Lords Sitting of 26 April 1996

Preamble
The House met at eleven of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Blackburn.

Road Traffic Offenders (Northern Ireland) Order 1996
The Parliamentary Under-Secretary of State, Northern Ireland Office (Baroness Denton of Wakefield)The Parliamentary Under-Secretary of State, Northern Ireland Office (Baroness Denton of Wakefield) rose to move, That the draft order laid before the House on 1st April be approved.
The noble Baroness said: My Lords, this order seeks to harmonise Northern Ireland's road traffic laws in relation to prosecution and punishment of road traffic offenders with those in force in Great Britain under the Road Traffic Offenders Act 1988. In particular, this revision of the law would introduce a penalty points system in Northern Ireland for road traffic offenders together with new dual level fixed penalties.
In brief, this order has three main parts. Part II deals with the trial of road traffic offenders and with evidence and production of documents to courts. Part III makes provision for the sentencing of offenders, endorsement of licences and disqualification. This part introduces penalty points for certain road traffic offences. Under this system road traffic offences would be divided into endorsable and non-endorsable offences. All endorsable offences would carry a number or range of penalty points and these would be endorsed on the counterpart of an offending driver's licence. On accumulation of 12 or more penalty points within a three year period the driver would be disqualified. The aim of the penalty points system is to provide for offences of varying gravity and to render any person who repeatedly commits endorsable road traffic offences liable to disqualification.
The proposed order also specifies offences which would carry obligatory disqualification in their own right and those where a court would have discretion to disqualify. In addition, provision is included introducing a new extended driving test for those disqualified on conviction of certain serious road traffic offences and for an experiment in the use of rehabilitation courses for drink drivers.
Part IV sets out the existing fixed penalty procedures and introduces two levels of fixed penalty. The present fixed penalty (£20) would continue for non-endorsable offences and a second level (£40) would be introduced for endorsable offences. These amounts would be subject to review.
The order creates five offences. These relate to failure to produce driving licences and certain information to courts, providing false statements in response to notices to owners seeking details of the driver of a vehicle at the material time and to the unauthorised removal of fixed penalty notices fixed to vehicles.
As your Lordships will appreciate, it is a matter of considerable concern that Northern Ireland's road casualty record is worse than anywhere else in the United Kingdom. In recent years there has been a substantial reduction in the number of road traffic deaths and serious injuries and it is encouraging to see, in 1995, a 29 per cent. reduction in fatalities and serious injuries when measured against the 1981 to 1985 average. However, our target is to achieve a one-third reduction by the year 2000 and there is much to do.
Among the measures being taken to achieve this reduction is a review of Northern Ireland's road safety laws. A Road Traffic (Northern Ireland) Order 1995 dealing with road safety and related matters was enacted in November of that year. This, the offenders order, follows on from the 1995 order and revises the law relating to the prosecution and punishment of road traffic offenders. Its provisions are designed to increase the contribution which road traffic law can make to road safety and in particular to reduce the number of casualties on our roads in Northern Ireland. I beg to move.
Moved, That the draft order laid before the House on 1st April be approved.—(Baroness Denton of Wakefield.)
Lord Williams of Mostyn: My Lords, I thank the Minister for that introduction. We welcome the order, in particular Article 41, the extended driving test for those disqualified on conviction of dangerous driving, motor manslaughter and causing death by dangerous driving. Article 36 seems to be an imaginative scheme—an experiment in the use of courses for drink drivers which brings about a reduction in the length of disqualification. We welcome the order.
Baroness Denton of Wakefield: My Lords, I thank the noble Lord for that welcome. It is important that we reduce casualties on the road. We appreciate the support of your Lordships' House. I commend the order.
On Question, Motion agreed to.

Ombudsman (Northern Ireland) Order 1996
11.11 a.m.
Baroness Denton of Wakefield Baroness Denton of Wakefield rose to move, That the draft order laid before the House on 25th March be approved.
The noble Baroness said: My Lords, in moving the draft ombudsman order, I speak also to the Commissioner for Complaints (Northern Ireland) Order 1996.
These orders are designed to update and replace the two 1969 Acts of the
Stormont Parliament which established the offices of Northern Ireland Parliamentary Commissioner for Administration and Commissioner for Complaints.
The Parliamentary Commissioner for Administration investigates complaints of maladministration against the Northern Ireland government departments and their agencies whereas the Commissioner for Complaints

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investigates similar complaints against local and public bodies. Both offices are traditionally held by one person, commonly known as the ombudsman.
Some of the changes in the orders flow from various Select Committee reports on the Parliamentary Commissioner for Administration recommendations and follow similar changes in Great Britain. The title Northern Ireland Parliamentary Commissioner for Administration is to be changed to Assembly Ombudsman for Northern Ireland.
There is provision for the removal from office of an ombudsman or Commissioner for Complaints who is incapable, for medical reasons, of carrying out his or her duties and is unable to resign. An acting ombudsman would be appointed to cover the period when the post is vacant pending a permanent appointment.
The original provisions which would have enabled the charging of fees for investigations by the Commissioner for Complaints have been removed as they are no longer considered appropriate. The existing time limit within which a complaint must be lodged with the Commissioner for Complaints has been simplified. Instead of a limit of two months from the time when the complainant first had knowledge of the action in the complaint or six months from such action, the complainant will now have up to 12 months from the day on which he or she first had knowledge of the matters alleged in the complaint. These limits are in line with those in the ombudsman order.
