Economic Affairs

HL Deb 29 November 1995 vol 567 cc608-60

Debate resumed.

5.25 p.m.

Lord Ezra

My Lords, I should like to join with the noble Lord, Lord Clark of Kempston, in expressing indebtedness to the noble Lord, Lord Desai, for introducing the Motion even though the economy was exhaustively debated a week ago. However, we can now consider the state of the economy in the light of the Budget. It is rate that we have been able to discuss the Budget so shorty after its presentation. I hope that this can become a precedent.

We need to consider the Budget in the light of the current economic trends. There is undoubtedly a slow-down, as the Chancellor accepted in his Statement yesterday. The question that needs to be asked is whether this i, a pause such as occurred in the mid-1980s or the precursor of a recession such as was experienced in the early 1990s. Let us hope that it is the former.

The facts are these. In the third quarter of 1994 the economy was rowing by 4.3 per cent. In the third quarter of this year, as recently announced, growth has come down to 2.1 per cent. Underlying that figure is the fact that there has been a substantial amount of industrial stock-building, and with the continued weakness in the market de-stocking could begin to take place. That would bear down further on the growth rate. Within the figure of 2.1 per cent. is an exceptional expansion of North Sea oil output. That indicates that the rest of the economy has been doing worse than the figures suggest.

Against that background it is not surprising that tax revenues are noticeably less than expected and that in consequence the public sector borrowing requirement has been higher. The Government had forecast that that would amount to £23.5 billion for 1995 but it is likely to be £29 billion, as we learnt from the Chancellor yesterday.

Those are the current circumstances against which the Budget has to be judged. However, there are two longer-term problems. The first is the continued inadequacy of productive investment. The effect of that is that every time there is an upturn in demand, increased imports are required and there is an inflationary risk. The second long-term problem is unemployment. Even though the level in Britain is somewhat less than in a number of other European countries, it is still exceptionally high and represents an enormous drain on resources in the form of unemployment benefit, quite apart from the adverse social effects.

I suggest that in those circumstances, if the Budget were taking place in the political mid-term, the Chancellor could have been expected to be very cautious about tax reductions and to reserve what resources he had at his disposal to stimulate investment and create more job opportunities. The measures taken would need to be sustainable and to avoid any form of overheating.

However, the Budget has not come at mid-term but near the end of term. There have been considerable political pressures. We have to bear that in mind in considering the Budget. In the event there is no doubt that the Chancellor has resisted pressures from within his own party to introduce substantial direct tax reductions. He seems to have accepted that it is a year in which the priorities, while keeping inflation under control, are to stimulate investment and create job opportunities. However, the Chancellor has estimated that growth next year could be of the order of 3 per cent. That considerably exceeds other estimates and is certainly out of line with present trends. It is difficult to see how that could be achieved without a degree of stimulus.

There is little of such stimulus in the Budget. For example, nothing has been done to increase capital allowances as proposed by the CBI; and there is no hint as yet of reducing interest rates. Would it not have been more desirable at this stage to reduce interest rates rather than reduce direct tax? A reduction in interest rates would stimulate the lagging housing and construction market and boost industrial investment generally.

The Government appear to be relying to an increasing extent on the private finance initiative, as was mentioned by the noble Lord, Lord Desai. While this initiative, which we from these Benches fully support, was originally introduced as a means of adding to the level of public investment, it now seems to be intended to replace public investment. If that is the case, we ought to have a clear statement from the Government to that effect. The level of PFI investment so far has been below government estimates. Is there, therefore, not a risk that the overall level of public investment, including PFI projects, could fall at the very time when we need more capital formation in both the public and the private sectors?

There is a specific area of expenditure reduction to which I should like to refer. For many years I have been involved with NEA which operates the Home Energy Efficiency Scheme. The reduction in the amount of funding of this scheme announced by the Department of the Environment in the context of the Budget yesterday is very disturbing. The total sum involved is £100 million, which was included in the Finance Bill last year. It was stated to be a funding which would last for three years. It has now been reduced by 30 per cent. Some 600,000 homes a year, inhabited by people on low incomes, particularly the elderly, are insulated as a result of the scheme. It is therefore creating much social benefit and reducing pollution from excessive use of energy. It is wholly desirable on those two counts. It is sad that, having decided on such an imaginative measure less than a year ago, the Government should now be going back on it.

I wish to conclude my views on the Budget by stating that I regret that more has not been done to deal with the long-term economic problems that we face; namely, the need for increased productive investment and job opportunities. While the Budget has been cautious, as befits present circumstances, it has not, in my opinion, sufficiently addressed those pressing priorities.

5.32 p.m.

Lord Monson

My Lords, I too am grateful to the noble Lord, Lord Desai, for giving us the chance to debate the Budget Statement—the first time ever, to my recollection. I congratulate him on his ingenuity in finding a formula whereby that can be done. I am not qualified to follow him in his economic analysis and will therefore concentrate on the Budget Statement.

There are things to applaud in the Budget: for example, the concessions on business rates, especially the concessions for small businesses; and the refusal to give more tax breaks to owner occupiers. We all know that the current flat housing market is not caused by lack of tax incentives but by job uncertainties. Once the present wave of "down-sizing", "delayering" and other ugly verbs has subsided, the market is sure to recover, given that house prices in real terms are the lowest for many years.

On a personal note, as the proud owner of a very modest classic car in which I never travel more than 250 miles a year, I am naturally delighted at the exemption from road fund tax, since I calculated that last year I paid more than 60p in road fund tax alone for every mile covered.

However, there are also things to deplore in the Budget. The cut in road building, particularly the building of bypasses round towns where pedestrians risk their lives every day of the year, is bound to lead to more costly and often fatal accidents, as well as adding to the costs of manufacturers, distributors and retailers. I also deplore the fact that the tyranny of the health fanatics has led to the poor smoker being clobbered yet again. I use "poor" in both senses of the word. The well-to-do smokers will not suffer much, but poor pensioners for whom tobacco is perhaps their only source of comfort will suffer. I declare an interest as a patron of FOREST, but not in my personal capacity. As a light smoker I find I can acquire enough duty-free cigarettes on my trips abroad to cover all my yearly needs.

I am uneasy at the reduction in the standard rate. Would not a further extension of the 20 pence rate have been preferable? "A penny off tax" sounds dreadfully old-fashioned and patronising, but I suppose that for all Chancellors, whatever their political affiliation, hitting the headlines is a political necessity. That is why no government, I fear, will ever dare to amalgamate income tax and national insurance, as we all know ought to be done—given that national insurance is bogus; it is not a genuine insurance premium at all. The amalgamation cannot be done because it would look terrible in the headlines, which would shriek: "Basic rate raised to 34 per cent." or whatever.

Finance Bills are almost always amended fairly extensively in Committee, so I should like tentatively to put forward some suggestions to honourable Members and right honourable Members in another place. First, as regards beer duty, I do not believe that one can complain about the level of duty on the stronger beers and lagers. But the duty on low-strength beers is too high, particularly in relation to that prevailing on the Continent. A reduction in duty on lower strength beers, by helping to alter the drinking habits of young people, would pay for itself. There would be less smuggling and less criminal damage to people and property resulting from drunken hooliganism and vandalism.

Secondly, the Conservatives claim to be the party of the family. They claim, for example, to prefer men and women of the same generation living together to be married rather than unmarried, other things being equal. How strange, then, that the tax concession on gifts made in consideration of marriage has never been raised in the 27 years since it was first fixed at £5,000. It would now need to be more than quadrupled, in order to regain its former value. Even if circumstances make it impossible to do so this year, could it not at least be doubled for the time being?

Finally, capital gains tax: by leaving the rates unaltered, the Chancellor is missing a magnificent opportunity to raise more revenue—paradoxical though that may sound. Now that the dice have been loaded against the taxpayer by the withdrawal last year of indexation relief on capital losses, individuals like myself are not—on principle—going to realise gains taxable at 40 per cent. other than in emergencies. Short-term gains—by which I mean gains on assets held for less than a year or perhaps two years—should continue to be taxed as income. But if the rates on longer term gains were reduced from the proposed range of 24 per cent. to 40 per cent. to, let us say, 16 per cent. to 27 per cent.—a reduction of about one-third—one could guarantee that there would be massive realisations and an enormous increase in turnover, resulting in a greatly increased take for the Exchequer—particularly with the prospect of a government of a different political persuasion looming on the horizon. This would be one of those rare occasions when both the taxpayer and the Exchequer stand to gain. I urge the Chancellor to consider this very carefully over the next few weeks.

Finally, I turn to stamp duty. Ad valorem stamp duty, as opposed to the fussy 50p stamp duty, fulfils all the criteria for a good tax, if any tax can be considered good, in so far as it is almost impossible to avoid; the rate is low, thereby avoiding both hardship and the distortion of prices; and above all, it is extremely cheap to collect. However, it should surely be levied on the seller rather than the buyer, sellers normally being better off. This would enormously help first-time home buyers. Obviously it is too major a step to be taken this year, but I urge the Chancellor to consider this measure for the 1996 Budget.

5.40 p.m.

Lord Eatwell

My Lords, what we all looked for yesterday was a Budget that addresses the needs of the country. First and foremost this country needs, as the noble Lord, Lord Ezra, said, more high quality investment. Today, three years into the recovery, the level of business investment is only 4 per cent. higher than it was in the trough of the recession. We are informed in the Red Book that business investment will increase by only a further miserable 3.25 per cent. in 1995. Manufacturing investment is still, despite recent increases, 18 per cent. below the previous peak reached in 1989.

At the same stage of recovery from the Tory recession of 1981, investment was 28 per cent. higher than in the trough. Without investment we cannot prosper. Without new capacity we can neither compete nor create sustainable jobs. Without competitive investment we are horribly vulnerable to inflationary pressures whenever the economy grows at anything like a decent rate.

Yet despite the importance of investment to our economic future, the Budget does nothing for private investment. There are some business rate and corporation tax benefits for small firms; but these are offset by the failure to uprate the threshold for VAT registration in line with inflation, and by the bizarre proposal to alter the rules on capital gains to encourage our most successful small entrepreneurs to sell up and retire at 50, when they are in their prime.

For the large firms which undertake the bulk of Britain's investment, there is nothing. No wonder British business has no confidence in this Conservative Government. Why should it, when the Government cut investment in Britain's future? The road programme is cut by 15 per cent., piling congestion costs on industry. Hospital building and repairs are cut by 18 per cent., piling misery on the National Health Service. Housing is cut, piling more people on to the streets and prolonging the misery of the construction industry. And while the public infrastructure crumbles around us, Table 6.4 of the Red Book shows that public sector capital expenditure is projected to fall in real terms year after year into the future, even when the private finance initiative is included in the figures.

As noble Lords will probably know, the idea of the private finance initiative was invented back in 1991 by my honourable friend John Prescott, when he was Shadow Minister for Transport. Little could he have realised that, in the hands of the Tory Party, the PFI would become in conception an exquisite illusion and in practice an administrative shambles.

Yesterday, Mr. Clarke relaunched the PFI, again, just as Tory Chancellors have relaunched it every year since 1992. The reality shown in Table 6.4 is that PFI-funded investment is running at a tenth of every projected figure. The PFI, as my noble friend Lord Desai suggested, is a fig leaf for cuts in government investment. The PFI is a dangerous illusion—PFI: probably fictitious investment.

Labour has put forward detailed proposals to make the PFI work effectively in the national interest. More generally, we have proposed a temporary increase in capital allowances to boost investment, together with measures to solve the key problem of long-term financing for small business and to encourage investment in the regions. And we have proposed a fundamental review of corporation tax and capital gains tax to encourage and reward long-term investment.

The Chancellor has not merely ignored those proposals. He has done something far more dangerous. He has pretended that the problem of low investment does not exist at all.

The second great need in Britain's economy today is a concerted attack on the growing inequality and outright poverty that defaces our country. Earlier this year, most Members of this House were shocked by the facts revealed in the Rowntree Inquiry into Income and Wealth. I say most Members, for we were treated to the distasteful spectacle of the noble Lord, Lord Mackay of Ardbrecknish, attempting to explain away the findings of the inquiry. Indeed, the Government put more effort into explaining away the facts of poverty than they have ever done into alleviating poverty.

Noble Lords will remember that the inquiry used government figures to show that around a fifth of our fellow citizens have enjoyed no increase at all in real income since 1979; that one in three children in this country are growing up in poverty (many of whom will be even more impoverished by the Government's shameful attack on the children of lone parents); and that one in five households now have no member working, compared with one in 12 in 1979.

The detailed analysis of the Budget by the Institute of Fiscal Studies, published in the Financial Times this morning, shows that once again the real incomes of the poorest 20 per cent. in Britain are to be cut by this Budget. That is the Tory way: take from the most vulnerable. I must ask the Minister: when are you going to pick on someone your own size for a change? Why are you always picking on the poorest and the weakest?

To attack poverty it is vital to get people off welfare and back into work. The Chancellor's uprating of personal allowances and his extension of the 20p band are therefore welcome; but it is still the case that most poor people taking up work will face a marginal tax rate, when loss of benefits is taken into account, of over 90 per cent.

Instead of adopting Labour's proposal for a 10p tax band to loosen the poverty trap, together with a concerted kick-start programme to get young people back into work, the Chancellor has cut housing benefit for young people. In an era in which flexibility and mobility are key elements in the efficient working of the labour market, this foolish Chancellor has encouraged the young unemployed to stay at home rather than going to look for work, thus reducing the likelihood that they will find work, and increasing the potential welfare burden. The noble Lord, Lord Mackay, demonstrated in his comments on the uprating statement that he just does not understand the mechanics of the poverty trap.

Indeed, there is little encouragement in this Budget for any of the unemployed. The cut in employers' national insurance contributions, which might help a little, is postponed to April 1997. Community Action, which helps people with learning difficulties into work, is to be abolished—attacking the vulnerable again.

There are no innovative schemes. Labour's idea of transferring benefits to employers to take on the long-term unemployed has but a pale echo in the reduction of employers' national insurance contributions. But the Red Book's projected slow-down in the overall growth of the economy also bodes ill for the labour market. And it bodes ill for the PSBR. Government borrowing is up—it was up £6.7 billion in 1995–96; there will be £8.5 billion more borrowing in 1996–97; and £10 billion more in 1997–98. We are talking serious money now. What could be more profligate than borrowing for tax cuts?

That increase in borrowing is a clear measure of economic failure—the failure to build an economy strong enough to sustain high non-inflationary levels of growth and employment, which would in turn result in healthy public finances.

And it is that failure to build a strong economy that also lies behind the relentless rise in taxation under this Government: 35.75 per cent. next year; up another half a per cent. the year after that; and another half a per cent. the year after that; and another half a per cent. the year after that, until we reach 37.25 per cent. of GDP in the year 2000. Upward and ever upward soars the Tory tax bill.

Of course, everyone knows that the Conservatives want to cut taxes. They are just not capable of doing it. And they are not capable of doing it because of the weakness of the real economy that their policies have produced.

