual total cost of this relief is estimated at around £50 million.

"The suggestion of a windfall tax is, by definition, a one-off tax. It could not replace permanent annual loss of a flow of revenue. In any event, it appears to be based on the suggestion of taxing profits on gains which, as the right honourable gentleman appears to have discovered in this morning's press, are already liable to taxation. A windfall tax would simply be another tax on a particular sector of industry. Like other taxes on business, it would inevitably have adverse effects on that business sector's investments and prices.

"My third and remaining option for 1995–96, therefore, has been to look at indirect taxation. As the House has rejected an increase in indirect taxation to which it had previously agreed, it is wholly consistent with my Budget strategy and it preserves the shape of the Budget to fill the hole with increases in indirect taxation. I have decided to bring forward certain increases in taxation in addition to those announced in my Budget to take effect from midnight, 31st December 1994.

"I propose that the duty on tobacco products, with the exception of hand-rolling tobacco, will increase by just under 4 per cent., equivalent to 6 pence on a packet of 20 cigarettes. This further increase in tobacco duty is consistent with our policy of increasing prices to discourage smoking.

"I also propose that the duties on road fuels will rise by a further 1 penny per litre. I have kept these increases to the minimum to limit the burden on business users and the rural motorist. Even after the increases, petrol will still be cheaper in real terms than a decade ago and cheaper than for our main European competitors. The increase will also play a part in our strategy for curbing the emission of CO2. We remain fully committed to the target of reducing CO2 emissions to 1990 levels by the year 2000.

"Finally, I propose that duties on alcohol will rise by around 4 per cent. This is equivalent to 1 penny on a pint of beer, 5 pence on a bottle of wine and 26 pence on a bottle of whisky. For the reasons set out in my Budget Statement, I had hoped to spare these industries any increase in duty this year. But in the present circumstances and as a result of my need to raise revenue from sources other than VAT on fuel, I have reluctantly judged it necessary to raise some additional revenue from them.

"Taken together, these increases will raise £180 million in the current year and nearly £800 million in 1995–96. In total this is sufficient to meet the shortfall next year. I expect the public sector borrowing requirement next year to be the same as I announced in my Budget Statement.

"Let me turn now to the following year, 1996–97. For that year I need to raise £1.5 billion. The tax measures that I have announced today will raise an additional £850 million.

"The impact of the higher duties that I have announced today on the RPI will not be as great as the impact would have been from the second stage of VAT on fuel. Inflation will therefore be very slightly lower than expected leading to further public spending savings on benefits of around £160 million in 1996–97 and later years. And there will be savings of around £200 million from the withdrawal of help to compensate for the second stage of VAT.

"There will, however, remain a further gap of around £300 million to be filled in 1996–97. I propose to finance this gap by reducing the public expenditure control totals for those years. For the time being I will score that reduction through a reduction in the provision that I have made for the reserve. The eventual consequence for departmental programmes will be addressed in next year's spending round. I expect the public sector borrowing requirement to be as I announced in my Budget Statement in 1996–97 and in subsequent years.

"Resolutions under the Provisional Collection of Taxes Act to hold VAT on fuel at 8 per cent. with effect from 1st January 1995 will be tabled very shortly. My right honourable friend the Leader of the House will then be arranging a debate before the House rises for the Christmas Recess.

"I said in my Budget speech that the British economy was currently facing the most favourable set of economic circumstances it has seen for many years. Trade figures published only this morning show that exports are up 14 per cent. in the past year and once again at record levels. The trade deficit is the lowest it has been for almost 10 years. The outlook for jobs and future prosperity for men and women in this country is improving day by day.

"This House has an obligation to keep this healthy recovery on track. We have an obligation to act responsibly and not be tempted by short-term populist measures which would undermine confidence in the Government's commitment to sound public finances. The measures I have announced today ensure that that commitment is fulfilled."

My Lords, that concludes the Statement.

3.47 p.m.

Lord Peston

My Lords, I thank the noble Lord for repeating the Statement. I do so most sincerely. But I am bound to say that responding to a Statement, sight unseen, is an absurd way for me and the rest of your Lordships to go on. All of us will respond as best we can. But there is an overwhelming case for dealing with these matters in a different way.