Other changes will bring within the remit of the Commissioner for Complaints, the administrative actions of staff in certain tribunals, and also extend the list of bodies subject to investigation. Before sitting down I would like to pay tribute to the quality of those people prepared to take on the position of ombudsman and Commissioner for Complaints in Northern Ireland. Recently retired Mrs. Jill McIvor set very high standards while in office and we are certain these will be well maintained by her successor Mr. Gerry Burns. I beg to move.
Moved, That the draft order laid before the House on 25th March be approved.—(Baroness Denton of Wakefield.)
11.14 a.m.
Lord Harris of Greenwich: My Lords, this order seems a little overdue. The Act which it is updating is more than 25 years old, as the noble Baroness has indicated, and during that time rather a lot has happened both in Northern Ireland and in Great Britain. I think it is generally conceded that overseeing quangos is a particularly important business in Britain. One has only to look back to some of the examination by the Nolan Committee to demonstrate the truth of that. But I think in Northern Ireland the responsibilities can be a great deal more substantial than they are in Great Britain, and certainly unaccountable quangos are highly undesirable in themselves.
One of the problems in Northern Ireland appears to be that many people seem to be entirely unaware of the existence of these bodies. Just to take an illustration,
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I understand that in the past two years there have been only six complaints about health in Northern Ireland made through the commissioner. I find it hard to believe that that represents the degree of potential complaint that there could have been within the National Health Service. There appears to be rather a worrying level of stoicism. The commissioner, Mrs. McIvor, is quoted as saying that only one in 10 people know there is an ombudsman at all. That being so obviously it represents the truth of the matter—what do the Government propose to do about it? Will they take some additional steps to publicise the existence of these bodies? It is highly desirable that they should do so.
I have just one further question. In the event of any new quango being appointed, would there have to he a new order putting it under the ombudsman's jurisdiction? It would be helpful to know that. Finally, Article 15 gives the ombudsman powers similar to a court to carry out his investigations. That is conceded as necessary. But are the people who are to be investigated by him to be warned about that before the investigation takes place? It is important to have an answer to that question. Having said that, I welcome the proposals that the noble Baroness has put forward.
11.17 a.m.
Lord Williams of Mostyn: My Lords, it is a curiosity that both posts are required to be specified by separate orders but they are held by the same person. I endorse the words that the Minister directed towards Mrs. McIvor who has discharged her duties with great distinction. I also endorse the remarks made by the noble Lord, Lord Harris of Greenwich. I believe it is not a case of stoicism in Northern Ireland but a case of lack of knowledge. If an individual member of the public simply does not know that there is a remedy by way of the ombudsman complaints procedure, that is a serious defect. If only 10 per cent. know of it, surely there ought to be some effort by the government publicity machine, which is effective in Northern Ireland, to bring this to the attention of the general public. Other than that, somewhat belatedly we welcome these orders.
11.19 a.m.
Baroness Denton of Wakefield: My Lords, I thank the noble Lords for their interest in these two orders. I assure them that while it has taken more time to bring this legislation forward than either of the noble Lords are happy with, that does not mean that the job has not been well done in the meantime. The action has been rather better than the paperwork.
As regards the number of complaints, we also watch that situation carefully. There are many reasons for the low number of complaints. I hope that the main reason is a positive one in that many of the matters which might be raised are dealt with before that stage is reached. I assure noble Lords that when my colleagues and I reply to unhappy people who write to us, we explain that this route is open to them. I believe that is of value. I shall refer the comments about lack of knowledge of the procedure involved to the ombudsman as that is a matter for him. However, the annual report of the ombudsman is always given maximum publicity and the

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citizens' charters have also enabled other routes and other definitions of people's rights to be made available. I believe that we can build on that.
The noble Lord, Lord Harris, asked if there was a mechanism for bringing new bodies within the scope of the order without actually introducing a new order. Any new bodies that were to be added would automatically be added to the list of bodies within commission jurisdiction. The commissioner for complaints order also contains power to make a subordinate order to add bodies to those within the commissioner's jurisdiction. There is no intention whatever in Northern Ireland to create bodies that do not automatically fall within this power.
The noble Lord also asked whether there was a case for a mandatory warning as regards the powers of the ombudsman. The ombudsman has total discretion in the way in which he or she conducts investigations. It would be for him or her to consider the need for some warning in a particular case.
It is the Government's view that the provisions in the order in relation to obstruction and contempt are clear and should leave the body being investigated in no doubt as to its responsibility to co-operate with the investigation and as to what the penalties would be were it not to do so. However, I will ensure that the noble Lord's views are drawn to the attention of the ombudsman. I commend the order to the House.
On Question, Motion agreed to.

Commissioner for Complaints (Northern Ireland) Order 1996
Baroness Denton of Wakefield: My Lords, I beg to move.
Moved, That the draft order laid before the House on 25th March be approved.—(Baroness Denton of Wakefield.)
On Question, Motion agreed to.

Finance Bill
11.21 a.m.
The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish): My Lords, I beg to move that this Bill be now read a second time.