To build that strong economy Labour has put forward detailed proposals for encouraging investment in new capacity and investment in the skills of the British people, loosening the short-termist tourniquet on the investment life-blood of our future. Labour has also put forward detailed proposals to reform the conduct of monetary policy, to aid the maintenance of macro-economic stability and low inflation. But the only guarantee of low inflation and macro-economic stability is a strong economy. That is the circle into which we have to break. High levels of investment are necessary to be competitive, to cut employment, to build a strong public sector, to secure the public finances and to fund sustainable cuts in taxation.

Nothing in yesterday's Budget suggests that this tired government have the faintest idea how to achieve those goals. Mr. Clarke was going through the motions without either enthusiasm or conviction. The Budget confirms, if confirmation were needed, that the sooner this decrepit government go and make way for a new Labour Government, the better for the wellbeing and prosperity of British business and the British people.

5.51 p.m.

Lord Boardman

My Lords, I hope that the noble Lord will forgive me if I do not follow him in the arguments that he put forward about the social services, but a time limit of nine minutes does not permit me to do so. However, I know that those arguments will be fully answered from this side on a future occasion.

Perhaps I may take up one point that the noble Lord made. He prayed in aid of his case the Institute of Fiscal Studies. Perhaps I may remind the noble Lord that that was the body which said that the proposed introduction by the shadow Chancellor, Mr. Gordon Brown, of a 10p tax band was a gimmick and that appearance seemed to matter more than truth. That is perhaps a side issue in the debate this afternoon.

I thank, as other noble Lords have done, the noble Lord, Lord Desai, for opening the debate. He has given us an opportunity that we have not had before to talk about the Budget. He is a very brave man for clearly he called this debate in anticipation of a Budget that he could attack. Indeed, he described in an article in the New Statesman at about the time that he must have decided to table this debate—an article entitled "No time for bribes"—what he confidently expected would be the Budget produced yesterday by the Chancellor. Obviously, he has been disappointed. It has not been such a Budget. Those of us on this side of the House did not expect that it would be. The press seemed to anticipate such a Budget but they, too, have had to retract. As the noble Lord said in opening, it might have been worse. That was the highest praise that he gave to it, although there were a number of elements in the Budget which he had hoped for but predicted would not be in it, such as publicly paid care. The concession made by the Chancellor was one for which the noble Lord had hoped though he had wanted it to be rather more generous than it was. It would have been nice had the noble Lord given some credit to the Chancellor for doing many of the things that the noble Lord feared he would not do. But so be it.

Much of the noble Lord's speech will prove a delight for economists. Perhaps he will forgive me if I do not devote my time and limited ability to trying to match it. I hope that others will do so. But in speaking of the Budget, he might have said something about the economy which supports it—the state of the economy which is the basis on which Budgets are built. He will have to concede—although he did not do so this evening—that the state of the economy is extremely good. My noble friend Lord Clark referred to it in his speech earlier. It includes factors such as low inflation, unemployment falling by 10,000 a month, exports per head, manufacturing output, faster growth and investment.

With regard to investment perhaps I may take up the point made by the noble Lord, Lord Eatwell, who was critical of the investment that we made in this country. But 40 per cent. of the investment in Europe from America and Japan comes to this country. That is a sign of confidence. Those who could choose any country in Europe have chosen this country. It is a sign of the confidence that they rightly have in this country.

Strikes over the past two years in this country have been lower than at any other time since records have been kept, which I believe is 1891. I cannot think of any other period in my political lifetime when this country has had a better economic future to look forward to or been economically stronger. At no other time in history has that been the case. Of course, many things can be and will be improved. But if any noble Lord can suggest a time when a government of the other side produced a stronger economy than this one, I shall happily give way to him.

Lord Eatwell

My Lords, I shall be delighted to answer the noble Lord. Is it not clear that the levels of unemployment were significantly lower, inflation was lower and growth was higher from 1964 to 1970?

Lord Boardman

My Lords, I shall be happy to challenge the noble Lord on all those points. But nobody has produced a state of the economy which is stronger, better and more strike-free than it is now. The noble Lord selected one or two points on which I should love to take issue with him, but the clock does not permit me to do so.

I suggest that the Budget was built on very sound foundations. It was not, as the noble Lord, Lord Desai, hoped that it might be, built on anticipating bribes to the electorate. It was described by the Chancellor of the Exchequer as concentrating on four fields: people will keep more of what they earn and save; more will be spent on schools, national health and police; public spending will be kept under firm control; and public borrowing will be kept on the downward path. Those are the themes that he put forward. I believe that most noble Lords in this House would strongly support them. The noble Lord, Lord Desai, said that they were issues that he supported.

The tax concessions contained in the Budget were more than covered by cuts in public expenditure. Again, that is a proper aim, consistent with the themes to which I referred.

I shall not speak further about the Budget, which was all clearly set out in the Chancellor's speech and is in the Red Book. Perhaps I may say just a few words about the Red Book and the way in which the Treasury produced its Budget statistics. Within a few minutes of the Chancellor sitting down in the Chamber, the Red Book and the press briefings were available in the Printed Paper Office. They are packed with matters which were of the highest secrecy and needed the highest security. We owe a great debt to all those who were concerned in putting together the Budget documents in the Treasury and for the way in which they managed to keep security. It is not general in most departments of life today. However, in the Budget itself, there is much that we could debate and much to praise but I do not have the time to do so.

Perhaps I may spend a moment or two speculating on the kinds of provisions that we might have expected in a Labour Budget. Mr. Blair constantly says that his government would not be one that would tax and spend. His colleagues do not seem to be convinced; nor indeed do they intend to comply. They have made it quite clear. There was a statement a few days ago on Radio 4 by one of his colleagues, in which it was said that Gordon Brown can say anything that he likes if he thinks that it will win the election, but when Labour is in power it will be looking for other priorities apart from tax cuts. That shows how much reliance we can place upon statements which come from the other side about their proposals for a Budget.

Labour has failed to say where it stands on a whole range of key subjects: inflation, interest rates and public spending. We know that it has committed itself to a number of other matters such as the minimum wage, the Social Chapter, payroll tax and regional development agencies—a kind of glorified national enterprise board. We know where it stands on those issues. Those who took the trouble to read A New Economic Future for Britain in June of this year, no doubt read it and shuddered at it as I did. We know what Mr. Brown's windfall tax is intended to cover and the 11 different massive expenditures it is to meet. But today we have a sound developing economy; we have a sound Budget to deliver a sustained recovery and to take it forward. We are extremely fortunate.

6 p.m.

Lord Shepherd

My Lords, I suspect the noble Lord, Lord Boardman, may be guilty of some complacency in the way in which he described the present economy. And the noble Lord, Lord Clark, was beginning to enjoy himself in regard to the situation in which the Conservatives found themselves in 1979, but he forgot one factor. I refer to the grave financial situation with which we were faced on the day we took office in 1964.

In the days when I first came to this House, some 40 years ago, it was the practice that, if one spoke after 5.30, one apologised for speaking "at this late hour". I shall therefore put aside what I had intended to say and, as my Quaker friends say, I shall speak as the spirit moves me and hope to keep within my time.

I fully support what was said by my noble friend Lord Eatwell in terms of the need to recreate and rejuvenate our manufacturing base. That is essential if we are to create the prosperity which our people expect. We must do that, though in a sense it will be like climbing Mount Everest. We need a programme that is broadly acceptable and that will last at least three parliamentary terms.

There is an acceptance and belief that because we are within the European Community we can trade comfortably within the tariff borders of the Community. I suspect that in time, with the enlargement of the Community and the development of the countries within the Asian basin plus the United States, great pressures—political and otherwise—will be brought to bear for the reduction of the tariff borders that surround the Community. If that happens—I suspect it will happen within one generation—it will be essential for this country, if we are not able to compete within the Community, to be able to compete throughout the world, particularly within the Asian basin.

We spoke of the prosperity league. I believe we are 18th on the list. I was not impressed with most of those at the top, but was conscious of two—Hong Kong and Singapore. I visited Singapore and Hong Kong in 1946. They were basically entrepôt ports. They had no industry or natural resources. Hong Kong had a population of 500,000 people. I remember water being rationed to two hours a day. Singapore had plenty of water because it had storage from Malaysia, but it had no industrial base. Today, both are major exporters. Their prosperity per head of the population is of the highest and is now above ours.

We should take all that into account in regard to what can be and will be achieved in the Asian basin, which we may have to confront, if we are not already confronting it. I sincerely believe that we must rejuvenate and expand our economic and manufacturing base. The noble Lord, Lord Boardman, said that we are doing well. But that depends from where one starts. We must recover what was once the manufacturing and economic base of this country. We are a long way from it today. I hope that the knowledge in regard to the potential competition that this country and other European countries may face is borne in mind.

In regard to the Budget, my understanding is that its object was limited. It was to make the economy more manageable and give it greater flexibility; it was to provide incentives for those who work in industry and trade; and it was to create new opportunities and protection for those who are retired or who have savings. That concept of the objects of the Budget is its basic weakness and sooner or later we shall need to find a new formula which gives us a longer term plan—I hesitate to use the term "national plan"—which will command the acceptance of all political parties.

I must say to my noble friends that I found yesterday's Budget extremely clever. It gave a little here and a little there. In terms of inheritance tax the move to £200,000 was about right. Why should the ordinary man be taxed twice? First, he is taxed on his earnings and, secondly, he is taxed on his savings. The reduction of the tax on savings is to be welcomed. Also, I support the concept that the workforce should be encouraged to buy shares within their companies, provided adequate safeguards exist.

I support all those elements of the Budget. But I turn to the 1 per cent. I do not support plebiscites, but if we had a plebiscite and put to the ordinary people of this country, "Will you accept a reduction of 1p in the pound on your tax or would you like that sum to be hypothecated, in addition to what is already paid by the state, to hospitals and schools?" most of us would be surprised at the response. I believe the ordinary man would say that he attaches supreme importance to the quality of our medical service and schooling and that he may well forego what is, after all, a minute saving.

My anxiety concerns the forecasts. My noble friend Lord Diamond sits behind me. But I believe forecasts to be extremely dubious. They may be based on specific facts, but they are highly vulnerable, particularly at this moment in time. For instance, if the PSBR is to be reduced, it will require a major change. The Government know from their recent experience that what is forecast for the PSBR now is much higher than what was forecast 12 months ago. I understand that forecasts have to be made, but the danger lies in getting them wrong, particularly when one bears in mind the risks to ourselves and our currency and one takes into account the speed at which currencies fluctuate and the fact that that fluctuation is difficult to stop once it starts.

The Chancellor is to be congratulated on producing a prudent Budget and—I say this to the noble Lord, Lord Boardman—for his courage in withstanding the enormous pressures placed upon him for solely political reasons.

6.10 p.m.

Lord Skidelsky

My Lords, I very much regret that a prior engagement will stop me from being present for the whole of the debate. I am very sorry about that. I was delighted to hear the speech of the noble Lord, Lord Desai, and I congratulate him on his success in securing us the occasion to discuss the Budget Statement. The speeches so far fully justify that innovation and I hope that it will become permanent.

One of the noble Lord's most endearing qualities is his intellectual honesty, which I know has been a source of some embarrassment to his Front Bench in the past. He was honest enough to say this afternoon that he favours a high tax economy. How he squares that with his penetrating analysis of the dynamics of the global economy I am not quite sure, but at least he favours a high tax economy. I hope that I am honest enough to say that I favour a low tax economy. That is the nub of the difference between us, and I venture to suggest that it is the nub of the difference between the Opposition side of the House and our side of the House.

I wish I could persuade the noble Lord, Lord Bruce of Donington, that in taking up that position I am not betraying John Maynard Keynes. I believe that the only way you can get the Government's budget to work in favour of stabilisation is on the basis of sound public finances and the only way to make them sound is by cutting public spending; otherwise you face a continuing borrowing problem which turns the markets against you and prevents governments from doing even the necessary things that governments should do. But that is another debate for another occasion.

I welcome this week's Budget as, above all, a responsible Budget. The Chancellor has resisted the temptation to go electioneering. Modest tax cuts are balanced by modest spending cuts. That is the only strategy consistent with getting our interest rates down, which is the only basis of the boost to the economy which the noble Lord, Lord Desai, and all of us want.

The noble Lord, Lord Eatwell, said that the Budget has done nothing for investment. But if it is a Budget that enables interest rates to come down, then it will have done an enormous amount for investment. It is a very old-fashioned view that the only way you can get more investment is by increasing government spending on capital projects; the way you get more investment is by running your public finances in a way that enables you to have low interest rates. If you have low interest rates, you get durable recovery and an upsurge in growth.

I welcome this Budget as a further confirmation that we have renounced the bad old days of stop-go, the days when government deliberately created political business cycles in order to get re-elected—all go before the election, all stop after the election. We have turned that corner and I do not think that any Chancellor will do that in the future. I am glad that the Chancellor has rejected the advice of some Tory pessimists to leave the public finances in a mess for an incoming Labour Government. I read that proposition in a couple of articles by Conservative journalists. The Chancellor has rejected it.

This Chancellor and all of us on these Benches want and expect the Government to win the next election and inherit a strong fiscal position as a basis for their further reforms. You could say that the Chancellor has learnt from the whole experience of the post-war period that short-term highs are not worth the long-term lows and anyway no longer fool the public. Modesty is forced on governments nowadays as it is very hard for them to make people pay more taxes than they actually want to pay. That is the practical problem with the vision of the noble Lord, Lord Desai, of a high tax economy.

People have shown that they do not want a high tax economy and they do not vote for parties which promise to put up taxes. It is increasingly easy for people to arrange their affairs so that they avoid paying tax, whatever they may say in the plebiscite suggested by the noble Lord, Lord Shepherd. For example, it is estimated that the Government lost £100 million in alcohol duty revenue last year from people buying their drink abroad. These schemes are becoming increasingly possible. This lack of revenue buoyancy, incidentally, is reflected in the interesting resort to pre-modern methods of taxation like the national lottery. Nor can governments borrow any longer to their heart's desire from savers who have been fleeced too often in the past.

I especially welcome the Chancellor's help for long-term care and his tax encouragement for savings and employee share ownership. I am very pleased—here I must declare an interest as chairman of the Hands Off Reading campaign—that the Chancellor has maintained zero rating of VAT on the printed word. We now look to the Government to maintain that position in Brussels against the continual pressure to harmonise VAT rates across the Community.

All that seems to me admirable. My doubts about the Budget chiefly relate to its spending side. Some of the spending cuts look a little cosmetic to me. This year £500 million has come off the contingency fund. The noble Lord, Lord Desai, has implied that the tax cuts are being paid for by a run-down in the reserves. I do not read the figures that way because according to page 131 of the Red Book falls in the reserves will be balanced by expected receipts. I do not know what the answer to that is. Perhaps my noble friend the Minister will elucidate this technical conundrum when he winds up.

There are also cuts of £1.5 billion in capital spending programmes. Those are supposed to be made up by the private sector through the private finance initiative. I tend to agree that these are likely to be spending cuts postponed rather than cut. It is difficult for hospital trusts to borrow on the strength of assets for which they are not allowed to charge and on the collateral of one year's guaranteed income alone. I wonder how successful the private finance initiative will actually be in raising capital investment.