There is certainly an overwhelming case for your Lordships to have some time, as I understand the other place will have, to debate these matters before Christmas. I know that we always say that this is a matter for the usual channels, who will take your Lordships' views into account. But too frequently they do not. Thus even on an important matter like this today, as I understand it, the Back-Benchers will be limited by our usual rule on Statements to 20 minutes after the Front-Benchers have had their say. That will not do. There are great events occurring in our country and your Lordships are placed on the sidelines as spectators. It is about time that we asserted ourselves a bit more and demanded the right to discuss problems like this when they occur and not when the relevant events are history.

We start from a different position from that,' of the Government because we believe that this policy was mistaken in the first place. What I have not heard from the noble Lord—and I must ask him this question among others—is this. Do the Government still believe that the tax on domestic fuel was a good thing? There has not been a word of withdrawal on that. Do the Government believe that they were right to have had the second tranche of that tax, which they have now had to withdraw, or can we at least be told that in future there will not be a further increase when they feel that they can get away with it? Is that the end of at least the second tranche? We need to have an answer to that.

Before turning to the detail, the other thing that I have to say, very unhappily, is that this is nothing to do with economics or finance; it is all to do with politics. It is all to do with the noble Lord's right honourable friend papering over the cracks in a totally split party. It is also to do with the Government desperately trying to think of a way of taking income away from the public by means of taxes and then giving people a bit back later in order to try to get a few people to vote Tory at the next election. The Government are taking with one hand and giving back with the other. I believe that neither of those political moves has any hope whatever of succeeding. I do not believe that the cracks have been papered over or that the Government can pull off that confidence trick yet again. The Chancellor would have been better advised throughout to stick to serious economic and financial policy-making.

Perhaps I may say en passant, since this is my only opportunity that, as I said yesterday, I believe that raising the short-term rate of interest was a mistake. It was a panic measure. It is disturbing to read in the newspapers today that at least some people believe that it is a preliminary to further such increases. To do that would be another example of misplaced policy. Indeed, the whole matter is puzzling because the noble Lord has said, and the Government have claimed, that the economy is doing very well. However, with respect to interest rate increases we have a paradox because the Government are saying, "Yes, we are doing well so we had better stop that and make sure that we do not do too well". To use an expression that we came across not too long ago, the Government are saying, "We can see some `green shoots' so we had better make sure that there is a bit of winter frost to destroy them".

I shall ask questions in a moment about the details—in so far as I can grasp them—but the other thing that puzzles me is that this whole matter is to do with very little or almost nothing. The way in which we approach the Budget in our country makes it a crisis if any attempt is made to amend it or to deviate from what the Treasury wants. Other countries manage these matters quite differently. Other countries do not regard it as a crisis or a catastrophe if the legislature endeavours to change fiscal proposals. They are discussed rationally and the legislature often get its own way. The Government seem to be placing themselves in peril. Indeed, they are in peril for a good many reasons, but it is absurd for the Government to place themselves at risk in this way.

I believe that if there could be a free vote in your Lordships' House on this matter, a similar view would result here as in another place, but we are not allowed to have such a vote because of our predecessors' misdemeanours in 1911. There is nothing that I can do about that. I cannot even blame any Member of your Lordships' House for what happened in 1911, but I would certainly like the opportunity to exercise that kind of power. However, unlike what happened in 1911, if I could exercise such power, I would then defer to the other place in due course. As I was saying, it is absurd that the Government should be placed in peril simply because, in my opinion, some sensible people rightly thought that it was a stupid tax.

I turn now to the detail, although it is immensely difficult to do so at the moment. Related to the question of whether the Government really still believe that what they were doing (until they failed to do it) was right is the question: Are the Government now telling us that they truly believe in what they are now doing? Or are the Government about to tell us that if they had the chance they would like to be able to impose the extra VAT on domestic fuel? Are they saying, "We are only doing these things because we can't do what we want"? What is the Government's position? Are they going to defend the tax increases because they believe that they are intrinsically correct or because they do not know what to do?

I ask that because I would certainly prefer one or two of the propositions to increasing the VAT on domestic fuel. Noble Lords opposite know my views on smoking. I believe that one of the best ways to reduce the incidence of smoking is to raise the excise duty on tobacco. I have no difficulty whatever with that. Indeed, I preferred that to what was proposed. My own view is that if we could have approached such matters sensibly, we would never have gone down the path of putting VAT on domestic fuel; instead, we would have done something about tobacco duty.