I am pleased that we have an opportunity today to discuss the 1996 Finance Bill and I look forward to an interesting debate. The Bill, which has already been debated in another place, implements the 1995 Budget, which was designed to further the Government's overall economic policy. That policy is aimed at sustained economic growth, increased employment, and rising living standards based on sound public finances and low inflation. As well as the headline measures of the 1995 Budget, the Bill before us also continues the important work of preventing the growth of tax avoidance and closing loopholes.
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The 1995 Budget was delivered against a background of strong economic fundamentals. This was no accident. The Government have had to make a number of difficult decisions on both tax and spending over the past three years. But being in government is about having to make hard decisions and sticking to one's principles. As a result of the decisions taken, this Government are now able to build on the hard-earned gains that have been made. The Budget cuts taxes to leave people with more of what they earn and save. At the same time the Government have demonstrated their willingness to spend more on the public services that people care about while keeping a firm control of public spending generally. Taken together, the tax and spending measures in the 1995 Budget keep Britain on course to be the enterprise centre of Europe.
The Government's tight control of public spending has significantly improved the public finances of the country. The last three years have seen public spending plans reduced by £53 billion. It is because of the progress that has been made in this area that it has been possible to allocate more resources to priorities that the Government and the public are agreed upon. In 1996–97 there will be £878 million more for schools, £1.3 billion extra current spending for the NHS and resources for 5,000 extra police. Although the Budget reduces planned spending overall by £3¼ billion, greater use of private finance will improve the efficiency and value for money of investment in public services. We are aiming to get the share of national income taken up by public spending below 40 per cent. of GDP. The signs are there for all to see that we are on our way to meet this target by 1997–98.
I now turn to the Bill. It will not have escaped your Lordships' attention that we have a long Bill before us today. However, when looking at the Bill's length one needs to remember that as a result of a deliberate attempt to make parts of the legislation self-contained and easier to use it is sometimes necessary for the legislation to be longer in places. It should also not be lost on the Opposition that two significant deregulatory and simplifying measures account for a large proportion of the Bill. The measures on corporate debt represent a major reform and simplification, and the self-assessment measures contained in the Bill represent the final part of a major change. The Bill also contains the legislation that is needed to introduce a new tax to help the environment (the landfill tax). This new tax will provide incentives to produce less waste, recycle and re-use more waste and send less to landfill. It has been widely welcomed. I am sure the House will appreciate that any new tax will inevitably involve a considerable number of pages of legislation to ensure that all aspects of the tax are covered.
I now turn to the detail of the Bill and begin with those clauses covering indirect taxation. Clause 1 of the Bill introduces a measure that has been welcomed up and down the country. It cuts the duty on spirits by 4 per cent. (equivalent to 27 pence a bottle) and helps maintain the domestic base of one of our most important export industries. There is no doubt that this measure has lifted spirits far and wide, but just as importantly, it will go some way towards assisting the economy and

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the employment situation in Scotland. Clause 2 has also been welcomed by those who prefer a glass of wine in that it reduces duty rates on wine or made wine of a strength exceeding 22 per cent.
Clause 4 increases the duty on petrol and diesel by approximately 5 per cent. above inflation, in line with the Government's November 1993 commitment. This measure continues to encourage fuel efficiency while helping to control harmful emissions. Many environmentalists continue to argue for greater increases in these duties. I believe there is a reasonable balance in the proposals that the Government brought forward in 1993 and are enacting for this year by means of Clause 4.
Clause 9 increases the duty on tobacco in line with the commitment given in November 1993 and further demonstrates the Government's commitment to using taxation as a means of encouraging further reductions in smoking. The duty on hand rolling tobacco was frozen, however—a positive response alongside Customs and Excise's excise verification work in combating a particular focus for smuggling.
Clauses 10 and 11 concern betting duties. Much has been said about the impact the National Lottery has had on the bookmaking, pools and racing industries. The Government have listened to the concerns that have been raised and have acted. General betting duty has been cut by 1 per cent. with the cut being shared by the punter and the racing industries. Pools betting duty was cut by 5 per cent. with a further 1 per cent. cut being passed on to the Football Trust and the Foundation for Sport and the Arts.
Clause 14 increases the rates of vehicle excise duty on cars, taxis and light goods vehicles. The increase is broadly in line with inflation and it is worth making the point that car vehicle excise duty is still lower in real terms than 10 years ago. Clause 18 introduces measures to exempt vehicles over 25 years of age from paying VED. This measure has been well received by many, including the vehicle preservation movement, and recognises the important part that vintage, veteran and classic vehicles play in our heritage.
Clauses 25 to 38 cover the various VAT measures in the Bill. The Government have looked at deregulation and reducing the real burdens on businesses. We have shown our commitment to business in the past and will continue to do so. We now have the highest VAT threshold in Europe and as a result have taken many small businesses out of VAT altogether. The changes to the second VAT directive will remove uncertainty in a number of areas and should make it easier to administer. Clause 26 will specifically provide a VAT-free trading environment for certain specified EC commodities, including some metals, foodstuffs and chemicals. We have also made changes to the VAT payment on account (POA) scheme, which requires the largest VAT payers with a liability in excess of £2 million to make two monthly interim payments of their VAT liability each quarter. These interim payments will be halved, which will improve businesses' cash flow, and businesses will also be given the option to pay the actual monthly
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liability rather than the preset amounts if that suits their circumstances better, which will contribute to improving the cash flow of larger businesses.