My real question, and the one on which I want to end, is whether there is any real strategy underlying the Chancellor's prudent housekeeping. What is the Government's medium-term fiscal aim? Is it to balance the budget over the cycle? Is it to balance the budget by 1998? Is it to bring the PSBR into balance? Those are all phrases which have been on ministerial lips in recent weeks. I am none the wiser. All I know is that the PSBR is obstinately stuck at about £30 billion. That is too high and the date for its reduction seems to be put back year after year and, even now, depends on rather optimistic sets of judgments and assumptions both on the revenue side and on the side of economic growth. I am not quite clear what the medium-term strategy is.

Let us be clear. We on this side want to reduce taxes. Everyone is committed to that. But I do not see a clear strategy yet for reducing the burden of taxation. In fact, I see from the Red Book that government receipts are expected to be higher as a proportion of national income in the year 2000 than they are at the moment and that the tax burden is expected to be 4 or 5 per cent. higher than it was in 1990. It is true that by then spending is expected to be below 40 per cent. It may be, on good assumptions, that we shall get a rough balance between taxes and spending at about 40 per cent. of GDP by the end of the century. That is better than nothing, but it is hardly dramatic. Both William Waldegrave and Chris Patten have recently called for a public spending share well below 40 per cent. I missed that commitment in the Budget strategy. As yet there is no real commitment, yet I believe that that is the only plausible basis for long-term Conservative economic policy.

The trouble is that we shall not get those cuts unless we reduce the agenda of the state. A debate on a Budget is neither the time nor the place to start that deep discussion, but I have no doubt that we shall have to have it, and we have to win it. What is the welfare role of government in a privately wealthy economy? What goods should the state provide and what goods should the private sector provide? We have to start that debate from first principles. I hope that a coherent vision of where we want to get to and how we intend to get there will inform the Budget strategy of the next phase of Conservative Government. After all, we have seven years in which to work it out.

6.21 p.m.

Lord Merlyn-Rees

My Lords, the noble Lord, Lord Skidelsky, is always thought-provoking even though in his last words he was romancing. He referred to the fact that some Conservative journalists said that it would be a good idea to leave a mess for a Labour Government to clear up. The noble Lord should look at 1964 because it has happened before. As regards his view on the link between interest rates and investment, when I was a boy in the 1930s interest rates were at rock bottom, but there was no investment. The link between the two is not as easy as classical economists think.

Lord Skidelsky

My Lords, I do not want to go on any longer. The noble Lord will know that there was a big housing boom in the 1930s, which was driven by very low interest rates.

Lord Merlyn-Rees

My Lords, the noble Lord will also remember that that picked up at the end of the slump in 1931, 1932 and 1933. It occurred again in 1938 and was driven by the trade cycle and not by a link between investment and low interest rates because they had been low before. I said that the noble Lord is always thought-provoking, but he must not allow me to think too much or I shall go over my time.

I shall not refer to the Budget because everyone else has done so. I shall refer to the state of the nation. I am very sceptical about Chancellors who believe that there is vote catching in Budgets. If they do catch votes, then within a few months of getting back into office something has to be done about retrieving the situation. That has happened on two or three occasions in the past 20 years. In any event, the reasons for winning elections are manifold. I do not believe the idea that one can buy the electorate is true, whatever party is in power.

As regards the state of the nation, I want to devote my time to employment, as I usually do, or unemployment, which is the other side of the medal. There has not been much talk about employment; it is no longer the "in" word that it was after the war. Indeed, in my young days there was heavy structural unemployment and nobody bothered very much. It took the war to make people see the iniquities of unemployment when people were brought together in the Armed Forces.

People in work at the moment are not very worried about those who are unemployed. I have a vested interest in unemployment as a result of my past and because for 30 years I represented an area where there was heavy unemployment. I shall come to the particular in a moment. As regards the state of the nation, a typical family pays more tax now than it did in 1979. Indirect taxation cannot be removed from the equation. It affects the lower income groups far more than the likes of most of us in this Chamber. Indirect taxation is regressive. There has been low growth in this country despite the figures over a short period. They are lower than the figures I have here for the other countries of the Group of Seven. We wasted North Sea oil. We invest less than our competitors and that is a matter that we should think about.

In my native Wales, which I see more of now, there is enthusiasm for working for a Japanese firm. Japanese firms invest. They are in manufacturing and they do it better than most British firms. We have to ask ourselves why. The reasons stem from the nature of the way in which the Japanese raise capital and invest. The Japanese firms are in manufacturing and they go to areas such as the north-east coast. Our manufacturing base has disappeared: is that a good thing? We used to be the workshop of the world, but we are not now. The Japanese are very good at manufacturing, mainly as regards the motor car industry.

I turn to the trade balance. Even with a 25 per cent. devaluation of the pound, compared with the rate when John Major took us into the ERM, we still had a deficit in 1994 of £10.5 billion. The recovery and boom in exports is in spite of and not because of government policy. Is that not marvellous when one thinks of all the troubles and tribulations that we went through with devaluation! The pound has devalued by 25 per cent. Let us imagine what the situation would have been if we were on fixed exchange rates through the IMF. Devaluation is the order of the day.

I come now to employment. The figures I have for October show that the seasonally adjusted claimants for unemployment stood at 2.2 million, which is equivalent to one in 12. For men the figure is 10 per cent., which is much higher, and for women it is 4.4 per cent. We ought to direct our minds to the doubts about the way the employment figures are collected. There are many people and economists who believe that they do not give a true picture. We should look at that, particularly in this House. In 1995 unemployment fell by 331,000, but it is still far higher than it was in 1979. Since that year the fraction of the unemployed out of work for more than a year increased by 50 per cent. to just over 1 million. There is an increasing mismatch between the skills of the unemployed and of those needed in industry.

I suggest to your Lordships that we should look at unemployment. It is falling, but the current situation remains bleak for millions of jobless people. One million people have been unemployed for more than one year and half-a-million have been unemployed for more than two years. One in three people without any 0-levels are now out of work and unemployment rates are much higher for young people and members of ethnic minorities. The underlying state of the labour market for women, the poorly educated, low-paid and young people, is getting worse; with poverty increasingly concentrated among the low-paid and households with no work. One in five households have no working adult member. That figure is up from one in 15 in 1975. The gap between higher and lower paid workers is greater than it has been since records began. Economic generation creates part-time jobs. It may be that such jobs are good, but they are not good for me—someone who was brought up on the basis that the man of the house worked a 40, 45 or 50-hour week. In the constituency I represented that does not apply.

I do not live under those circumstances and neither do my children, but many of us who were Labour MPs saw that on a daily and weekly basis. Unemployment is in my political blood and we should direct our minds to it. I fished out some figures from the Library, but they are not quite for the area that I represented because there has been a redistribution. In my area 60 per cent. of the population are of working age and of that number 16.5 per cent. are unemployed. In other parts the figure is between 25 and 30 per cent. There is nothing that the Government can do—I am trying to be non-political now—that will alter that fact. The idea that when the economy lifts they will be brought into work is not true. The unemployment situation varies from one part of the country to another. They are good people.

I have said in the House before that when I was in Northern Ireland I met the children of my constituency as soldiers in Northern Ireland. Nowadays the Army is so small, I regret to say, that that does not apply to the same degree as before. I was speaking about Leeds Central. There is unemployment at 8.8 per cent. in Leeds North East, which is a Conservative seat. The way in which people vote is determined not by whether they are caught by the Chancellor, but by the unemployment situation in the area by nature of social class. Those of us who have been absorbed in politics over the years know that to be so. I do not believe that the normal upturn will do very much for us.

The work of the Commission on Social Justice was published not long ago. We have to change our outlook. Our modern war on poverty must tackle the fundamental causes of inequality. High and persistent unemployment leaves people without income and with low and inadequate skills.

I have been putting my mind to this issue and the one thing that I should like to draw to the attention of the House is an article in The Political Quarterly by Professor Dore of LSE and MIT in which he states: the form of unemployment that we have in Europe today is … different from … the 1930s … there is only limited possibility of making a dent in the unemployment figures by macroeconomic demand management … there are equally limited possibilities of making much more impact on the employment intensity".

He referred also to the driving force of change on the Pacific Rim and to the changes in that part of the world. It is a gloomy prognosis. He has said, "People do not like me saying this" but is it true? Are we wasting our time with the modern analysis of unemployment in which we have been schooled?

There is something fundamentally wrong in this country. In my view, whatever party is in government some people in the kind of area that I represented will be unemployed. Whatever happens to the rate of interest, whatever happens in the banking system, there will be marginal changes, but more fundamental changes need to be made. At the moment, the important department of state in this country is the Department of Social Security and the reason is that we are paying out money because our system does not work and we have to keep people off the breadline.

6.31 p.m.

Baroness O'Cathain

My Lords, I too thank the noble Lord, Lord Desai, for tabling this Motion. The economic state of the nation is good. It is not the greatest in the world, but it is considerably better than many of us had dared to hope, having been subjected to the endless drip-drip of negative comment emanating from both noble Lords opposite and the media.

With this Budget, I get the strong feeling that all is under control. That is most comforting. It really is a case of "steady as she goes". The temptation to tinker endlessly has been rejected. Naturally, there will be disappointment that some of the more absurd predictions which littered our newspapers in the days before the Budget have not materialised. On a personal level, there is one omission, on which I had placed some hope, but more of that anon.

As an aside, the noble Lord, Lord Desai, told us that the Budget had been given a lukewarm reception by the Tory Back Benches and a hostile reception everywhere else. When I heard that, I went straight to the Library, thinking that my croaking voice had also affected my brain and vision and that I had misread something in today's Financial Times, but when I looked at the comments from businessmen, they were all supportive. Perhaps the noble Lord does not think that the opinions of businessmen matter.

The management of an economy which has a turnover of nearly £800 billion is no small task. The enormous figures sometimes cloud the brain. We have heard about massive government expenditure and massive government debt, but in simple terms, the total government expenditure of £306 billion is well within the convergence criterion for joining EMU and, similarly, the plans are that the deficit meets the other convergence criterion of 3 per cent. long before EMU takes effect. Not that I am for one moment suggesting that we should positively aspire to EMU membership; I merely wanted to make the point that, whereas one is often led to believe that we are the poor man of Europe, a second-class citizen in EU economic management terms, the reality is that we are strong and healthy. As an aside, the IMF expects us to be at the top of the G7 growth league, along with Germany, next year. Does that indicate economic weakness?

We frequently hear of our declining position in the "wealth table" of the world. Indeed, the noble Lord, Lord Shepherd, referred to that earlier. We are 16th in terms of GDP per capita, but some of the countries that have overtaken us are the low tax, deregulated economies, particularly Hong Kong and Singapore. If we aspire to move up the league table, we must also adopt an even lower tax and deregulation strategy. I wonder whether the Opposition would go along with that. I have yet to discern a great move on those Benches for lower taxes and further deregulation.

But let us not be bemused by statistics. We should get behind some of the numbers; for example, four of the countries ahead of us in that wealth league table (Belgium, France, Germany and the Netherlands) have lower graduation rates. Do we want to reduce our graduation rates from their current level of 25 per cent.? We have the strategy to improve education standards and to increase the proportion of the population which will benefit from university education so that long term our international competitiveness will increase.

We require, above all, stable economic management which will ensure sustained economic growth and rising prosperity. I emphasise the word "stable". We do not want drastic turns one way or the other. To quote from the Red Book that we have all been using tonight: Economies work most efficiently when inflation is low and stable",

and that is precisely what we have got. Since inflation targets were first introduced, inflation has remained below 4 per cent. for the longest continuous period for almost 50 years. That is a huge achievement. That is the background that business requires in order to invest, grow and increase its competitiveness.

When we talk of the wealth league, let us not forget that it is business in the main that creates wealth. The voice of business is not heard loudly or often enough in your Lordships' House. It is perhaps useful to point out that the forecast income from corporation tax and business rates combined can fund more than total government expenditure on education; combined they can fund more than the budgets for defence and law and order together; combined they can fund more than 82 per cent. of the health and personal social services budget. That is why we have to encourage business and to help business, in turn, to prosper.

Therefore, I am delighted with the Chancellor's proposals for the relief of some business and agricultural assets from inheritance tax. Even more welcome is the change proposed in the relief from capital gains tax for more entrepreneurs and shareholders in family companies. That will result in skilled and successful businessmen—and women—finding it easier to release their capital into new business projects.

I said earlier that I was disappointed by one omission. I refer to the failure to abolish capital gains tax completely. Perhaps I may give my reason. There are millions of individual shareholders who invest in British business from the proceeds of their after-tax income who I am certain would increase that investment if the capital gains from that investment were not taxed. Gains from investment in premium bonds, which in my experience give a much better return than the National Lottery, are not taxed; neither are the gains from the so-called "investment" in the same lottery, so why are the gains from investment in the wealth-creating business sector singled out for continued taxation? Following what will undoubtedly be the positive increased growth resulting from this strategic economic policy, I hope that a tactical shift in taxation can be made in the next Budget and that we can say farewell to capital gains tax for ever.

All of us must be single-minded in our approach to encouraging business. To that end, I was delighted by the Chancellor's proposal to reduce the small companies rate of corporation tax to 24 per cent. from 1st April 1996. It is a staggering thought that about 350,000 companies will benefit from that reduction. It should prove to be a huge incentive to small businesses. Those 350,000 companies account for 85 per cent. of all companies that pay tax. With a wry smile I ask: how about the other 15 per cent. next time?

If I sound optimistic (albeit rather croakily), it is because I truly believe that the economic health of business is good. Many companies are operating at a level of efficiency and effectiveness that they have never reached before. Our best companies are among the best in the world, creating wealth to underpin a social structure which is equally among the best in the world. Those are the facts. They are not just feelings. Perhaps I may suggest that we drop the phrase "feel good factor". Feelings, according to the Oxford English Dictionary, are defined as, A generic term comprising sensation, desire and emotion but excluding perception".

Let us have more perception and thought. I do not want to feel good. I want to perceive that things are good. I do perceive that, and I think, too, that the Budget is good.

6.40 p.m.

Lord Bruce of Donington

My Lords, my own perceptions of the economic significance of the Budget have been expressed more eloquently by Mr. Matthew Parris on page 2 of The Times today, which I commend to your Lordships' attention. However, on a purely personal level I suppose we shall have the spectacle of more clapped-out bangers in the car park outside, and there is the remote possibility of my noble friend Lord Peston lowering the whisky prices in the bars here. That is roughly the significance of the Budget to which we have been treated.

I propose to deal with three short aspects only which are in continuation of the remarks I had the privilege to make in the debate last week. I was especially glad that my noble friend Lord Eatwell referred to the significance of investment, particularly in the field of replacing lost capacity. One of the achievements of Her Majesty's Government over the past 16 years has been to preside over an economy which started out with a balance of trade surplus of £7 million and which has ended up now with a trade deficit of £7 billion. There is considerable significance in that. What caused that is simple to understand. There has been a mass destruction of manufacturing capacity in this country which has been reflected in an ever-increasing import penetration into the UK. It is as simple as that.