I know that the alcohol question is a little more difficult. On the one hand, I believe that the Treasury should raise as much revenue as it can from drinking but, on the other hand, I know that there is the problem of competition in a free market in Europe. It is a difficult technical problem. Does the increase in alcohol duty include the reduction in the duty that is being reversed on champagne and other sparkling wines? Perhaps the Minister can tell us about that very important matter.

Lord Stoddart of Swindon

My Lords, what about the champagne socialists?

Lord Peston

Exactly.

I turn to my next point. In taking £200 million away from pensioners, I take it that the noble Lord is saying that pensioners were to get that £200 million to offset the second tranche of the increase in VAT and that he is now saying that, because there is no increase in VAT, the Government are taking back whatever the sum is just to show how generous they are. I take it that it will amount to about 35p per pensioner. Are the Government saying, "Just to show what a caring government we are, we are taking that 35p away from you"? Can the noble Lord confirm that?

I have referred to sitting on the sidelines and I know only what I learn from sitting on the sidelines, but we are told that a great deal of extra money was found as part of a package to buy off the noble Lord's honourable friends who opposed the increase in the second tranche of VAT. I thought that the sum was £100 million. Can the noble Lord tell us what has happened to that £100 million? Has it just disappeared? Indeed, from where was it being found in the first place? It is not for me to advise the Government in their pathetic attempts to try to recapture some popularity, but having got the Treasury to agree to that £100 million, I should have thought that it would be sensible not to let the Treasury pinch it back again. I would have found a way of not taking that sum from the pensioners at least. But that is up to the Government.

Although I am keen to have a debate on this matter, I do not feel that this is the correct time to go through, as did the noble Lord, the main suggestions put forward by the Opposition. There is no hurry for me. Only the others will be made to hurry. The noble Lord did us the honour of telling us that he had considered seriously all the suggestions that had been made by the Labour Party. I must advise him that I am shocked by the Treasury's rejection that it wishes to rule out any intensification of the way in which we deal with loopholes. I am unhappy about that. If we have an opportunity to debate it, I shall explain to the noble Lord how we can deal much more seriously with loopholes than is the case at present.

I take a similar view of executive share options. I am amazed to discover that there is a new Treasury doctrine that we do not care for windfall taxes. I should like to know the date of that Treasury doctrine. The rule in the Treasury used to be, "We'll tax anything we can and keep what we can get away with. The fact that it was a windfall will not bother us at all". Perhaps the noble Lord could reflect on that and tell me whether he would like to consider the matter further.

I have nearly reached my final remarks. What really puzzles me as an economist is that we are heading towards a public sector borrowing requirement of £20 billion with a lower figure still to come. Speaking from memory, I recall that the margin of error in the public sector borrowing requirement is plus or minus £6 billion. That is in the nature of such economic figures. Is it not strange that within a number such as £6 billion we are footling around with £200 million which is of a totally lower order of magnitude? Why does not the Chancellor approach this matter rationally and say, "I wanted to do it, but the economy is doing pretty well, and I wanted it to carry on doing well", and let us forget the whole thing, apart from apologising to the pensioners?

I conclude by echoing the remarks of my right honourable friend the Leader of the Opposition in the other place. He offered to help the Government out of their difficulties in this matter. I should like to echo those remarks. I wish to be as helpful as I possibly can, because I am concerned about the future of our great nation, and my desire is that the economy should not be made worse than it otherwise would be. Will the Minister tell his right honourable friend the Chancellor of the Exchequer that if he feels that he needs my advice, which I feel strongly he does, he has merely to pick up the telephone and ask, and I shall respond as positively as I can?

Lord Ezra

My Lords, I too should like to thank the Minister for having repeated the Statement, and to support what the noble Lord, Lord Peston, has said, that, exceptionally on this occasion, we on this side of the House did not receive a copy of the Statement, something which I regard as rather rare in our proceedings on such an important issue. Furthermore, I hope that we can have time for a longer debate on this matter.