Earlier I mentioned the Government's determination to counter avoidance. As I conclude my brief remarks on the VAT measures in this Bill, perhaps I should draw your Lordships' attention to Clause 31, "Groups: anti-avoidance". It had become apparent that there was a willingness on the part of a minority of users to manipulate the grouping rules in the furtherance of VAT avoidance schemes. With that in mind we have increased the discretionary powers available to the commissioners of Customs and Excise for determining the operation of the grouping rules. This measure will provide a comprehensive and flexible counter to the serious threat from avoidance in this area. Grouping is a massive deregulatory facility which the Government are anxious to preserve. Properly used, the facility puts businesses operating as a number of individual companies on the same footing as single companies organised on divisional lines. That saves groups some £400 million in VAT a year which they would otherwise have to suffer, as well as reducing accounting costs considerably. The measures are not designed to recoup any part of this acceptable loss. Rather they are designed to halt the growth in avoidance schemes which rely on manipulation of the facility to secure advantages well beyond those intended. Unless such deliberate avoidance is tackled effectively the future of grouping could be jeopardised.
Clauses 39 to 71 introduce measures related to the new landfill tax. Back in the 1994 Budget, we announced that this important new tax would be introduced. Full and wide consultation has taken place and I am pleased to note that the new tax has been well received. We believe the new tax will contribute to the protection of our environment by encouraging waste producers to produce less waste, to recover more value from waste (for example, through recycling or composting) and to use more environmentally friendly methods of waste disposal. I am sure noble Lords will welcome these measures as they not only have a positive effect on the environment but also have a positive effect on the tax on employment, as a result of the decision to use the revenue raised from landfill tax to reduce employers' national insurance contributions from April next year.
I turn now to direct taxation. Clause 72 sees us return to our tax-cutting agenda by reducing the basic rate of income tax from 25 per cent. to 24 per cent. It also allows for the lower rate band to be increased by £700 to £3,900, which is £500 more than required by indexation, and for the basic rate limit to be increased by £1,200 to £25,500, which is over indexation by £200. Clause 73 reduces the tax charge on savings income from the basic rate to the lower rate of 20 per cent. Clause 74 increases personal allowances allowing all taxpayers to gain. When one considers some of the measures that I have just mentioned, it will be clear for all to see that they take us closer to our goal of a 20 per cent. basic rate and clearly demonstrate our determination to allow people to keep more of what they earn and save. That point is further reinforced when one considers that since 1979 this Government

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have continually lowered income tax rates. That has continued to such an extent that we now have the lowest basic rate of tax for over 50 years.
Clauses 77 and 78 of the Bill set the main and small companies' rate of corporation tax at 33 per cent. and 24 per cent., respectively.
Clauses 80 to 105 cover the measures in this Bill which relate to the taxation of corporate debt. The measures are a major simplification, bringing the tax treatment of all corporate debt from bank loans to complex instruments in line with accounting practice. The measures will make paperwork easier and cheaper for firms and it is no surprise to learn that the reforms that we are putting in place have been widely welcomed. Your Lordships will no doubt be aware that the Government made a number of amendments in this area during the Standing Committee stages in the other place. As a responsible Government we are always prepared to listen. We sought to address all the major points made in representations on the detail of the proposals.
Clauses 111 to 120 contain a package of measures to stimulate the use of share schemes for more junior management and lower paid employees. We see these measures as important in encouraging direct employee participation in their businesses through wider employee share ownership.
Clauses 121 to 142 contain the final tranche of legislation required for the introduction of self-assessment. The provisions contained in this area have been developed with the help of extensive consultations and the tax return has been trialed by real taxpayers. We believe that self-assessment will introduce a clearer and more streamlined system, making it easier for taxpayers to understand their liabilities, with one tax return covering all aspects of a person's tax affairs for the year; one tax bill for the year; and one set of dates for paying tax. We also believe that it will bring major savings for the self-employed, with annual compliance cost savings of up to £250 million, once the new system has bedded in.
This year's Bill contains three main provisions on inheritance tax. Clause 183 raises the inheritance tax threshold to £200,000—£40,000 more than required by indexation. That change safeguards the hard earned wealth of ordinary families and will mean that only one in 45 deaths will lead to an IHT bill for heirs. This particular measure also marks another important step towards the Prime Minister's long-term aim to abolish inheritance tax.
Clause 184 gives a further boost to investment in unquoted, often small and growing family companies, by extending 100 per cent. business relief to all unquoted shares in qualifying companies, regardless of the size of the holding. Clause 185 improves the IHT relief for agricultural assets.
Finally, Clauses 186 to 196 contain measures to adapt the present rules for stamp duty and stamp duty reserve tax on share transfers to cater for the introduction of paperless share transfers.
I believe that this Bill contributes to helping people keep more of what they earn and save by reducing the basic rate of income tax to 24 per cent., widening the
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lower rate band by some £700 and cutting the tax on income from savings to 20 per cent. for basic rate taxpayers; to protecting family savings by increasing the inheritance tax threshold to £200,000; and to continuing to reinforce Britain's status as the enterprise centre of Europe by having a tax system that encourages wealth creation and keeps business taxes and employment costs low.
This Bill implements many important parts of the Budget—a Budget that was designed to build on the foundations already in place for sustainable growth, low inflation and higher living standards for all; a Budget designed to promote sustained economic growth and increased employment and ensure that the economic fundamentals of sound public finances and low inflation remain in place. I commend it to your Lordships.