Even when the country has a sporadic recovery due to an artificial injection every now and again from a nearly defunct government, that is lost immediately, because when demand revives domestically there is not the domestic capacity to meet domestic consumer demand. So increased imports arrive. That is something that noble Lords opposite cannot wish away. You started off with a trade surplus and you now have a massive trade deficit which you cannot escape.

We have to have more investment. Everyone is agreed on that. A variety of inducements has been produced for those in possession of capital to invest in UK industry. Noble Lords from time to time in their own self defence, to which of course they are entitled, quote the fact that, Japanese investors in particular—there are also others—have made massive investments in the UK. What they do not say is that their friends who finance their own party invest most of their money outside the UK. They do not even have the confidence that their own political arm protests that they ought to have.

So, as my noble friend, Lord Haskel, pointed out in correction of my rough figures last week, for every £100 of investment invested here by countries like Japan in a vote of confidence, £160 is invested by British companies in America or in the Pacific Rim. We have to have some more investment.

Who possesses the funds? Clearly, the lower tenth of the population does not possess anything. It has no capital; its income is its capital. Who has the money? The wealthy and the institutions have the money. How can they be induced to invest? A variety of ways have been suggested: capital allowances; all kinds of hidden subsidies; all kinds of privileges; all kinds of regional grants, and so forth. All of them are very good, but what happens if they will not invest? That is a problem that Mr. Edward Heath addressed to the country in 1972, "and still you won't invest", he said to the financial interests in the City of London. Of course, investors are human. I hesitate to reproach the noble Lord, Lord Skidelsky, with Keynes's view on the subject, which I know may be unpopular. He says at page 162 of The General Theory of Employment: In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends".

What was true then is true now.

I have to suggest, as was suggested in the White Paper on full employment published in 1944 by the Coalition Government, that where private investment does not find it convenient, or has no inclination to invest, then the state must. The state itself has to finance enterprises. That may not be popular to either side of the House, but it will recur time and time again over the years that lie ahead.

The noble Baroness, Lady O'Cathain, referred to small businesses and said how important they were. Indeed they are, because it is by investment in small businesses that the recovery, when it comes—if it comes—is largely likely to be propelled. What is the situation with small businesses at the moment? I can well remember the time when it was possible to go along to the manager of a small bank, have a friendly chat, discuss proposals with him, produce the necessary projection papers: cash flows, draft profit and loss accounts, and so on. Often on his own initiative he would make the necessary advance. But what happens today? One does not go to a manager any more, but to a computer operator who says in accordance with instructions from head office, "I am afraid it is quite impossible for that to be done".

Even where finance is provided by banks, it is accompanied by rates of interest and conditions which are part of a bank's plan to recoup from the small practitioners, the small businesses of this country, the losses incurred due to its own folly of investing in the South American states.

There was also a time when it was Conservative Party policy that some efforts should be made to get the larger companies, which frequently gobbled up small enterprises, to make prompt payments to their small suppliers. There was a plan to have interest charged on overdue accounts. It was put forward by the DTI, and yet when the President of the Board of Trade (as he then was) came into being after the last election we found that that did not happen. I wonder why.

The practice followed by large corporate firms is clear. A distinguished member of one of them has already recorded the following views: I remember a moment in my business life when every Friday the company finance director used to bring in the list of outstanding creditors. There were three columns headed: solicitors' letters, writs received and writs whose time limits for reply were about to expire. The bills in the last column we paid".

The author of that was none other than the right honourable Michael Heseltine who admits building his business upon that basis. We may possibly have to change that.

Time prevents me from embarrassing the Government any further. With those few parting words and pleasantries, I am pleased to resume my seat.

6.50 p.m.

Lord Birdwood

My Lords, it is no purpose of mine this evening to add to the avalanche of comment about yesterday's Budget. One of this country's niche growth industries is commenting about the Budget. What the ingenious and well-timed Motion of the noble Lord, Lord Desai, does yield is a rare chance to stand back and look at the relationship between the economy and the Government. Perhaps I ought to give that a more academic colour. Perhaps I ought to say the relationship between any economy and any government.

I wish to limit myself to making one point in the form of one question. Why do no government publicly acknowledge that there are in any and every developed economy two perpetually opposed forces? These forces are the search for efficiency and the employment of people. We do not need to tangle with the sophistry of Clause 4; we do not need to worship at the shrine of free market ideology. But we do need to recognise that the more efficient an enterprise the fewer people it will employ. It is painfully, transparently obvious to the ordinary citizen but seems to be quite outside the vocabulary of Westminster, or Washington, or Paris, or Berlin.

The special areas of interest to myself are the new ingredients of innovation and technology which have become the accelerators in the search for competitive advantage. More hard science has been deployed in commerce and industry with the object of greater efficiency in the past 15 years than in the previous 50. What is the end game of this process? Every advance in, say, manufacturing technology raises productivity, makes that company leaner, more profitable, more attractive an investment and needing fewer people. So the state picks up the responsibility for those human beings now outside the virtuous circle of the efficient enterprise. The by-product of the efficient enterprise is taxable profit to feed a vicious circle of numerically unemployed and increasingly unemployable individuals.

The paradox is that technology is the lubricant for a country to get richer but for its people to be left staring at the prospect of the end of work. How peculiar. It is my belief that no component in the social fabric puts more strain on its stability than the universally experienced absence of work.

Following from those reflections, I am intensely interested in whether the UK economy is rugged or fragile. It seems to me that there are two expert views of the economic model and they are at odds with each other. The first is that a developed economy such as ours has built-in stabilisers so that the ship stays roughly level when the money storm strikes. The other model introduces mathematical catastrophe points where quite small variants can produce chaotic results. Personally, I lean to the latter because I think that it better mirrors the reality of political powerlessness. Some economic theorists still look for Kondratieff long cycles. Even if they were ever there, the speed with which capital moves around the world and the fine mesh of global information have consigned those ideas to history.

It is totally unoriginal to observe that markets are more powerful than governments. Companies are richer than governments and will be increasingly so. Of course we feel comfortable with these political rituals. They give all of us the chance to assess and calibrate the relationship between an economy and a government. What one perceives though in the veiled agendas of modern Budgets is the recognition of governments that more and more the moment of a Budget is an opportunity for a little social engineering rather than hauling on the levers of macro-economics. And even in social engineering, prudence is the watchword; not so much carrot and stick, more pea and twig.

Have any government cut a template for the millennium which other regimes can use as their patterns? I fear not. No, perhaps I should say that I hope not. Modern economies long ago escaped from their national boundaries. I am not saying that the future fate of future governments will be to become just a caring agency for the illiterate and the immobile. But I am saying that the time is right to bring into the open a new public debate about the relationship between government and the economy because new influences are shaping this relationship in ways undreamt of by Burke, or Adam Smith, or even Karl Marx.

6.57 p.m.

Lord Haskel

My Lords, tonight noble Lords opposite have referred to noble Lords on this side of the House as being people who run down the nation and the economy. The facts and figures on which we base these arguments come from a document called Competitiveness, Forging Ahead. It must be an accurate document because it is published by HMSO and the foreword states: It is a hard-headed assessment of our competitive position".

The foreword is signed by the Prime Minister.

Pages 12 to 15 list all the countries which are ahead of us in wealth. They were mentioned by the noble Baroness, Lady O'Cathain, and the noble Lord, Lord Shepherd. I believe that before noble Lords opposite accuse us of running down the Government and the economy they should look at this book, because all the data are contained in it at pages 12 to 15.

I wish to speak about investment, which was introduced by my noble friend Lord Eatwell. Yesterday the Chancellor told us that our future prosperity depended on achieving 3 per cent. growth. Central to that must be the investment that we spoke about; that is, investment in infrastructure, education, skills, technology, new products and new markets. That must be the key to growth.

It is fair to ask: what has the Budget done to encourage this investment? The answer, as other noble Lords have pointed out, is that the Government seem to be pinning their hopes on the private finance initiative. Perhaps we can debate that in more detail when we have seen the Treasury's handbook setting out the projects to be undertaken under the scheme. In the meantime, we shall need to be convinced that the scheme is in addition to government investment and not instead of it.

My noble friend Lord Eatwell pointed out that the private finance initiative should not be used as a means of disguising government's lack of interest in the real side of the economy. For the past two years the present Government's private finance initiative has been successful in attracting around £500 million from the private sector. However, during the same period the cut in government investment in precisely the same areas has been in the order of £2 billion. That is a net disinvestment of £1.5 billion. Clearly, the Government can cut public capital expenditure with certainty, but they cannot be certain on delivering private sector funds. In the past, those funds have not been delivered. Little wonder that bodies like the CBI are wondering whether they will be delivered this time round.

Industry will find it very frustrating if imaginative schemes are announced by the Minister while, at the same time, investment programmes are cut in anticipation of them. The new concept of "sponsored investment" seems to consist only of direct government spending. I share the concern of the noble Lord, Lord Skidelsky, on the matter. If the scheme of PFI is to be extended, many problems will have to be sorted out. For instance, the very high bidding costs make it prohibitive for all but a few very large companies. The complexity of the rules make it very difficult for most firms to get involved. The PFI initiative is to be welcomed but, as we have said in the past, it has to become much more flexible and more user friendly. However, perhaps a significant decrease in interest rates will help to secure the investment that is needed.

My noble friend Lord Merlyn-Rees raised the question of jobs. We are all worried about unemployment. We are worried about the economic cost and we are worried about the social cost in terms of crime, in terms of ill health (both physical and mental) and in terms of social unrest and how that contributes towards the racial and other tensions in our society.

The stubbornly high youth unemployment is both painful and worrying. We all know that the long-term consequences will be bad. It was with that in mind that the Shadow Chancellor proposed several ways to bring down youth unemployment. He also suggested ways of reducing the poverty trap and making the welfare system more of a pathway from welfare to work. But what has the Chancellor of the Exchequer done about it in his Budget? By reducing the tax thresholds, and reducing the basic rate by 1 per cent., he has helped smooth the passage from welfare to work, but that has to be combined with imaginative job creation schemes. What about these? We estimate that state-funded training budgets are being cut overall by 4 per cent. and the budgets of the TECs are facing cuts of some £200 million this year.

The abolition of the community action scheme next March will be a blow for many trying to get from benefit into work, particularly the long-term unemployed. It is hardly an encouragement to those many volunteers who now administer some of those schemes with such dedication.

I am not suggesting that the Government should become the employer of last resort with those schemes. But I am suggesting that the schemes and tax rules should work in harmony to get people from welfare into work. The Shadow Chancellor suggested that there should be a windfall tax on the privatised utilities to fund the passage from welfare to work, but that was ignored by the Chancellor of the Exchequer.

That neatly brings me to another matter which we discussed last week; namely, fairness in the tax system. The noble Lord, Lord Skidelsky, accused us of being the party of high tax. We are not the party of high tax; we are the party of fair tax—fairness in terms of who pays, who can afford to pay and who benefits.

I see that my time is running out and, therefore, I do not have much time to talk on the question of tax. However, on the matter of share options and the privatised utilities—where much of that unfairness lies—I should just like to say that what the Chancellor of the Exchequer has done is virtually to reintroduce the old discretionary option scheme which he found so unsatisfactory in July and call it the "company share option plan". That gives a welcome encouragement to staff share ownership having tax benefits on schemes up to £20,000. But it does nothing to stop senior executives benefiting under a non-approved scheme and is unlikely to make any difference to the amount of tax that they pay.

The Government have also ignored the Greenbury recommendations as regards publishing the full facts about pensions. Indeed, the whole business of regulating the newly privatised utilities needs urgent review. I hope that we will be told about this when the President of the Board of Trade speaks on the matter tomorrow in another place. Meanwhile, this morning we had another wonderful example of a private monopoly exploiting the public. Yorkshire Water announced a rise in its six months' profit, and increased its dividend by 10 per cent. I wonder what the results would have been if its customers had been able to switch to another water company. This is not the politics of envy; it is the politics of fairness.

7.5 p.m.

Lord Monkswell

My Lords, I, too, should like to thank my noble friend Lord Desai for opening today's debate in such an elegant way. We are asked to debate, the economic state of the nation",

and the Budget Statement. I should like to talk a little about the economic state of the nation and then make a few comments about the Budget.

I believe that we need, first, to think in terms of what we mean by the economic state of the nation. I should like to follow my noble friend Lord Merlyn-Rees, who effectively suggested that one of the criterion we need to use is unemployment. We need to make a sensible comparison between what is happening now with the economy and the state of the nation and what the situation was in 1979. The noble Lord, Lord Clark of Kempston, made some comments about 1979, but I suggest that the facts are rather different from those that he stated.

If we look back to 1979, we can see that unemployment was less than 1 million and decreasing. We can also see that inflation was decreasing and that we had a positive balance of trade in manufactures. In fact, all those situations are now virtually reversed. Therefore, how do we judge the economic state of our nation as being at all satisfactory if we have over 2 million people unemployed? The noble Lord, Lord Birdwood, suggested that the more efficient an organisation became the fewer people it would employ. That is not my definition of efficiency. My definition of the word in terms of an organisation is where the best use of all resources is made. Effectively, just on the Government's figures, we have 2.2 million people unemployed. To have unemployed resources is surely not efficient.

I must admit that it is most interesting to listen to such debates, to pick up what noble Lords say and then to wonder just on what basis they make their remarks. Can it be satisfactory that a significant part of the productive investment in this country is actually financed from abroad? I was utterly astonished to hear the noble Baroness, Lady O'Cathain, suggest that investment—I believe that she was thinking in terms of investment in industry and commerce—is the same as a gamble or taking part in the lottery. I see that the noble Baroness wishes to respond.

Baroness O'Cathain

My Lords, I thank the noble Lord for giving way. I was just drawing attention to the fact that people can actually put their after-tax income into stocks and shares but, if they put it in Premium Bonds, they would still have their capital and would not be taxed on their winnings. Similarly—and it was a flip comment—I also mentioned the National Lottery. We do not tax those gains, so why tax the gains from investment in stocks and shares?

Lord Monkswell

My Lords, I maintain my astonishment that a comparison should be made between investment and the other matters to which the noble Baroness has referred. However, perhaps investment on the Stock Exchange is a gamble.

As regards the Budget Statement, we need to consider the effect of the Budget. I suggest that it has carried on the Tory philosophy of reducing the tax burden of well-off people and increasing the tax burden of poor people; or rather, it is not a question of increasing the tax burden on the latter but of reducing benefits. The net effect is the same: poor people will become poorer and well-off people will become richer. I do not think that that is a recipe for improving the state of the nation. In practice it will make things worse because one injects the wrong sort of demand into the economy. One reduces the demand for locally produced goods and services when poor people have their incomes reduced. By increasing the incomes of relatively well-off people, the chances are that one will make the balance of trade and balance of payments worse.