The whole issue raises the question of what is the strategy behind the Budget. The Chancellor has been knocked off course on a relatively small part of the Budget; but that calls into question whether the aim is to support our long-term economy or to build up a reserve to use for a short-term political purpose. If in the next Budget the benefits which have been derived from the improvement in the economy are used purely for short-term purposes, then I should have thought that the thinking was deficient. I should like to have an assurance from the Minister that the intention is to build up the economy; that as we derive greater benefit from the current improvements, they will be ploughed back into the business of Britain in the form of stimulating further investment; to improve our infrastructure; and to ensure that we can overcome the next downturn in the world economy more effectively than we have in the past. That is the first point that I should like to raise.

The second point is one that has already been referred to by the noble Lord, Lord Peston, and that is the interest rate increase. Was the motivation for that increase a feeling that the economy was overheating, and that it would have been imposed in any event, or was it a reaction to the Government's failure to get through their proposal for VAT on fuel? We need to know what led the Government so quickly to introduce an interest rate increase. If it is due to the overheating of the economy, are they concerned about that seriously, and can we expect further increases in interest rates in the near future?

As to the specific measures taken, I believe that most would agree that if additional revenue had to be found, then it would best be found in areas where we should have fiscal disincentives—disincentives on smoking and drinking, and to deal with the problem of pollution from transport. I must say that I concur with the last question posed by the noble Lord, Lord Peston, bearing in mind that this represented such a small proportion of the total revenues about which we are talking, was it necessary to consider raising additional taxes anyway?

Perhaps I may conclude by saying that this has been a most disturbing episode. We are not clear what is the Government's fiscal and financial strategy, and the way in which this has been dealt raises many further doubts.

Lord Henley

My Lords, I start by giving the noble Lord, Lord Ezra, a categoric assurance that obviously we intend to see the economy build up. That is what my right honourable friend the Chancellor of the Exchequer was making clear in his Statement. That is why he made the decisions that he did. I am somewhat surprised by the attitude of the two noble Lords, particularly, that of the noble Lord, Lord Peston, a distinguished economist. He seemed to imply that £200 million was a figure which was not worth bothering about. I have to explain to him that we are talking not about £200 million but about £1 billion. That is a fairly large sum, and I suspect that his attitude to those relatively insignificant sums—as he terms them—probably explains why my right honourable friend the Chancellor of the Exchequer is the Chancellor of the Exchequer and why it is exceedingly unlikely that he will be ringing up the noble Lord to seek his advice. It probably goes some way towards explaining why all Chancellors of the Exchequer for the past 15 years have been Conservatives.

I note the noble Lord's request for a debate. He makes such requests on many occasions. I can say only that I am sure that my noble friend the Leader of the House heard his request. I should remind him that we do not debate the Budget, and this is to some extent an offshoot of that. We recently had a debate on the economy during the debates on the Queen's Speech. We normally have an opportunity to have a debate on Second Reading of the Finance Bill.

Perhaps I may move on to the subject of VAT, and whether we thought that it was a good tax, and whether we shall be returning to it at some later stage. We believe in a broadly based tax system. We thought it was therefore sensible to go ahead with the second stage of VAT on fuel, not least because we provided considerable protection for pensioners, disabled people and other vulnerable groups. We should have preferred not to have increased excise duties, but we were left with no option. Obviously it is not without cost.

The most important thing is that we maintain healthy growth by sticking to the path mapped out for public borrowing. I can assure the noble Lord that we shall continue along that line. The noble Lord asked about the £100 million. As that was part of the compensation for the second stage of VAT on fuel and power, it is only right that it should have been withdrawn when the VAT vote was lost.

Both noble Lords asked about the rise in interest rates. Our monetary policy is based on the inflation outlook, and the half point rise yesterday was justified in those terms. We are committed, unlike noble Lords opposite, to avoiding the boom/bust cycle. It is important that we made that increase to maintain confidence in our finances. I do not wish to speculate on any future tax increases.

Perhaps I may deal with one or two small points. The noble Lord, with his Socialist interest in champagne, asked whether the increases announced would apply to it. I can assure him that the earlier reduction will still apply, because sparkling wine was taxed at a rate higher than similar products, including even stronger fortified wines, and that seemed wholly anomalous. Obviously the newly adjusted downwards rate will be adjusted upwards by the same percentage as other products and therefore the noble Lord will find a small increase of some 7 pence also on his bottle of champagne, but I dare say that he will manage to live with that.