Moved, That the Bill be now read a second time.—(Lord Mackay of Ardbrecknish.)
11.38 a.m.
Lord Bruce of Donington: My Lords, the House will be grateful for the rather subdued speech of the noble Lord, Lord Mackay, this morning. He has plenty to be subdued about. In the course of his remarks, he did not refer to the fact that when the Finance Bill went to the other place it was 406 pages long but when it emerged from there and came to this House it contained 461 pages. I doubt whether even the most thorough examination advocated in this place by the noble Lord, Lord Boyd-Carpenter, who is an expert in these matters, would have enabled the Bill to have passed through the House with the degree of expedition that is normally required on a reasonable reading of standing orders. However, it is a Bill.
I do not want to depress the noble Lord too much. What I have to say this morning will, I hope, be full of cheerfulness. But I observe that he did not find it wise to refer to the recent court judgment, which looks as though it will make a substantial impact on the Treasury in respect of refunds due on VAT to companies that have been engaged in what are called "interest-free sales transactions". The press puts the figure at £5 billion. I do not want to comment on that; I certainly would not invite the noble Lord to be more particular. But my guess would be somewhere between £2 billion and £3 billion. At any rate, it is interesting to find that the Government's attention to VAT is likely to be more detailed in the future.
When the Government approach the country on the question of taxation in the most self-congratulatory terms, normally they mean income tax. That is the only tax that really concerns them. They always ignore the fact that the amount of VAT levied has roughly doubled since they took office and is a great burden on the bulk of the population.
The noble Lord rests the Bill on the Government's economic expectations and performance, the statistical detail of which I am sure my noble friend Lord Eatwell, when he winds up the debate, will deal with far more adequately than I can ever do. But, according to the noble Lord, Lord Mackay, the benefits that we now have are a result of sound money and sound administration.

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We are now approaching the sunny uplands. What the Government have not dealt with so far is the question of unemployment.
Unemployment remains the greatest problem that the country faces. We are a talented nation. In our island's history we have excelled in the fields of exploration and science, both theoretical, abstract and applied. We have a great history in engineering and in administration, not only in our country but in the territories that we once held in the Empire. There is enormous artistic talent within the country and an enormous sense of citizenship. We are well blessed with the people that we have in the United Kingdom. They are one of our greatest assets. They have enabled us progressively—sometimes a little violently, but not much—to make fair progress in ameliorating suffering, not only among our own people but for other peoples of the world. They have enabled us to make great advances in medicine and in other fields. Our inventors are probably second to none.
We therefore have substantial assets in our country—the people. We have a reasonable climate within which to operate. We are not without our natural minerals either and, according to my late right honourable friend Aneurin Bevan (to what effect I do not know), we are surrounded by fish—though that may be subject to query at the present time.
We have enormous assets in the United Kingdom, and I do not like those who decry their own people or minimise their importance. They are the most precious and the greatest jewels in the crown that we hold. In wartime we freely acknowledged that fact. Suddenly, those working in the coalfields, on the land or in the factories, instead of being classed as "hands for hire" or "hands wanted", became elevated to the saviours of the country, as indeed they were in the years of the war from 1939 to 1945. Then, anybody who dreamt of casting aspersions upon the working population of our country would have been howled out of town.
Those were the days of the working man, the ordinary person of Britain who worked extremely hard in order to secure our victory, as indeed did noble Lords here. We did not hear then of shedding labour. We heard of people whose efforts, not only on the battlefield, on the sea or in the air but in the factories, were held in high esteem. They even had works councils in various factories on very much the same lines, though much more comprehensive, as those envisaged in the social chapter, which is so much denounced. In fact, joint works councils and joint consultation were instituted throughout the war industries and our war industries would not have prospered as much as they did without them.
So there we have another precious asset. What are we doing with it? In 1945 and even before, and for some 20 years afterwards, the rate of tolerable unemployment never exceeded 3 per cent. If it went much above 2.5 per cent. there was an unholy row and unease throughout the country. Now the acceptable figure is apparently between 5 per cent. and 6 per cent. That will not do.
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It is not as though the Government themselves are devoid of sensibilities. In many ways they are devoid of any fundamental philosophy other than that which was enshrined—though it is slowly disappearing—in the doctrine enunciated by the noble Baroness, Lady Thatcher, when it was every man for himself and there was no such thing as society. That divided our society and that thinking is something that we now have to abolish. We must get back to a reasonable co-operation, not only among the ordinary working people themselves in the factories but also between them and management.
Much has been said about the social chapter. I regard it as an irrelevance because it was used by the Government in another place to scare their supporters into accepting Maastricht. It was used by my party largely to get our Members to lobby against its abolition in order to gain support from them for Maastricht as well. That is why there was unanimity. When my party comes to power shortly, it will no doubt produce its own domestic legislation which will be in far less ambiguous terms than the social chapter. If we win the election, we will provide a social chapter and we will not have to bother Europe at all.
When the Government get into any kind of difficulty, they do not think. Many of their Ministers do not have time to think. I have touched on this point on a number of occasions when I have had the privilege to address your Lordships' House. The day is only 24 hours long; there is a certain amount of time for sleeping, eating, doing one's toilet and all the rest of it and interviewing people. The time for thinking and for reading is very small. So the Government have been tempted over the years whenever they are in difficulties to go to consultants. They have gone consultant mad. They spend around £500 million a year on consultants when they ought to be able to make up their own minds on principle.