There is one little ray of hope within the Budget but even that contains a problem. I refer to the private finance initiative. We can see that there is something like £7.5 billion of capital expenditure forecast for the next year. That is a significant amount of money for capital investment and it will generate a significant amount of economic activity. It will bring people into work and the multiplier effect will also be apparent. However, we need to recognise that there will be increased costs as regards raising capital investment on the basis of the private finance initiative rather than on public sector borrowing. Obviously the cost of capital raised by the Government directly or by local authorities directly will be less than if private firms have to raise the capital themselves.

I hope that when the Minister replies to the debate he will be able to answer my next question. I wish to ask him about the effect of the private finance initiative on local authorities. There has been reference to the fact that capital expenditure controls on local authorities will be relaxed to enable them to engage in what might be described as local PFI. My question is: is the total for the likely capital expenditure under that particular initiative included within the £7.5 billion or is that on top of the £7.5 billion that is projected in the Budget Statement?

My final question concerns Northern Ireland. I think we all understand that the situation there is fragile in terms of the peace process. We discussed that matter a little this afternoon following the Statement. As regards the Budget, what plans do the Government have for increasing capital expenditure in Northern Ireland? What plans do they have for capital investment through the private finance initiative in Northern Ireland? I think we can all accept that capital expenditure will be beneficial in that it will provide jobs and economic activity and so reduce the stresses and social tensions that lead to the breakdown of society that we have seen particularly in Northern Ireland but also within the major conurbations of mainland Britain. I hope that the Government can answer those two small questions.

I conclude by pointing out that the creative accounting that local authorities engaged in in the early and mid-1980s, prior to their being clamped down on by central government, provided economic activity in this country at a time when, if it had not occurred, the social consequences of the problems society was facing because of government action would have been far greater.

7.15 p.m.

The Viscount of Oxfuird

My Lords, this is a timely Motion proposed by the noble Lord, Lord Desai, and we are fortunate that his, if I may say so, usual independence and skill have enabled us to take up the cudgels this evening.

It was Benjamin Disraeli who in a message to his constituents on 3rd October 1868 said: There can be no economy where there is no efficiency".

How well those historic words were proven by yesterday's Budget and by the sterling record of Her Majesty's Government.

Yesterday, and already to some extent in your Lordships' debate today, we have been bombarded with a variety of statistics. I must confess that, given the wealth of good news provided to us by the Treasury and others over recent weeks, I had to resist very hard the temptation of falling into the same trap or going down the same route. I find it exciting that the IMF now predicts that the United Kingdom will grow faster in 1995 and 1996 than the G7 average, just as we did in 1993 and 1994. I also find it exciting that the United Kingdom has more people in work and fewer unemployed than any other major European country.

It would not be in the spirit of your Lordships' debate this afternoon for me to fall into the same trap as European Commissioner Kinnock did this week and question the timing of EMU convergence. However, it gives me some satisfaction that the United Kingdom is one of the few countries in the European Union that meets all of the convergence criteria which would allow us to join if we wished.

In a limited time debate such as this it is possible to deal with only one or two points. Perhaps I could concentrate on that vitally important issue of exporting with which I have been concerned most of my professional life and which is one of the strongest influences on the economic state of our nation. It is indeed heartening that yesterday's Budget gave such a boost to exporters. I ask noble Lords please to forgive me, however, if I draw your Lordships' attention to one particular matter which concerns me as one who has a special interest in exporting, and not because—we must all be precise these days—I have any direct interest or involvement in the matter.

Having for many years travelled this globe marketing British engineering equipment I have some experience of the importance attached to the purchases made by our armed forces. Experience of operations worldwide has ensured that their judgment is greatly respected by those who are responsible for major military purchases overseas. I must say that our military are always prepared to back Britain and support British manufacturers when negotiating with foreign governments. I therefore find it somewhat alarming that at present the Ministry of Defence is considering an alternative bid for the tender for Army field ambulances from the Steyr Company of Austria rather than the British-made Land-Rover which I am told fully complies with the tender specifications. What message would be sent out to the world if we bought other than the Land-Rover in such circumstances?

I am given to understand that the Steyr machine is of such sophistication that the driver has to be trained specially to handle the product safely on rough terrain. What happens if he is shot? Is there a spare driver immediately available? We all drive Land-Rovers, or many of us do. I am sure that there is a lesson here, particularly for the poor injured person on the battlefield. I thank your Lordships for allowing me to make that sincerely heartfelt point.

So far as concerns the thoughts of the noble Lord, Lord Bruce, on the ratio of £100 to £160—and I believe that the noble Lord, Lord Haskel, has been responsible for some of the figures in this field—that is a fascinating ratio. If we take inward investment as £100 and outward investment as £160, the profit seems to be £60, but perhaps my maths are not quite the same as those of noble Lords opposite.

That investment overseas is very important. It does not come cheap. I have had the experience of setting up companies not only in Sweden but also in the United States. You do not get something for nothing. You cannot go and borrow from the bank in Sweden. You have to put hard-earned profits on the counter, directly into the Swedish bank to establish your capital base. That costs money. That money has to come from the UK. Therefore, that £160 is good news.

Turning from the particular to the general, it is heartening to note that UK exports are currently running at record levels and are expected to grow further, helped by growth in world trade and the UK's strong competitive position.

Indeed, the UK economy as a whole is on a path of sustained steady growth and low inflation. The economy has been growing for over three years and output is now 6 per cent.—I hope your Lordships will forgive me for using a statistic—above its previous peak.

It is just not true, as some commentators have suggested in recent weeks, that our economy is heading for recession. Of course the rate of growth had to slow from the very rapid rate seen in 1994, but all the fundamentals are still in place for healthy growth. We have an enviable combination of circumstances which has already been mentioned: low inflation, sound public finances and competitive business.

Business surveys from distinguished bodies like the CBI and the EEF point to high export orders and strong investment intentions. Yesterday's Budget will underpin consumer confidence. In short, growth in the UK economy is set to continue.

We have all been bombarded for the past 24 hours with a variety of analyses of the effect that the Budget will have on each of us. It has been a field day for the economists, who have presented us with a dazzling array of often contradictory conclusions. The reality is that yesterday's Budget was steady and prudent. It was deliberately honed to maintain our economy in its present sound shape. It was also a fair Budget, giving a welcome boost to health, education and the police.

I have been moving about the country a good deal in recent weeks, and I sense a new mood at the grass roots. As an election approaches it is clear that the average voter is beginning to take stock and compare the performance of our present Government with the promises that are being made by the Opposition. It is fascinating that if you ask somebody whether they would support an increase in government expenditure you will find that 70 per cent. will say yes and 30 per cent. will say no, but if you ask whether they would support a reduction in tax 70 per cent. will say yes and the other 30 per cent. will say no.

I believe that yesterday's Budget will help to reinforce the growing view that in the present Government we have a tried and tested team who can be trusted not to play ducks and drakes with our economy for short-term political gain.

7.24 p.m.

Lord Diamond

My Lords, having listened to every speech from this side of the House, and agreeing with them all, one is driven to the conclusion that there is very little left to say, particularly on the topic to which I wanted to devote my few remarks; namely, the need for greater investment. However, I shall do so, because I am convinced that we are not tackling the problem with sufficient vision and seriousness.

When we talk about increasing investment, we always compare investment in our economy in one year with investment in another year. That is not the appropriate comparison. The comparison should be between what we as a nation have tended to invest over the past century and what other nations have done. I agree with the noble Viscount that we should not flood the Chamber with statistics, but if there is one statistic which I implore all of us to bear in mind all the time it is that we as a nation have throughout this century eaten more of our seed corn than any comparable nation. The independent OECD figures show that today we are still at the bottom of the league in terms of the percentage of investment in relation to national income or GDP. Although, like others, I am grateful to the noble Lord, Lord Desai, for presenting us with the opportunity to discuss this matter, I am bound to repeat that we must do much more and be much more imaginative about investment.

Not only must we invest more, we must invest earlier. We must learn the arguments for contra-cyclical investment and take them on board. Not only must we invest more and earlier, we must invest more widely, not only in capital equipment but in research, development and new products. All these are essential to achieving a growth economy which will start to turn the unemployment figures into a very different state of affairs.

An example of what worries me is the way in which the media—our spokesmen—tend to welcome an increase in imports. They say that every upturn in the economy is preceded by an increase in imports, and therefore we should welcome this as a sign that we are on the up and up. Instead, they should say "Here we go again", caught out once more with inadequate investment so that when the upturn comes domestic manufacturers cannot supply for the next 12 months so that we have to go abroad for something which is not necessarily better, but is delivered on time and available because overseas manufacturers have invested and we have not. They have the stocks and we have not. That is an example which I see time and time again of the way in which an increase in imports is often commented upon. It irritates me no end.

It is certainly not an easy matter to increase the level of investment in the way I have indicated. It is all very well for the large firms, which understand the need for contra-cyclical investment. It is a different matter for the medium-sized firms, which do not. It is a very different matter for the smaller firms, which cannot. They go to their bankers and say, "I want to invest in more plant, and so on. It will not be used for the time being". The manager replies, "Are you telling me that for the time being you cannot service a loan that you are asking for? You want me to wait three or four years until you receive the income from the investment to service the loan? There's the front door, my friend". So much for the help the smaller firm receives from its average bank manager, my Lords.

We and the Government have to do much more. For the life of me I cannot see why the Government are so hesitant about increasing capital allowances. Such a proposal is a direct invitation; it would be popular; it costs nothing in the long run. Of course, there is a cash-flow problem for the Government. If you give more now and less later it affects the cash flow, but overall it would cost nothing. Certainly for the small firm which is making no profits it costs nothing to set that increase against nil profits. Certainly for the new entrant which everyone is so keen to encourage it costs nothing. I should be perfectly happy to see us going straight to a 100 per cent. write off in the first year. That would be a real encouragement to firms to develop and invest. Alas, there is nothing in the Budget which encourages that or which, through greater investment and growth, would make the impact on unemployment that I regard as our first priority. Quite the opposite, my Lords. There is a slashing of government investment under the so-called formula of PFI, and the hope that someone else will pick up the balance that is needed. It is pure hope, pure speculation, and a resignation by the Government from their responsibilities.

I wish to talk about the unemployed. What I say now may not be as accurate as my normal statements. I am told that as a result yesterday of the Chancellor's enormous efforts, and no doubt the whisky as well, he fell asleep in his chair on his return to No. 11, and had a dream. He dreamt that outside was a huge line of unemployed workers carrying banners. As he read the banners he saw, "Three Cheers for Ken"; "Well done, Ken"; "Penny off standard rate"; and "No tax on your estates up to £200,000, Well done, Ken".

He thought, "This is delightful", and invited the three leaders of the delegation to come to his room in the Treasury to thank them. He said to the first, "What was your express view?" The man said, "I wanted to bring with me one of the group who actually paid tax and could benefit from the penny in the pound but unfortunately there was no one there. Nevertheless, Mr. Chancellor, you must realise the sincerity of my gratitude to you for what you have done". The second unemployed leader said, "I, too, want to thank you for increasing the allowance on estates. We tried very hard to find someone in the delegation who had such an estate so that he could express his gratitude more precisely, but we could not find anyone. Indeed, Mr. Chancellor, they are all bankrupt. They cannot even pay their mortgage interest, never mind benefiting by having a £200,000 estate to leave". The third man said, "Since I am here, Mr. Chancellor, perhaps I could ask you whether you had in mind anything else to help the unemployed?".

The Chancellor said, "Yes, you're good fellows. Come to this window and share my magnificent view over the square and the Houses of Parliament. There you are". And that is about the sum total that this Chancellor has done for the unemployed. The unemployed family is the only family in all the standard family calculations published at this time of year which is worse off. Others are better off.

7.35 p.m.

Lord Stoddart of Swindon

My Lords, like other noble Lords, I should like to express my appreciation to my noble friend Lord Desai for introducing the debate, which has been good and well informed.

I had not intended to be provocative until I heard the noble Lord, Lord Boardman—he is in his seat but not paying attention—and was struck by his criticism of Labour Party Members, in particular the Shadow Chancellor who, he said, would say anything to gain power. I remind him that at the last election the Prime Minister promised the country that VAT would neither be increased nor extended. However, one of the first things that the Government did was to put VAT on domestic fuel. It would have been at 17.5 per cent. rather than 8 per cent. if the Opposition, joined by one or two brave Conservatives, had not prevented the Chancellor from raising it to 17.5 per cent.

I wish to talk about the Budget. It is a Budget which fails to meet the needs of Britain, in particular the need, as so many noble Lords have pointed out, for investment in productive industry. It is a Budget which has pleased few and angered many. Above all, it will not restore the feel-good factor in the British people. At the same time it has not cured the feel-bad among Tories.

I also believe that we are still experiencing the baleful effects of the disastrous experiment with the exchange rate mechanism. The economy is still depressed. Fear and insecurity still abound. This Budget, which should be about reviving confidence, will simply leave things as they were on Monday, before the Budget. Perhaps they will be even worse, because expectations were raised which have now been dashed.

The Chancellor's and the Government's concentration on low inflation and getting the PSBR down is causing great difficulty. He is trying to get it down; indeed, he is forecasting the public sector borrowing requirement down to zero or below by 1999—in time, I fear, for this country to be frogmarched into a single European currency with all the harm that that will do to our economy and to the unemployed.

I want now to turn to one specific item in the Budget: the reduction of 27p. in the tax on spirits and the real reduction in all other alcoholic drinks except strong cider through the failure to increase the duty in line with inflation. Of course, a great cheer goes up for reducing tax on alcoholic liquor, but count me out of the cheering. Alcohol is a most potent drug and is the cause of enormous misery and indeed slaughter as well as ill health and sickness. One in five road traffic deaths and injuries is alcohol related. That means that two people a day are killed on the roads and every day thousands are injured due to drink driving. Millions of days are lost at work through alcohol consumption and accidents at work are often alcohol related. Vandalism, brawling, knifings and murders are often related to over-consumption of alcohol. It is also the cause of a huge proportion of wife and child battering.

Yet despite all that, which the Government know well because they have to pay for the social consequences, the Chancellor has seen fit to make the consumption of alcohol cheaper, thereby ensuring that consumption will go up. With it there will be an increase in the social evils relating to alcohol. It is morally corrupt and disgraceful that the message in this Budget has been sent out by the Government that alcohol is harmless. "Drink up and be merry", the Government say, "even if your merriment injures or kills others or results in child and wife battering". It is a great pity that it is I and not a Bishop who has to preach this evening the evils of the demon drink, but someone has to do it because it was a wrong decision. Perhaps the decision was related to the fact that the Tories have very few MPs in Scotland and many of those they have are in areas which distil whisky.

Let me turn to taxation. I agree with the Leader of the Labour Party and the Shadow Chancellor that we should aim for fair taxation. I believe that that also means reasonable, not excessive, taxation, but it should be a system where those on high and very high earnings should be expected to pay rather more than they do at present. I am not one of those who are enamoured of the slogan, "Let people keep all the money they can in their pockets and spend it as they wish". That usually means less taxation for those on very high earnings or incomes and much higher expenditure for those on low incomes. It is the latter who lose out.