Lastly, perhaps I may repeat that we are as committed as anyone to fighting genuine loopholes fully. We have done so on many occasions, and on occasions the party opposite has voted against those proposals. The Opposition's proposals put forward by the noble Lord's right honourable friend were not loopholes but taxes on business. I hope that that deals with most of the points put to me by the two noble Lords.

4.10 p.m.

Lord Boyd-Carpenter

My Lords, I warmly support the request of the noble Lord, Lord Peston, that your Lordships' House be given an opportunity to debate this Statement in full. It is slightly absurd that, while the two party spokesmen opposite have a reasonable allowance of time, the rest of us are confined within 20 minutes. Given the immense importance of the subject and the wide variety of expertise in this House, it is absurd that we should be so confined. I beg my noble friend seriously to consider arranging a full day's debate on the Statement in order that all Members of your Lordships' House can contribute.

There was little, if any, mention in this Statement of the Government being in the situation in which they were placed as a result of the decision of another place, reducing public expenditure. Surely that would have been the best method of adjusting the balance. I remind my noble friend that this year legal aid is being increased by £100 million. If we are so hard pressed and in such difficulties that we have to increase taxes in order to achieve a balance, surely thought should be given substantially to cutting back on legal aid.

Lord Henley

My Lords, as regard the first point that my noble friend made, I can only express a degree of sympathy. I recognise that there is considerable expertise in this House; we have as Members former Chancellors of the Exchequer, Chief Secretaries and writers of letters to The Times. I remember a great letter that was written some 15 years ago. I imagine that many people would care to debate these matters and my noble friend the Leader of the House heard what my noble friend Lord Boyd-Carpenter said. However, there are other occasions on which we can debate them.

My noble friend made a substantive point about reductions in public expenditure. My right honourable friend believed that after going through the public expenditure round it would be invidious to go back to departments to seek further reductions. The Government are committed to seeing a proportion of GNP that is taken up by public expenditure reduced over the years. That is what my right honourable friend the Chancellor of the Exchequer would like to see. I shall not comment on particular departments, although my noble friend raised the question of legal aid. The general point is that it would have been invidious to go back to departments after having achieved a settlement.

Lord Marsh

My Lords, does the Minister accept that many people will agree with the noble Lord, Lord Peston, that the measures that have been outlined are a preferable alternative to the Government's policy? That is not a unique discovery on my part because for some months almost everyone in the country has been saying that. The alternative measures that have been announced are preferable to what was taking place.

Will the Minister accept that the worrying aspect is that £1 billion is a great deal of money as part of a Budget, because a Budget is made up of billions of pounds? The Government got into this situation as a result of their refusal to listen to anything that anyone said in this connection. They were prepared to sacrifice their majority and turn the issue into a major crisis. Does the Minister agree that that is a mixture of stupidity and, even more frightening, a growing level of crass arrogance?

Lord Henley

My Lords, I totally disagree with the noble Lord. He is incorrect in making such assertions. We believed that in a broadly-based taxed system it was right to go ahead with the second stage of VAT on fuel, not least because we were offering the appropriate protection to the various vulnerable groups. Obviously, others thought otherwise and therefore, having lost the vote, my right honourable friend said that he would not go ahead with the increase. However, unlike the noble Lord, Lord Peston, and, I suspect, the noble Lord, Lord Marsh, my right honourable friend considers £1 billion to be a fairly significant sum. That hole had to be plugged and that is why my right honourable friend came forward with the proposals that I announced in the Statement.

Lord Stoddart of Swindon

My Lords, my noble friend said that he wished to help the Government. I assure the Government that the only way in which I wish to help them is out of office, and the sooner that that happens the better things will be for this country and its taxpayers. I must say to my noble friend that if he expects the Government to listen to him, he is living in cloud cuckoo land. They do not even listen to the chairman and vice-chairman of the Tory Party. I understand that the chairman advised the Government that the introduction of the further 9.5 per cent. VAT on fuel would amount almost to political suicide. However, the Government went ahead which was, as the noble Lord, Lord Marsh, said, an act of sheer stupidity. Unfortunately, the country is having to reap the whirlwind of the seeds that the Government have sown.