They also run to economists, of whom I am sorry to say I do not hold a very high opinion. That is a general professional observation very often made by accountants in regard to their colleagues, who are the economists. They operate on the basis of certain econometrical assumptions which are fed into a computer and produce a whole number of equations and a whole number of answers according to whichever model they adopt, forgetting of course that by the time the result has come out of the computer the facts that were put in have already become obsolete.
Economists assume that people behave reasonably. My Lords, they do not. Economists assume that people operate on certain standard assumptions. They do not. In many cases it depends on what side of the bed they get out of in the morning. If a person is in control of a very large company, that can have quite considerable effects not only upon the company but on the economy at large. Economists also tend to assume—I would not dream of associating my noble friend on the Front Bench with this observation—that they do not have to make allowances for the size and scope of enterprises.
According to a Written Answer given in another place (at col. 704 of Hansard of 14th March) there are some 3.5 million enterprises in the United Kingdom, of which

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2.5 million have no employees at all. They are one-man businesses. Those are joined by 790,000 which do not employ any more than nine people and 107,000 which employ between nine and 20 people. What we find is that there are only 8,000 firms which employ more than 200 people—0.2 per cent. of the total number of enterprises. There are just 8,000 enterprises with between 100 and 199 employees.
The larger firms are almost impervious to the actions of government. The Government can fulminate about employment and wage rates and about the necessity for keeping wages down and within controlled limits. But the top firms ignore that altogether. They plan two years ahead. They not only plan their price structure two years ahead; they plan even their wage rates two years ahead and the publicity expenditure to get the turnover that they want. They largely ignore the Government, apart from occasionally giving them party subscriptions because they like the smiles on their faces. So parts of the economy take a long-term view and other parts take a short-term view. It is very difficult to find out which, so it is very difficult to predict the course of the economy.
The unfortunate point is this—at the moment both political parties, or perhaps I should say all three, are completely united in their economic remedies. They have all formally endorsed, with varying degrees of enthusiasm, the economic policies put out by the European Commission in the form of its White Paper on growth, competitiveness and unemployment. Therefore they are committed to deflationary policies. There was a time when political controversy was respectable. You could actually talk and argue about the things in which you believed. Apparently, one is now so terrified of what the press will say if one makes any definite policy statements that one clouds one's policies in a sea of ambiguities that are meaningless to everyone. We should get out of that. Surely we know one another well enough in this place and in another place to say exactly what we mean and what we believe in rather than hedge everything under the 11th Commandment of "Thou shall not commit thyself", which is what is happening at the present time. That is why the British people are becoming a little restive.
Moreover, unfortunately they are fearful. They are fearful of unemployment, they are fearful about their security, they are fearful about their old age and they are fearful about the effects of crime. There is fear in the land. If we acted to abolish or to try to alleviate fear, if occasionally by a display of the utmost good humour or at any rate a sense of humour, it would help. We have not done that. In the past 20 years we have gone progressively into saying "We have nowhere else to go. Under which wing can we go? With whom can we associate?", rather than enunciating our own standpoints and our own culture subject to our own arguments and our own disputes.
I am very optimistic that this will eventually happen and that even the noble Lord, Lord Cockfield, and myself may occasionally be able to have a pleasant joust across the Chamber with the utmost good humour. That is what has to be done. At the moment the parties, when
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they are not snarling at each other like little boys, are hiding behind a lot of ambiguities for which the public do not care.
At any rate I am very optimistic about it all. I can see a time coming when all these constraints will depart, when we can all say exactly what we mean and argue with one another with the utmost good humour; but above all apply ourselves to the greatest task of all—of seeing that unemployment never stalks this land again.
11.58 a.m.
Lord Ezra: My Lords, we have had a clear statement from the noble Lord, Lord Mackay, on the Budget for which we are very grateful. It was a subdued statement, as the noble Lord, Lord Bruce of Donington, said, but no doubt the noble Lord, Lord Mackay, will make up for that when he replies to the debate. We have also had a vigorous and optimistic statement from the noble Lord, Lord Bruce of Donington, in which he took quite a sideswipe at those of his colleagues who are economists. We shall have to see how that is responded to later.
For my part I should like to examine some of the underlying assumptions behind the measures contained in the Finance Bill and in so doing it may be necessary to go over some of the ground which we covered in the debate introduced by the noble Lord, Lord Eatwell, on 20th March on economic strategy. That cannot be avoided, but at least we can update some of our views.
Before passing to that I would like to make specific reference to the landfill tax to which the noble Lord, Lord Mackay, referred. I am among those who support the thrust and objective of this tax. However, it has been brought to my notice that it is, like all new measures of taxation, bringing in its train some anomalies and difficulties. One of the major difficulties is the great increase in costs that it will impose on local authorities. Therefore, it seems desirable that some way of mitigating that, during the period when other ways of disposing of waste can be developed, should be seriously considered. I have no doubt that the Government will be doing that. Also, a number of specialised enterprises which have developed ways of disposing of the inevitable waste from their processes over the years, will be particularly hard hit and they will be unable to do much about it. I know that representations in these cases have also been made.