The Shadow Chancellor has been criticised and even mocked for suggesting a 10 per cent. bottom rate of income tax to assist the low paid and to ease the transition from benefit to employment. In my view, that is an altogether laudable aim which should be supported and encouraged. Unfortunately, the Shadow Chancellor did not go far enough in his proposals for fair direct taxation. More needs to be done than simply proposing a new rate of 10 per cent. We need that, certainly, but it is quite absurd that people earning just over £30,000 per annum find that their tax rate at the margin jumps from 25 per cent., or 24 per cent. now, to 40 per cent. That is a huge jump and thus they pay the same rate as people earning 10 or 100 times as much. As well as a lower bottom rate of tax, we need a higher top rate with a gentler progression to each band.

A top tax rate of 50 per cent. or even 55 per cent. would hardly be confiscatory, if applied to high earners. Indeed, in my own view, many of those high earners would welcome a direct tax system which was seen to be fairer than the present one. They could enjoy a warm glow of satisfaction, knowing that they were making a fair contribution towards the services that we all enjoy in this country. If the number of tax bands were increased in line with a lower bottom and higher top rate, it would then be possible to arrange movement from one tax band to another in gentler steps, thus easing the transition.

No doubt I shall be told that what I have suggested would cause administrative difficulties and would not be tax efficient. However, I believe that for the longer term those ideas should be considered.

I should have liked to talk about the family, but unfortunately my time is up, so I shall complete my speech. As I said at the beginning, the Budget failed to meet the needs of Britain. The only really good thing about it is that it has probably hammered the last nail in the coffin of this awful Government.

7.45 p.m.

Lord Astor of Hever

My Lords, despite what we have heard from the other side tonight, I am convinced that the Budget will help move the United Kingdom towards our goal of being the enterprise centre of Europe. The business climate could hardly be more favourable. The recovery is well established, the economy continues to strengthen, profitability remains high and companies are in a healthy financial position. We have low interest rates and low taxes. On this point, I was interested to read a recent survey by Tribune, in which two-thirds of the Labour MPs polled said that they wanted a new higher top rate of tax. Indeed, the last speaker would agree with that. Clearly, Labour still want to penalise success and pursue the politics of envy.

Obviously, Labour does not understand business. It wants to spend on increased capital allowances when investment is already growing. It wants to introduce the social chapter and a minimum wage which would cost jobs and hold business back. Just when our companies need lower costs and lighter regulation, Labour would burden them with extra red tape.

One of the industries that has really benefited from the business climate under this Government is the motor industry, which has literally been reborn. Ninety-nine per cent. of our motor industry is owned by foreigners. A noble Lord—not on this side of the House—remarked to me at lunch last week that this fact made him feel ashamed. Interestingly, later that day I saw him drive off in a French-built car. However, it is not a matter for shame; it is a matter for celebration and is a really substantial success story for this Government. Foreign ownership is a colossal advantage, since it has brought to Britain the world's best practices in car production and greatly improved export prospects.

Exports could account for a million cars a year by the end of the century. As production levels in British car factories rise—and both Honda and Toyota are planning significantly to increase their capacity by the end of the decade—a circle of prosperity comes into effect, both among the manufacturers themselves and in the component industry supplying them. It becomes more sensible to make all the major parts over here.

The component industry, including thousands of smaller British-owned companies, is reaping the rewards, having sharpened itself up to meet the more demanding specifications of the car makers. This in turn means that British firms are now better placed to sell abroad, although they will have to maintain their position of world-class competitiveness.

A perfect illustration of that turnaround was the announcement by Lucas Industries that they are to supply £1 billion-worth of electronic fuel injection systems for diesel engines to Volkswagen, a contract which in previous times could only have gone to the German supplier Bosch. Mercedes has invited several British companies to tender as suppliers for the first time.

The opt-out from Maastricht's social chapter is also helping the revival. Social costs here are much lower than on the Continent. A low-cost economy, union co-operation and sterling competitiveness mean few countries present so benign an economic environment for making cars. As a result, more than £1 billion of investment has been promised this year, with much more to come.

Ford is investing heavily, with plans for new Jaguar production in Coventry and engine programmes in Dagenham and Bridgend. Vauxhall has upgraded Luton with dramatic effect and Rover is still investing heavily in Birmingham to cope with booming Land Rover sales, which I hope will include field ambulances for the Ministry of Defence. Within the next six months, Ford and Vauxhall will be considering where to build the replacements for the Escort and the Astra, two of the most important models in Europe, raising hopes of further investment in Britain. There should be no contest.

7.50 p.m.

Lord Murray of Epping Forest

My Lords, one of the strong and welcome themes running through tonight's debate is the need to modernise British industry and to that end improve investment, both in physical assets and in training.

I agree very much with the noble Lord, Lord Desai, to whom we are all indebted for the debate tonight, that, while the economy above all needs a boost in capital spending, cuts in income tax have no great observable incentive effect in that direction. I agree, too, with the noble Lord, Lord Diamond, that, as history shows, most people are likely to spend their tax cuts on consumer goods, probably imported. There is certainly no assurance that the money will be invested in British industry.

The Government rightly encourage and indeed help particular industries to invest. To that end they offer financial inducements—dare I use the word "subsidies"?—to Japanese, German and Korean companies to set up shop here, if necessary outbidding other governments. I strongly agree with my noble friend Lord Merlyn-Rees and the noble Lord, Lord Astor, as to the great advantage that such inward investment has brought to this country.

But, if it is right to encourage inward investment in this way, surely it is equally right to encourage domestic companies which are important to our future to remain here and survive. I want to descend from the macro-economic peaks that have characterised the debate to the level of examining particular industry. I want to argue that it is right to encourage shipping companies not to continue flagging out abroad, with the consequent loss of trade and earnings for Britain, to say nothing of the implications for defence. The Budget Statement signally fails to do that. However, I want to argue that it is not too late and that this matter should be looked at again.

I declare an interest as a trustee of the National Union of Marine, Aviation and Shipping Transport Officers. But my greater interest is in halting and reversing the decline of what has been, could be and ought to be a major national asset.

Shipping is not a sunset industry. Britain depends on shipping for the carriage of 95 per cent. of the exports and imports referred to so often this evening. But four-fifths of those imports and exports are now carried in foreign ships, as the noble Lord, Lord Mackay, will remember from a previous incarnation, when he graced the office of Minister for shipping. Last year, world seaborne trade hit a record total of 41 billion tonnes. By the end of the decade it will be seven billion tonnes. World shipping earnings are £100 billion a year, of which Britain now receives only 4 per cent.

Even with reduced crewing on modern ships, the demand for seafarers is growing. There is expected to be a world-wide shortage of 350,000 officers by the end of the decade. British seamen are the best there is, but they are a threatened species. In 1980, 63,000 officers and ratings were employed on ships with the UK Chamber of Shipping. Today, there are less than 20,000. As we heard this afternoon, in 1980 nearly 1,300 cadets were in training; today there are less than 400.

The results are plain. They are characteristic of so much that has happened to this country over the past generation—not merely under this present Government but under previous governments as well. British shipping has traditionally been one of the biggest earners of invisibles. Now the balance has gone into the red. Less obviously, the fleet's decline is being felt in a wide range of related industries and services—shipbuilding, shipbrokering, marine insurance and so on. British owners can no longer afford to replace their ships with modern ones, so our ships are now on average 16 years old—twice as old as they were 15 years ago. That brings into focus and illustrates a point made by so many speakers in the debate, not only on this side of the Chamber but on the other Benches as well. It is a challenge to us. If we could capture just one per cent. more of the world market, it would be worth £1 billion to us in terms of gross invisible earnings. But—and here's the rub—given the extent of support that foreign governments provide for their merchant fleets, the UK shipping industry cannot do it alone.

Japan is planning to extend its already big aid programme with a £300 million support package, including tax exemptions for seafarers, tax breaks for shipping companies, loans of up to £240 million for new ships. The Dutch Government introduced a shipbuilding scheme worth more than £20 million and this year is adding new special tax arrangements. Malaysia has established a £215 million fund for investment in shipping. France recently brought in new measures to encourage fleet modernisation, with a £55 million fund for shipowners and investment aids worth a further £17 million a year. I could go on.

When the Government are told what is happening and warned of the consequences, Ministers repeatedly take the line that they must work for the abolition of all aid packages. But the packages are increasing, not diminishing.

To be fair, the Government have offered a little assistance in recent years. There was the Government Assistance for Training Scheme for cadets and the Development of Certificated Seafarers' Scheme, giving grants to employers. But as we heard earlier today, the GAFT grants are not proving big enough to encourage employers to take on cadets. The Government also partially restored, in 1994, in the form of roll-over relief, part of the tax incentives withdrawn in 1984. And since 1991, deepsea seafarers have had the 183-day rule income tax concessions.

I welcome those concessions. However, the point is that, in introducing them, the Government have clearly acknowledged the need for support but they have set them at a minimal level which does not enable the British fleet to compete effectively. In other words, we are getting the worst of both worlds.

It is still not too late for the Government to have second thoughts—or for the Opposition in another place to put down amendments to achieve our national objectives. At the very least, if the Government are serious in their intention to persuade other governments to drop their subsidies, they should go in to the negotiating table armed with some bargaining counters in order to negotiate away the schemes if that is the long-term effect.

The industry does not ask for massive support. The support proposed would cost some £40 million. Less than half of 1 per cent. of the £6 billion transport budget is spent on ships and ports. The cost of doubling that to a modest 1 per cent would be minimal. The market is there and the opportunity is there, but the market is rigged against Britain. It is time we took some action to redress the balance. The Budget provides that opportunity still.

7.59 p.m.

Baroness Rawlings

My Lords, as neither an economist nor a businesswoman, I rise to speak in this debate with great reservation in a House not only filled with so many Budget experts, such as the noble Lord, Lord Desai, but also containing no less than six ex-Chancellors of the Exchequer.

The practice of the House as I understand it is not to have on Wednesday a Motion that is in any way controversial; but I gather from what we have heard today that that does not mean that we do not have a controversial debate.

This Budget has been hailed for weeks, nay months, by most commentators as more of a political budget than an economic one. The Party opposite had already made its comments and given its briefing criticisms on the Budget last week, long before the Chancellor had even delivered his Speech. It is difficult to believe that it already had all the details last week. Were they perhaps leaked? I think not.

There has been strong criticism from the Benches opposite but I am loath just to negate all those criticisms by reeling off a mass of statistics which go on for hours, like the old Soviets used to do. Most of your Lordships know them all already. Probably that would not only send your Lordships to sleep but myself as well. But why, whenever noble Lords on the Benches opposite discuss the economy, do they knock it? They cannot admit that Britain, far from being left behind in the world economy, is doing very well. Like the old Soviets, they prefer to look at statistics instead of realising that the Government have been prospering in the real world.

It is a tough old world out there. Our competitors in Europe and the rest of the world constantly monitor the position in Britain. They know that our key industries are more competitive than ever before. They know that investment in our economy has grown faster than in any other major European country and six times faster than under the last Labour Government. Labour closes its eyes to that and only wants to run Britain down.

I know that it is difficult to accept that your opponents are successful and on the right track, but we can only look at the hard facts. Britain is the main country in Europe for overseas investment from the United States, Japan and Korea. That means thousands of jobs. We have the necessary stability for outside investment. That is vital for our economy. I am afraid that the only thing that Labour—even new Labour—with its rush to sign up to the social chapter, will attract to Britain is more European regulations. Now even the other European countries have admitted that the social chapter does not work. Europe is following Britain's lead today while Labour is following Europe's leaders of yesterday. I remember losing vote after vote in the European Parliament for five solid years in this area because we were in opposition. But, luckily, when the real decisions were taken in the Council, we had a sensible Minister, a Conservative Minister, who was not prepared to sell our industries down the river through even more of those damaging regulations.

Britain needs strong world-class companies to compete in global markets. It needs companies such as British Telecom, which is a privatisation success story with more than £25 billion invested in Britain. That is an investment which the Treasury could never have afforded to give and makes BT one of the most advanced networks in the world. It considers Europe as its natural extended home market, which is critical to its globalisation plans. It is a British company operating in more than 40 countries around the world. It cannot operate successfully if it is hampered by petty rules, regulations and regulators. Its guidelines should be the competition policy set out by the GATT and the World Trade Organisation, not the constricting ropes of the social chapter. All companies, whatever their size, need a stable and sound economic environment in which to operate, where people feel secure. That is exactly what the Chancellor, in full command, has produced with this Budget.

Finally, I should like to touch on just two points in the Budget. First, there is the cut in income tax: basic rate has been cut by 1 p to 24p; that is a tax cut—the kindest cut of all; the 20p band has been widened by £700; there is the new 20 per cent tax rate on savings income. It means that 26 million taxpayers will be better off. Now, one in four taxpayers will pay tax at only the 20p rate. Secondly, at the same time, this Budget keeps public spending at 40 per cent. below GDP. That is essential for a lasting recovery. We all know that a lasting recovery will bring higher living standards and more jobs. Surely this is a responsible, sensible budget that will be proved a success not only now but, more importantly, in years to come. It is not a "quick fix" but a Budget for the long-term good of the British economy.

But the Labour Party calls this Budget "yet another failure". If it is a failure, then, remembering the great French composer Bizet, who died aged 37 broken-hearted over the supposed failure of his opera Carmen, so be it.

8.5 p.m.

Lord Rea

My Lords, most noble Lords so far have spoken about the health of the British economic situation and many have proffered remedies. I shall reverse those words and talk about the economics of the British health situation; by that I mean the health of the British people—the nation—rather than the National Health Service.

When the National Health Service was founded 47 years ago, it was expected, together with the other provisions of the so-called welfare state, based on the principles set out by Lord Beveridge, that it would level up and make equal the health status of "all sorts and conditions of men"—and by men I also mean women, even if the Book of Common Prayer from which the words are taken, along with Thomas Jefferson, did not do so, as Madam Speaker pointed out earlier today. It would do that by eliminating the five giants: want, idleness, ignorance, disease and squalor.

It is true that the expectation of life has risen. Many infections are no longer a major threat and infant and maternal mortality rates have fallen to a level which was undreamt of 47 years ago. Some of that is due to the ingenious discoveries of science as applied to medicine; but most of the improvement is due to the better nutritional and environmental conditions which have been experienced by the population, thanks to the improvement in the social and economic situation of the majority of the British working class during almost 40 years of nearly full employment from 1940 to the late 1970s. However, even in the days of the government of the noble Lord, Lord Callaghan, uncomfortable evidence was appearing that some sections of the population were slipping behind. That led to my late and much missed friend Lord Ennals setting up the working party on Inequalities in Health chaired by Sir Douglas Black. His report, the Black Report, was published, rather reluctantly in small numbers, in a cyclostyled version by the then right honourable Patrick Jenkin, Minister for Health, who took no action on its recommendations; and nor did the Chancellor.

The report revealed that there was an increasing discrepancy between the best off, whose health status was racing ahead, and the worst off, who had higher sickness and mortality rates over almost the whole range of diseases. Since that report, much admired as it was for its academic thoroughness, a steady mass of evidence has accumulated to show that since 1979 the gap in health has been widening. For the first time, last year a report was published in the British Medical Journal showing that mortality rates among deprived population groups in the north of England were in fact increasing. Up to then, although the health gap was widening, even the least well off were showing some improvement.