Now the people are faced with a double whammy. First, their taxes are being increased and, secondly, perhaps as a matter of revenge, interest rates are being increased. Let us think about that and understand that, although the Government say that they are in favour of the family, the Budget has hit married couples. There has been a reduction in the married man's allowance and home buyers will be hit a second time by the increase in interest rates. It is all completely unnecessary.

Will the Minister confirm that this year taxation will increase by £26.4 million? Will he also confirm that, if the Chancellor increased the higher tax rate and adopted the measures that were put forward by my noble friend, he would not have to increase the cost of living and put burdens on those in our community who are already worse off?

Lord Henley

My Lords, I agree with the noble Lord in one small particular. He was correct in saying that his noble friend is living in cloud cuckoo land. I totally and utterly reject his allegation that interest rates were increased out of revenge against—I am not sure against whom it was supposed to be. Interest rates were increased for the reasons that I gave and not out of revenge.

I cannot confirm the noble Lord's figures about the increase in taxes. I am grateful to him for pointing to the right page in the Red Book. He knows perfectly well that taxes had to be increased in order to reduce the amount of borrowing. The noble Lord and, for all I know, his party are wedded to the idea of borrowing, borrowing, borrowing. However, that is not the way out. In the end, the gap had to be narrowed and there are two ways of doing that; the first is by having firm control of public expenditure, which we have; and the second is by increasing taxes.

Lord Aldington

My Lords, I too ask the Government—my noble friend the Leader of the House is in his place—to consider an early debate on this matter. I do so not necessarily for the reason given by my noble friend Lord Boyd-Carpenter but because some of us believe that the Government were right about the Budget, right about the interest rate and right about the proposals that they have brought forward today. One would not obtain that impression from listening to these questions.

Lord Henley

My Lords, I can only say that I am very, very grateful to my noble friend for making the point that the Government were right, although misguided people on the other side in the other place voted against certain parts of the Budget. I am sure that my noble friend the Leader of the House will have noted what my noble friend Lord Aldington said; namely, that it might be appropriate for us to have an early debate so that we can make the Government's case loud and clear and can demonstrate that this was a good Budget sadly led astray by others.

Lord Barnett

My Lords, I wonder whether the Minister has read the Government's Red Book. I am glad that he has it with him. Perhaps he will look at paragraph 4.32 of it. It is true that £1 billion is quite a lot of money, but to pretend that you can carry out a Budget with that degree of accuracy is, frankly, misleading.

As we see from the paragraph to which I have referred, the plain fact is that there is an estimated £10.5 billion margin of error in the public sector borrowing requirement. Therefore, is not the real mistake that the Government believed their own Whips and that they could get through the increase in VAT to 17.5 per cent.? They should have asked the Whips whether they can count properly because they obviously counted wrongly. For factual reasons, apart from how damaging it would be to ordinary people, as we have heard, they should not have proposed such an increase. Why on earth did they go ahead with that proposal, given the huge margin of error, when they did not need to?

Lord Henley

My Lords, I am reminded of the saying, "A billion here, a billion there and pretty soon you are spending serious money". I do not agree with the noble Lord. There was a gap there. I accept that there are margins of error; but if one takes out £1 billion, which in effect is what has happened as a result of the vote, it is quite right that the Chancellor should try to put it back and that is what he has tried to do in a manner which is the least damaging possible.

Lord Clark of Kempston

My Lords, does my noble friend not agree that it is essential in running a sound economy to keep control of the public sector borrowing requirement? I hope that my noble friend will agree that my right honourable friend could have increased the public sector borrowing requirement by £1 billion and that would probably have gone through unnoticed. On the other hand, he could have robbed the contingency reserve fund of £1 billion and not increased taxes. But in taking the decision that public sector borrowing is so essential, I believe that my right honourable friend has done the courageous thing and has increased taxation in order to make up that loss of £1 billion. Does my noble friend agree with me that that is a sounder way of running the economy rather than running into debt?

Lord Henley

My Lords, I agree totally with my noble friend. I am sure that he will understand when I say that it is unlikely that noble Lords opposite will agree with my noble friend and me on this matter. As he suggests, they would either have borrowed more or raided this fund or that fund. However, the sensible approach is that adopted by my right honourable friend the Chancellor of the Exchequer.