I turn to the underlying assumptions. We need to consider these carefully not only as justification for the measures taken, but more significantly in relation to the future conduct of economic affairs and future budgets. I would like to indicate one or two of the basic assumptions in order to examine how robust they are. We have talked about estimates of growth in the economy on a number of occasions and we know that the Chancellor indicated his firm view in the Budget Statement that growth this year will be at 3 per cent., but so far it is much nearer 2 per cent. If it is to achieve 3 per cent. there will need to be a very substantial increase in the final stages of the year, which can only come from a great increase in domestic consumption, which itself can contain risks of overheating. We have

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been through that before. The general consensus among economists—if I dare mention that name—is that growth will be somewhere between 2 per cent. and 2.5 per cent. for the year as a whole. It will be interesting to know whether that is now the Government's revised view and what impact that will have on future economic policies.
The reduction in the rate of inflation has been a great achievement. It has been maintained at a much lower level than in the recent past and let us hope that will continue. But let us not become too euphoric about it. The level of inflation in the UK is higher than among 12 of the other European countries. Our inflation rate is only lower than the rate for Spain, Italy and Greece. Therefore, that suggests that we have to continue to be very vigilant in this area. We cannot just sit back and assume that all is going well—not, at any rate, by comparison with what others are achieving.
A particular anxiety which has been indicated recently is the way in which monetary growth is developing, particularly M4, which is broad growth in the money supply, including not only money in circulation, but also deposits. For the fifth month running that has exceeded 10 per cent. and that is noticeably above the Government's target. In their early days the Government were much concerned with monetary targets although they have changed their emphasis on this since. Nevertheless, the rate of money supply is of importance. For example, Professor Congdon, who is one of the Chancellor's "wise men", has stated in his most recent broadsheet,
"If broad money growth remains above 10 per cent."—
which it has been for the last five months,
"a return to inflation rates of more than 5 per cent. is inevitable, sooner or later".
What are the Government going to do about that area? The amount of money in circulation and on deposit in the United Kingdom is noticeably above that in some other European countries, particularly in Germany, France and, indeed, in Italy. In those countries it is 3 per cent. to 4 per cent. below and therefore they seem to have this matter more under control.
Perhaps one of the most worrying aspects of the underlying assumptions relates to public borrowing. The latest figures on PSBR for the financial year just ended show an overshoot of over £3 billion over the Government's forecast of £29 billion. The Chancellor's comment on that was that he considered that it was within the margin of error. All I can say is that it is a pretty hefty margin of error.
The reason for this shortfall appears to be one-third due to an increase in expenditure, but two-thirds due to reduced tax take. A large measure of the reduced tax take must come from the fact that growth has not been as buoyant as anticipated. But there is also something of a conundrum over VAT returns. I understand that there will be a special inquiry into this. This situation will be exacerbated by what the noble Lord, Lord Bruce, referred to; namely, the recent Court of Appeal judgment disallowing VAT on interest-free finance. It is reported in the press that that may cost the Government
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as much as £5 billion in returned tax: it might be less than that, but we do not know. At any rate, it will be a substantial figure. It will be interesting to know how the Government propose to treat it. For example, will they be making provision for it in the contingency reserve for next year?
We need to consider also the general state of investment because that is one of the recurring themes that we have been talking about in connection with economic policy. If investment shows signs of declining or not increasing, then the impact on future economic prospects can be very serious. What I find particularly disturbing is the report that manufacturing investment in the fourth quarter of last year had been reduced by 5 per cent. The CBI has recently issued a rather pessimistic statement in its quarterly survey about sentiment in the manufacturing sector, which is suffering particularly from reduced export prospects as a result of the weakness in the economies of Europe and elsewhere.
So we really need to look at this matter very seriously and to see what can be done to stimulate investment in the private sector. What is equally worrying is what is happening to investment in the public sector. Table 6.4 on page 120 of the Red Book, shows that it is the Government's intention to reduce public sector capital investment over the next four years from £21.7 billion in 1995–96 to £19.2 billion in 1998–99, which over four years will represent a reduction of 11.5 per cent. That is very serious if at the same time as there is an apparent weakness in private investment, the Government are pursuing a policy of deliberately reducing public investment. Surely, then, our future economic prospects will be jeopardised.
In the same table the Government give their views on how the private finance initiative will operate in that period. They expect it to rise from £0.6 billion in 1995–96 to £2.8 billion in 1998–99. In other words, they are assuming that the reduction in public capital investment will be offset by growth in the private finance initiative.
That assumption has been seriously queried in a recently published report by the Treasury Select Committee of another place issued on 1st April. It doubts whether this degree of substantial growth in the private finance initiative will take place. It asks, first of all, a leading question, which I believe we are all entitled to ask; namely, what is the Government's objective now as regards the private finance initiative? Originally, it was to supplement public investment, but now it appears to be quite definitely to replace it. Is that indeed where we stand? If that is so, the outlook appears to be pretty bleak because, according to the report, there are, for example, substantial delays in the bidding procedures. Furthermore, the cost of bidding is now discouraging many in the private sector from doing so.
The Select Committee considers that a large number of unsuitable projects are being put forward for private investment. There seems to be a directive within government circles that all projects for investment should be put out for private investment whether or not they are suitable. At any rate, that is the view of the

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Select Committee. There is still uncertainty about how risk should be shared between the public and the private sectors, and that is causing problems.