In Britain it is not merely the health of the poorest 10 per cent or 20 per cent. that should give us concern but also that of the largest group in the population: the skilled working class, classified by the Registrar General as social class 3, non-manual and manual—the office workers, computer operators, fitters and electricians. Though their health is better than that of the unskilled, they suffer more illness and earlier deaths than those in professional and managerial work, who are setting the trend in high health status, even when lifestyles deleterious to health (smoking, physical inactivity and so forth) are allowed for. In fact, Professor Michael Marmot's study of the whole range of Whitehall civil servants, from cleaners to senior mandarins, showed that, starting from the top, there was a steady deterioration in levels of health and increasing incidence of illness as one came down the scale.

Incomes in the Civil Service range from £120,000 at the top to £6,000 at the bottom, a 20-fold discrepancy. There is little difficulty in understanding why those at the bottom are less happy and die younger than those at the top. But there is a linear relationship between health status and job status throughout the range.

Dr. Richard Wilkinson of Sussex University (a proper doctor with a PhD) showed a relationship between an improving life expectancy and the proportion of a country's GDP going to the least well off—70 per cent. of the population—when comparing countries which have a GDP of over 5,000 dollars per head of population. In other words, countries with the most egalitarian wealth distribution have in recent years shown the biggest gains in health.

During the past 16 years, while the distribution of wealth in the UK has become more and more unequal, Britain has fallen a long way down the international league table of health statistics—that is, life expectancy and infant mortality rate—starting at No. 8 and now just passing No. 20. We have been passed by countries such as Eire and Spain and left standing by Hong Kong, Singapore and Japan, which is now the top of the league.

The Budget did nothing even to start to reverse that trend; indeed, it may even make it worse. One of the first tasks of a new Labour Government—or perhaps a government of new Labour, as the noble Baroness pointed out—must be and will be to start the process of redistributing income more fairly. A minimum wage is a start. Fairer progressive taxation is another. But, above all, by borrowing initially if necessary, we must have measures to help the unemployed back to work.

Nearly 90 years ago George Bernard Shaw wrote in Major Barbara that poverty is, The greatest of evils and the worst of crimes".

We may have eliminated absolute poverty in the United Kingdom—but sadly failed in the rest of the world; in fact our aid budget has stayed stable or gone down while we have reduced the price of whisky—but in Britain relative poverty is still rife. That can damage both the individual, as I have shown, and society as a whole. We tolerate it at our peril.

8.14 p.m.

Viscount Chandos

My Lords, if there were not already sufficient reasons for feeling a degree of nervousness in speaking for the first time from this Bench, on top of that I am faced with trying to wind up, on behalf of these Benches, a vigorous and stimulating debate with contributions from many of your Lordships' distinguished economists and economic specialists. As the proposer of today's debate, my noble friend Lord Desai and my noble friend Lord Eatwell, who opened, are, without doubt and without partisanship, among the most erudite economists of all. I feel as though I have been asked to sing "Nessun Dorma" equipped only with a packet of throat pastilles, in concert with two of the "Three Tenors".

When a friend heard that I was faced with this formidable task he said that he presumed, in the finest traditions of the Foreign Office, that I would speak on endogenous growth theory while my noble friends would speak on the subjects investment bankers are expert in—whatever they may be. In the result, my noble friends have shown not just their academic expertise, but also their mastery at analysing the real world in terms vividly and, sadly, painfully understandable to the layman. We should therefore be particularly grateful to my noble friend Lord Desai for introducing today's debate and enabling your Lordships' House to address the economic "State of the Nation" in the immediate aftermath of the Budget Statement.

In the limited time available I cannot respond to every noble Lord who has spoken today, let alone raise every aspect of our current economic situation or the Budget Statement's inadequate recognition of the economic mountain we have to climb. But, before I concentrate on my particular theme, I cannot help but join my noble friend Lord Eatwell in expressing my dismay at the mean-spirited foundation of the Government's Budget.

Despite evidence to the contrary, it cannot be only noble Lords on this side of the House who feel a repugnance towards measures which, however ostensibly prudent in macroeconomic terms—my noble friend Lord Desai exposed the questionable nature of that prudence—are in some cases viciously unfair in the way the burden of taxation is maintained or even increased on those with the lowest income, while the first steps of reversing the huge tax rises of recent years are so clearly for the benefit of the better off.

I should like to concentrate my remarks on the Government's objective of achieving sustainable non-inflationary growth—something to which every noble Lord aspires and which is, of course, the only way we can in the longer term achieve the resources and the opportunity to provide a significant improvement in the standard of living for those who have been so poorly treated by this Government, as well as continued steady progress for those more fortunate.

The noble Lord, Lord Astor of Hever, echoed the phrase of the Chancellor of the Exchequer in his Budget Statement, Britain is the enterprise centre of Europe".

That conjures up a variety of visions. I wonder whether the Chancellor really meant the "Enterprise Centre of Europe"; the latest supranational agency for whose location we need to compete with our European partners, no doubt to the disgust of the Chancellor's Euro-sceptic colleagues. In which case, like the British Library—another great construction disaster over which the Government have presided—this Enterprise Centre is sixteen and a half years behind schedule. Countless billions of pounds have been spent (£120 billion from North Sea oil revenue alone) with only so much to show for it. Or was the Chancellor thinking of a role in Europe akin to that of Hong Kong or Singapore in South East Asia—this sudden and simplistic discovery by the Conservative Party of the so called "tiger economies"? If so, I am afraid that the Government's policies over a decade and a half and the measures proposed in the Budget Statement will do no more than deliver an economy with the characteristics of a mangy old alley cat—in poor shape; inadequately housed; with insufficient investment behind it, but always on the prowl for a short-term opportunity.

My noble friends and our colleagues in another place have made it perfectly clear that we are centrally and fundamentally committed to an enterprise economy at the very heart of a market-based system. Professor Patrick Minford, who seems to think that his position as one of the three remaining so-called "wise men" advising the Treasury, is an appropriate platform for facile political invective, is quoted today as saying that our party's intentions towards a low tax, free-market economy are at best doubtful, at worst damagingly hostile. That is absolutely untrue, as Professor Minford will in due course find out, though I cannot hazard whether my right honourable friend Gordon Brown will have the benefit of Professor Minford's advice at that time. The noble Baroness, Lady O'Cathain, and the noble Lord, Lord Skidelsky, who should know from our shared creation of the Social Market Foundation of my personal commitment to a market economy, can, I believe, likewise be reassured.

What we on these Benches are committed to is an enterprise economy in which the opportunity for enterprise and the benefits from enterprise are open to everyone, not just those whom the Government will now permit to avoid inheritance tax above the hugely increased threshold by acquiring shares on the Stock Exchange's alternative investment market, the latest in a long line of the Government's ill-advised and economically distorting tax shelters for the wealthy. I might add at this point that, whether or not there is a case for differentiating between the capital gains tax rate on short and long-term gains, it is both wrong and unrealistic to contemplate what the noble Baroness, Lady O'Cathain, and indeed the Prime Minister suggest—the outright abolition of capital gains tax.

We are committed to an enterprise economy in which, as my noble friend Lord Eatwell has argued, careful measures to stimulate productive capital investment by both the public and the private sector creates an atmosphere of confidence for industry and consumers alike—which in turn creates the sustainable, non-inflationary growth which this country needs and is entitled to. In the absence of the noble Lord, Lord Skidelsky, I will risk suggesting that, if low interest rates alone were sufficient to stimulate adequate levels of investment, the historically low interest rates of the past three years should not have allowed the serious shortfall in investment which is now apparent.

We are committed to a low-tax market economy, where the low taxes apply to those on low incomes and not just to those on high incomes. Last week, regrets were expressed in your Lordships' debate on the gracious Speech that the Labour Party had advocated a lower tax band, of 10 or 15p in the pound, thereby, in the eyes of some of your Lordships, creating a competitive bidding process for lower taxes. How odd. I thought competition was now accepted on all sides of the House to be good. And we were not competing to cut the taxes for those already well paid, well off and fully employed. We want, as my noble friend Lord Eatwell spelt out so clearly, to lower taxes and eliminate distortions in the benefits system and to remove the disincentives for those out of work or on welfare to take up employment and join the enterprise economy themselves. Sixteen years after this Government reduced the top rate of income tax to 60p in the pound, they have still left unchanged effective marginal tax rates for those out of work or on low earnings of 90p or more in the pound. Sixteen years, my Lords, the time from birth to school leaving age, and noble Lords opposite and their colleagues in government have learnt nothing, forgotten nothing.

Investment, as so many noble Lords on this side of the House have argued—none better than my noble and valued friend Lord Diamond—is the key to a more prosperous future than our Tory past; investment in education, investment in training, investment in technology, machinery and equipment. That is why, in the face of the relentless squeeze on productive public sector investment over the past 16 years, my right honourable friend Mr. Prescott proposed the principles of private finance for the public sector and why we therefore support, as preferable to the alternative, the PFI. I should declare an interest at this stage, that a company of which I am a director has a subsidiary which acts as consultants to NHS trusts in seeking private sector finance. But, for the same reasons as those advanced by my noble friend Lord Eatwell, I have serious concerns that PFI is not the best long-term way of addressing the issue. How much better would it be to tackle the underlying inconsistencies in the country's public accounts and restore, as the noble Lord, Lord Clark of Kempston, proposed from the Benches opposite, a proper, updated distinction between capital and current expenditure, so that the appropriate financing of productive investment can then be gauged and implemented.

I cannot end without taking one further example of the Government's cock-eyed priorities, so requiring me to declare another interest, as a director of English National Opera, which, as a supplement to its buoyant box office revenue, depends on Arts Council grants. At the same time as proposing a cut of more than £60 million in the funding available to the Department of National Heritage, and hence a 3 per cent. cut to the Arts Council, this Government propose to exempt classic cars from road fund tax at a cost, estimated today by experts in this field, of at least £25 million per annum, without even allowing for the costs of ensuring by other means adequate standards of safety. I would not want to impose any financial hardship on the noble Lord, Lord Monson, and, with a lifelong interest in cars, bear no ill will towards other classic car owners. But can it really be right, in considering the quality of life for those in a position to enjoy life, that we should threaten our national heritage and culture in order to exempt cars of more than 25 years of age from tax—let alone freeze the lone parent's allowance, at a saving of only half what is handed to classic car owners?

My Lords, this is not a Budget whose immediate reception should give the Government much encouragement: Budget blues put f near record low",

reads today's Evening Standard headline. "You can't buck the markets", said the Prime Minister's predecessor. And is it surprising that the pound is weak when the Government's own forecasts in the Red Book (Tables 3.1 and 3.3) predict continued loss of market share in our export markets?

Nor do I believe that this Budget will be better regarded in six months' time, as some of the Government supporters try to find comfort in thinking. It is mean-minded and inadequate now, and it will be mean-minded and inadequate then, when the long-term problems in our economy will be ever more cruelly exposed.

The noble Baroness, Lady Rawlings, has cast her right honourable friend the Chancellor as a latter-day Bizet, the composer of one and a half successful operas. I look forward to the many future Budgets of the Verdi of prospective Chancellors, my right honourable friend Gordon Brown, and the prospects then, despite the run-down and underinvested economy he will inherit from this Government, of sustainable, non-inflationary growth and progress towards full employment once more.

8.28 p.m.

The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)

My Lords, I welcome the noble Viscount, Lord Chandos, to the Front Bench. I hope he survives longer on the Front Bench than his noble friend Lord Desai, who thought a few unthinkable thoughts and found himself back on the Back-Benches. The debate has gone on perhaps a little later than many of your Lordships thought. I therefore appreciate that some noble Lords have had to go because they had planned their day on the basis that our debate would last for four and a half hours and would be over by 7.30 p.m. Therefore, I fully understand that some noble Lords have had to leave.

It has been a very interesting debate. I am always grateful when the noble Lord, Lord Desai, speaks. The noble Lord and I joined your Lordships' House at the same time and for many months we both found ourselves very much at the bottom of the batting order, usually fairly adjacent to each other in any debate in which we were involved. But I notice today that the noble Lord has managed to get himself at the top and myself at the bottom, so some progress has been made. I say also to the noble Lord, Lord Desai, that I always enjoy his speeches. He is an economics professor under whom I might have enjoyed being a student—not that I was ever a student of economics and, as some may say, that will be apparent shortly. Like most of the rest of the world, I did not study economics. However, I believe that I might have enjoyed studying under the noble Lord, Lord Desai. I am not sure whether I would have enjoyed studying under his noble friend Lord Eatwell. I might have found it a little uncomfortable. Nonetheless, I am sure that it would have been as equally interesting.

The overriding aim of this Budget is to maintain a healthy and sustainable rate of economic growth because without growth, there can be no prospect of improved public services, more jobs and higher living standards. The British economy is growing steadily. The recovery is now in its fourth year. Growth has been well balanced and output is at record levels. Exports have been strong; business investment has started to pick up and consumer expenditure has been on a steady upward trend. Unemployment has fallen by over 700,000. Businesses have created half a million new jobs and inflation remains low. It is no wonder that the OECD said that our performance last year was "impressive". It praised the pace-setting reforms that the Government have implemented since 1979, which have immeasurably improved our competitiveness.

s Although growth has indeed slowed in recent months, as some noble Lords have pointed out, it has not stopped in its tracks, as perhaps some have tried to suggest, but far from it. All the indications are that growth will continue at a healthy rate into next year and the year after. The fundamental ingredients are all there; namely, low inflation, sound public finances and competitive businesses. Seldom can a Chancellor have delivered a Budget against such an encouraging background as my right honourable friend did yesterday.

It is not just the Government that expect the British economy to continue growing at a healthy rate, as my noble friend Lord Oxfuird said; it is also the view of independent forecasters. He drew our attention to the IMF and no less a body actually expects Britain to join Germany at the very top of the G7 growth league next year. Exports have very much led the recent phase of the recovery and they are at record levels. They are competitive, highly profitable and they are benefiting from expanding world markets.

I listened, as I always do, with great interest to the noble Lord, Lord Bruce of Donington, who talked about the mass destruction of manufacturing capacity. The noble Lord lives in an unreal world. I might agree with him if he had said that there have been massive changes in the nature of our manufacturing capacity, but to talk about "massive destruction" shows that the noble Lord, like many others, tends to think about manufacturing industry as the traditional manufacturing industries we had many years ago and not the new manufacturing industries. Exports of goods are up by 6.5 per cent. in volume terms over the past year. Export growth last year was the fastest for 20 years. United Kingdom exports in volume terms are indeed at record levels. We are now Europe's largest exporter of items such as computers and colour televisions. I suspect that one of the problems we have in this debate is that some noble Lords do not recognise these items as manufactured products. They are the modern manufactured products.