Lord Howell

My Lords, perhaps I may refer to the reference that was made in the Statement to public expenditure in the year 1996–97? Perhaps I may draw attention to the very serious situation which is affecting most local authorities, whatever their political complexion. They are now finding the greatest difficulty in financing education, housing and social services, which are the services that really affect people living in desperate conditions. Therefore, perhaps I may put in a plea in advance that if the Government are to look again at reducing the public sector borrowing requirement, which I understand, that they take into account the very real difficulties now affecting local authorities and therefore affecting many millions of deserving people in this country.

Lord Henley

My Lords, as my right honourable friend the Chancellor of the Exchequer made quite clear in the Statement, we are committed where possible to keeping down public expenditure. We have a very good record in that regard. But he made it quite clear also that we are committed to providing essential services. That is why he cited just two examples: there has been increased provision for both the police and the National Health Service. I am sure that my right honourable friend will note what the noble Lord has said about anxieties in relation to local authorities. But all parts of government, in one form or another, will be subject to some constraints while we remain committed to providing all essential services.

Lord Skidelsky

My Lords, does my noble friend agree with me that the Chancellor was committed to the VAT increase on fuel by his predecessor and had he not made an attempt to fulfil that commitment, the very same people who now condemn him for stupidity and arrogance would be the first to condemn him for weakness and breaking promises? Failure to attempt to fulfil that commitment would also have had a very damaging effect on the credibility of the Government.

Lord Henley

My Lords, my noble friend is quite correct. Another place had voted on that matter. That VAT increase had been voted through, I believe, on four occasions.

Lord Bruce of Donington

My Lords, many of your Lordships will be rather puzzled by the noble Lord's insistence that £200 million or £300 million are extremely important. I was very struck by that remark because it seems a little odd in view of the fact that the Government had a suicide pact on the necessity for increasing public expenditure to £3.5 billion per annum to be paid out to the European Community. A three-line Whip was put on that vote to increase public expenditure, and indeed it became a vote of confidence. Surely there must be a sense of proportion somewhere. Why do not the Government consider giving a complete rethink to this whole matter, rather than leaving it to a lot of technicians within the Treasury whose errors in the past have been so astronomical that even the Government themselves have found it necessary to reduce their number?

Lord Henley

My Lords, I am afraid that I cannot agree with the noble Lord. The noble Lord will have to accept that I think that the £200 million or £300 million to which the noble Lord referred is a significant sum, as is £1 billion. I shall be delighted if the noble Lord wishes to debate the issue of own resources. There will be ample opportunity to do that in due course. I believe that the decision made in Edinburgh was good. That has kept down the increases and the noble Lord should be grateful for that. Perhaps he will remember that the Commission was seeking something like £1.37 billion; but, as a result of the negotiations of my right honourable friend the Prime Minister, that was kept down to £1.27 billion. That was a decision which was generally welcomed by all sides of both Houses and, for all I know, by the noble Lord himself.

Lord Skelmersdale

My Lords, does my noble friend recall that yesterday my noble friend Lord Trefgarne introduced a debate in your Lordships' House on the subject of small and medium-sized businesses, with special reference to the manufacturing sector? In the course of that debate, my noble friend Lord Ferrers was asked to pass on to my right honourable friend the Chancellor of the Exchequer the view that it would be disastrous for the Government to take the easy option of increasing VAT by 0.5 per cent. across the board. Therefore, the Government are to be congratulated for not taking that easy option.

Secondly, does my noble friend recall that when VAT on domestic fuel and power was originally suggested and introduced at the rate of 8 per cent., part of the rationale for that was that it was a carbon tax? Does my noble friend consider that VAT on domestic fuel and power at 8 per cent. plus the additional taxes on road fuel will be a suitable equivalent to the proposed EC carbon tax?

Lord Henley

My Lords, with regard to the first point raised by my noble friend, I can confirm that my right honourable friend the Chancellor of the Exchequer always takes considerable note of what is said in debates in this House. I am sure that he noted the comments to which my noble friend referred in the debate introduced yesterday by my noble friend Lord Trefgarne.

In relation to his second point, even with the increases now of only 8 per cent. in VAT on fuel, prices for both electricity and gas have come down over the past few years in real terms, even after taking into account that 8 per cent.

Back to