We must not forget the export of services and our investment income, the so-called invisible receipts, largely coming from work in the City of London. Taken together, these account for around one-half of all our overseas earnings. We are the only major country with substantial invisible surpluses. The success of our exporters has helped us to achieve current account surpluses with the rest of the G7 countries and with the four Asian tigers. The noble Lord, Lord Shepherd, rightly pointed out something that we always have to remember—that is to say, we have not only to compete in Europe, which is a very important market, but also around the world because we are a major trading nation. We depend not only on the European Union for our markets but also on the rest of the world. We have a current account surplus with these Asian tigers; namely, Hong Kong, South Korea, Singapore and Taiwan. Overall, our current account deficit remains very modest in relation to our GDP.

Investment is picking up where firms need to expand capacity and adapt and adopt new technology. The climate for investment is excellent. The recovery is well established and profitability is high. I say to the noble Lord, Lord Diamond, to whom I always listen with great interest, that it is much more important than giving investment allowances to ensure that companies have good, high profitability on which they can base sensible long-term investments. These company finances are strong. Company tax and interest rates are low. Business surveys show strong investment intentions. Indeed, investment in the manufacturing sector is already 12 per cent. up over the past year to its highest level for four years.

I understand noble Lords who say that in the great tables of things the situation does not look as obvious as I am trying to make it. We are accused as a country, and more than just as a Government—the noble Lord, Lord Diamond, again spoke about over 50 years—of not investing enough. An interesting thing is that the noble Lord, Lord Desai, who introduced this debate, wrote in a recent article in the New Statesman: The United Kingdom notoriously invests a lower proportion of its GDP than, say, Japan or Germany, but the rate of growth of the UK economy is not that much lower. The British get bigger bangs for the bucks from investment than the rest. It is not fashionable to say this, but after all, it is outputs that matter and not inputs".

We ought to bear that in mind.

The story of investment is good. Total investment has grown faster since 1979 than in France, Germany and Italy and about six times faster than it did under the last Labour Government. The manufacturing productivity gap between us and our main Continental competitors has been narrowed substantially from between 30 per cent. and 50 per cent. in 1979 to just 10 per cent. now. The gap actually widened under the last Labour Government.

My noble friend Lord Boardman rightly pointed to inward investment, as a number of other noble Lords have done. That is very important. I say to the noble Lord, Lord Merlyn-Rees, that that inward investment has helped very many parts of the country which have had serious unemployment problems. He discussed Wales; I could discuss Scotland.

Without going on too long, perhaps I may list one or two of the most recent stories of inward investment in this country. Chunghwa Picture Tubes Ltd. from Taiwan has just announced a £260 million investment in Mossend in Lanarkshire, creating 3,300 jobs in manufacturing, which will go a long way to replace the unfortunate closure of the steelworks there. Lexmark International of the United States is going to Rosyth, Fife, to create 500 new jobs. To show that I am not looking just at Scotland, Fujitsu from Japan announced an £800 million expansion at its County Durham site, creating 500 new jobs. Nissan has a £250 million investment in the north-east. Siemens from Germany announced its decision in August to build a new £1.1 billion semi-conductor plant in North Tyneside, creating 1,800 new jobs. The whole House knows that I could go on with a number of other examples in recent times and, indeed, other examples where the factories are now up and running.

By keeping inflation low we have managed to keep interest rates low. I believe that that is very important from the point of view of investment and jobs. I thought that my noble friend Lord Birdwood was being unnecessarily pessimistic in the view that somehow or other improved technology and efficiency would inevitably lead to fewer jobs. I do not believe that that is necessarily true. Perhaps I may commend at least part of a speech by the noble Lord, Lord Peston, in the debate on the Address last Thursday, I believe, where, from the point of view of an economist, the noble Lord addressed that problem. I shall perhaps address it in a more simple way and point out that countries like Japan and the United States, which are arguably the most technologically advanced societies, have kept unemployment low and they are still at the cutting edge of those changes. So I really do not think that we need to be pessimistic about it. However, we have to make sure that we are in a position to seize any opportunities for such new investment. Dare I say that as a cultural change we need to accept that those new products are manufactured products every bit as much as the ships or railway engines which the industrial areas of Tyneside and Clydeside once produced?

We should not be too pessimistic about employment. We should remember that we have more of our people in work than is the case in other European countries. I gave the figures the other day. Sixty-eight per cent. of our population of working age are in employment. The figure for Germany is 66 per cent., in Italy it is 51 per cent., in France 60 per cent. and in Spain 45 per cent. We should remember that that is the other side of the unemployment figures. I now live in Glasgow and although I did not represent that area when I was in the other place, I know about the pockets of serious unemployment. I do not minimise the difficulties for the people who live there. However, there is no point in trying to paint a picture of Britain as somewhere where there are only unemployed people. We should not paint a pessimistic picture of Britain, especially if we want to encourage people to buy from us or to come here and invest.

While I am giving comparative figures, perhaps I may look at this from the viewpoint of unemployment. On the ILO base—I am trying to be as reasonable as possible to noble Lords opposite—unemployment in the UK is 8.2 per cent. In Germany it is 8.4 per cent., in Italy 11.3 per cent., in France 11.4 per cent. and in Spain 22.2 per cent. All of your Lordships are rightly worried about the youth unemployment rate. In the UK it is 13.6 per cent. I think that we can all agree that that is far too high and, indeed, Germany is doing much better with only 8.3 per cent. However, the youth unemployment rate in Italy is 31.8 per cent., in France it is 27 per cent. and in Spain it is 40 per cent.

I am not too surprised that noble Lords opposite did not talk much about the social chapter and the minimum wage because one of the interesting things about the figures that I have just given is that the countries in almost the worst position among the major players in the European Union are France and Spain which have the lethal combination of the minimum wage and the social chapter. Those are the countries with horrendously high rates of youth unemployment, with general unemployment and with a much lower percentage of their population in work. So I do not think that we should paint too gloomy a picture of the position in this country when one looks at how our near neighbours are getting on in terms of their employment and unemployment figures.

Not many noble Lords mentioned inflation, although my noble friend Lord Boardman is an exception. I am not surprised by that because we are now enjoying the best inflation performance for almost half a century. The underlying rate has been at or below 4 per cent. for 38 consecutive months. We have achieved that by setting an explicit inflation target and by putting in place some of the most open and transparent arrangements for monetary policy in the world. Thanks to the brave decision that was taken last year by my right honourable friend the Chancellor to increase interest rates when the economy was coming under pressure, we believe that inflation is now close to its peak. The cost pressures from higher commodity prices and the depreciation of sterling are now easing. Cost pressures in the labour market are also noticeably subdued. We expect underlying inflation to fall steadily.

I believe that with continued care we have broken through the psychological barrier that we have had in this country for far too long of accepting inflation as something with which we have to live. One of the great strengths of the German economy is that neither the politicians nor the people there have accepted that philosophy. I do not want to go too far in this aside, but I also think that living with high levels of inflation has meant that when we do come to a prolonged period of low inflation people do not feel as well off as they thought they used to feel because they thought that getting more money in their pockets, for their houses or in any other way was an indication of increasing wealth when, against a background of rising inflation, it certainly was not.

I turn now to government borrowing. Sound public finances are vitally important. The less the Government borrow, the easier it is to keep down interest rates. The noble Lord, Lord Desai, argued that point in his article of a fortnight ago and again in his speech today. That is good news for business, good news for investment, good news for home owners and good news for jobs. Sound public finances are essential to sustain economic growth. No country can expect to run a large budget deficit for long without getting into trouble. Under the last Labour Government, the PSBR reached nearly 10 per cent. of national income—and we all remember what happened. Inflation and interest rates soared. The economy collapsed, and eventually we had to call in the IMF. In doing so, we encountered the only time in the post-war period of the UK economy when real spending has been cut. It was cut by 7 per cent. and, in the words of the noble Lord, Lord Desai, it was a "traumatic experience" and it is an experience to which this Government have no intention of ever subjecting this country again.

We have to take tough decisions. Governments often have to do that. We often have to risk short-term unpopularity in order to get our public finances back on a sound footing. Borrowing always increases in a recession, but once the recession is over, as is ours, the Government need to make sure that borrowing comes down again. This Budget keeps government borrowing on a clear downward path by keeping tight control of public spending. The PSBR, which stood at £45 billion two years ago, will be reduced to £29 billion this year and will continue to fall in the years to come. Indeed, with government borrowing here falling faster than that of any other major European country, we are on track to achieve a balanced budget by the end of the decade. We have managed to do it before and I am sure that we shall do it again.

The key to lower government borrowing has been tight control over public spending. In his three Budgets my right honourable friend the Chancellor of the Exchequer has succeeded in slashing £53 billion off previous expenditure plans. The new plans allow for real growth in public spending of just one-quarter of 1 per cent. per year. By 1997–98 we will have met our target of getting public spending below 40 per cent. of national income.

We have re-examined and refocused our spending priorities and there is more money for some of the key public sectors about which people care such as schools, hospitals and the police. I believe that people are offered a fundamentally flawed choice when it is suggested that we can either reduce taxation or spend more on health and education. I believe that with a healthy economy one can successfully do both.

We intend to spend more on education and to build on the considerable improvements that we have seen in the past 16 years in education and in the outputs of education. Today about one in three youngsters goes on to higher education; 16 years ago that figure was one in eight. The number of youngsters staying on at school today after the leaving age of 16 is markedly larger than 16 years ago. I am certain that we all applaud those improvements. Of course, we want to do better and, with the extra spending, I am sure that we shall do better.

The noble Lord, Lord Rea, rightly pointed to the importance of the health service. We have put more money into the health service in every year of our term of office and will do so again this year. Perhaps unfortunately for governments, the cleverness of doctors and the advances in medical technology create their own pressures for higher spending. Today many operations, procedures and medicines are available which were not available 16 years ago but—dare I say this wearing my Treasury hat—they all seem to cost a great deal more money. That is something that we must face up to. As I have said, we have put a lot more money into the health service and many new hospitals have been built and are now open throughout the country. One or two of them even bear my name on either the foundation stone or plaque.

We have put more money into those two important areas of government spending. We have done so to help young people in school and to help people when they require the National Health Service—

Lord Rea

My Lords, perhaps I may intervene because the point of my remarks was not to say that more money needs to be spent on the health service; it was to say that much of the ill health in this country is due to inequalities in income. The poorer people are, the less healthy they are. The best way to improve the health of the nation is not necessarily to improve the health service but to improve the economy and to make the distribution of income more equal.

Lord Mackay of Ardbrecknish

My Lords, we are, as I have been trying to argue, improving the country's economy. We are seeing unemployment come down. We are seeing people finding jobs and having higher incomes. All those things do, indeed, count. However, I suspect that were Ito say to the noble Lord that we were cutting the NHS I would be hearing a slightly different story from him. One cannot just say that there are other factors. The improvement in health care and the cleverness of physicians and surgeons at childbirth, for example, have meant that the statistics for perinatal and neonatal mortality have come down hugely in all social classes, as I believe the noble Lord would accept.

I should like to turn to one aspect of the debate which was dealt with by the noble Lord, Lord Eatwell, and many others. It was about public spending. At about £22 billion, public sector capital spending, which includes the PH, will remain well above its 1980s levels, and the private finance is being mobilised on an increasing scale. We expect about £14 billion of PH projects to have been signed up by 1998–99. That goes well beyond any reductions in public sector capital spending. There are a number of projects, of which all of your Lordships are aware, which are being financed in that way: London Underground, parts of the road network and so on.

I was interested to hear confirmed today by two noble Lords opposite what I heard on television on Sunday: Mr. John Prescott claims to be the originator of the scheme for PH. I wish that he would tell the Labour Party in Scotland, and particularly his colleague Mr. Brian Wilson, who I believe is currently its transport spokesman, because one of the really exciting PH projects in Scotland has been the bridge "Over the Sea to Skye". It is being constantly attacked by the Labour Party largely because the word "private" is associated with it. The noble Viscount, Lord Chandos, suggested that the new Labour Party is interested in entrepreneurs. If he were to read the Scottish papers for a few days he might think that he was talking about a different Labour Party or that his colleagues north of the Border had not yet quite picked up the message that they approved of these entrepreneurial projects.

Lord Graham of Edmonton

My Lords, pie in the sky!

Lord Mackay of Ardbrecknish

My Lords, it is not pie in the sky, as the noble Lord says. The Skye bridge exists, so it is more than pie in the sky.

I was going to try to be 25 minutes, but I gather that we have some time in hand so I can turn to one last aspect of the debate. That is: why cut taxes? One of the reasons we cut taxes is to encourage people. The noble Lord, Lord Bruce of Donington, talked about the importance of small businesses. When I listened to him I thought to myself: what do my friends who are small businessmen complain about when I talk to them? They complain, not about the lack of hand-outs from the Government, but because they want the Government to take their hands off them in many ways, including taxes.

There is still a fundamental difference in principle between speakers on this side, who believe that the most successful economies of the future will be low-tax countries with small public sectors and deregulated economies, and those on the Benches opposite who believe in high public spending. Fortunately, the tide of public opinion and history is on our side. That has been the message of the previous three general elections.

I make no apology for our Budget, which leaves ordinary people with more of what they earn and save; boosts incentives; encourages enterprise; and creates wealth and employment. My only regret is that because of the recession we were unable to do it sooner.

The Budget takes three more steps towards our goal of a 20p basic rate of income tax. Basic rate has now been cut to 24 per cent., the 20 per cent. band has been widened, and there is a new 20 per cent. tax rate on income from savings. That means that one quarter of taxpayers will pay income tax at the 20p in the pound rate only. A number of other people have been taken out of taxation by the increase in personal allowances. All those things help everyone: they help the low paid, because they will be helped by the widening of the 20p tax band and the increase in the bottom limit; and they help business in particular.

Perhaps I may turn to the noble Lord, Lord Desai, who started this interesting debate. He indicated—I do not believe that anyone dissents from this—that he would like to see interest rates down by 0.75 per cent. We shall not achieve those reductions in interest rates if one seeks a high tax/high spend economy. It will just not happen. I do not believe that the party opposite has changed its view on taxation. Indeed, in the article I quoted—I should have liked to have quoted a lot more of it, but time prevents me from doing so—the noble Lord said: All macho tax-cutting hype should be avoided. I want Gordon Brown not to match them"—

that is us— in this immoral exercise"—

that is tax cutting— but to keep his hair shirt on and make it clear that Labour will not match their tax cuts, but will reverse them".

So I shall be interested to see whether in the other place the party opposite votes against the tax reductions my right honourable friend has presented to us.

This Budget will leave people with more of what they earn and more of what they save. It is a Budget which spends more on the services about which people care, while keeping public spending as a whole under the tightest control. It is a Budget which keeps public borrowing on a clear downward path and takes no risk with inflation. It is a Budget which sustains economic recovery and helps make Britain the enterprise centre of Europe.

Lord Desai

My Lords, at this late hour I do not wish to say very much. I wish to thank all noble Lords who have taken part. In particular, I wish to congratulate and welcome my noble friend Lord Chandos on his first appearance on the Front Bench. The Minister wished him well and a longer stay on the Front Bench than I had. My only advice to him is not to write any articles in any Left-wing newspapers. Your friends will not read them, but the Government will read them and quote them. That has been my sad experience, but I shall not learn from experience; I shall go on writing. I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.