Turning to the health sector, it is proposed that private investment should make a substantial input, but there are still major uncertainties over the constitution of the health service under the present arrangements and about the funding arrangements. It is feared that the risk might ultimately have to be borne by the private investors if trust hospitals get into serious financial difficulties. I should declare an interest because I am involved in some bids in this area and we are concerned about that added risk on top of the normal risks that any business faces.
The conclusion of that very important report, which I hope we shall have an opportunity to debate at greater length on a subsequent occasion, is that the Select Committee regards it as unlikely that the levels of private finance investment estimated by the Government to offset their intended reduction in public sector investment will take place. It would be useful to know what the Minister thinks about that.
In conclusion, there are doubts about some of the basic assumptions underlying the Finance Bill, and that clearly limits the freedom of action with regard to the next Budget. What is particularly worrying is what is happening in investment in both the private and public sectors. Unless we can sort that out, the risks that we run are not only short term, but could be longer term as well.
12.12 p.m.
Lord Boyd-Carpenter: My Lords, this is a very difficult debate in which to take part because it brings together—or clashes together—what in another place is done at separate Sittings. In another place, the Second Reading of the Finance Bill is treated as an occasion for the discussion of the economic policies of the Government and the general way in which they are handling the economy. The later stages, Committee and Report, are devoted on the whole to discussions of particular changes in tax arrangements, such as increases or decreases in tax and whether there should be any such changes, whereas today we are compelled to discuss all those matters in one Sitting—and that on a Friday morning.
I must advise my noble friend the Minister that much as I admire the way in which he opened the debate and much as I respect his technique in handling the House on these matters, this is a very bad way for your Lordships' House to be treated. We ought to have at least one occasion, say, the Second Reading of the Finance Bill, when the general state of the economy and the general trend of measures are discussed. We should then have another separate day or days—perhaps it should be days—when we can discuss the detailed financial proposals, such as proposed changes in tax.
I am well aware of the fact that we in this House cannot vote on changes in tax, but I think that it is unrealistic not to acknowledge that what is said in this House both on the general policy matters to which I have referred and on particular changes in taxation can
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have a considerable impact because your Lordships' House is known to contain a great deal of financial experience, having Members who have been former Chancellors of the Exchequer, Chief Secretaries and economists—both academic economists and economists in practical business. Although we cannot amend the Finance Bill, I believe that if its provisions are firmly and clearly debated in this House we can so influence opinion that it is likely, perhaps at another stage or on another date, that amendments will he put into effect in due course. Therefore, I advise my noble friend that, despite the admirable way in which he opened the debate, this is necessarily a difficult debate and it is not one which will make full use of the experience, knowledge and qualities which noble Lords possess in these matters.
I know that the usual channels have no use for the Finance Bill. That is why it has to be considered at one Sitting, and on a Friday at that. The usual channels take the view that because for some years this House has largely faded out of financial discussions we should just let the Finance Bill go through and save them the trouble. However, I beg my noble friend to try to get into the head of the usual channels—if they have a head—the point that the standing of this House is of very great importance to the future of this House and that unless this House can maintain its reputation—a reputation that can be well supported by its experienced membership—it may well be that in another Parliament steps will be taken by another government of a very adverse nature indeed. However, if this House and its reputation are fortified by intelligent, informed and experienced discussions, any government (however radical they may be) will hesitate to make any radical approach.
Perhaps I may ask my noble friend another question about the procedure being followed. As I understood him, he said that the enormous length of this Bill—again, that enormous length does not help when it has to be discussed in just one Friday Sitting—was designed to tie up so many loose ends that in the future it will be easier to legislate on such matters. Is he telling the House that this Bill is designed so to simplify the procedure of Finance Bills that in future such Bills will be shorter and less complicated because the main structure will be clear and well understood? I thought that he was near to hinting at that, but I am not sure that he went quite so far as to say that that was the intention. However, if my noble friend will allow me to say so, that would be a good explanation of why the Bill is this enormous length.
Again, some explanation is required as to why this House—indeed, both Houses—should have to cope with a Bill of this length unless there is some purpose behind legislating so lengthily. A good purpose would be to tighten the system so that future Finance Bills can be a good deal shorter. Again, that would facilitate fuller discussions, particularly if the usual channels would modify the rather murky flow of their liquid and allow at least two full days for discussion on finance.
I refer to one or two specific matters, the first of which is landfill tax. My noble friend the Minister was full of enthusiasm for it. Not everybody is full of

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enthusiasm for it. I have had a letter from a very distinguished firm that deals with these matters called Brunner Mond. I have no other connection with it. That company says that it will be adversely affected by the landfill tax, which will impose very heavy burdens on it if it is introduced. For some of these companies, in its proposed form the tax will be very damaging. I would be grateful if my noble friend would consider that. If when he comes to wind up he refers to the matter, that will be very helpful.
An even more serious problem is the effect that the withdrawal of tax concessions on saving schemes will have on the provision that a great many people now make for the future education of their children. In view of the high level of school fees, it is the practice for parents to start a savings scheme at an early stage which mounts up so that when the child attains the age of 13 or so and goes to a fee-paying school there is a fund available to help pay the fees. As I understand the Bill, that tax concession is to be removed from these schemes. Therefore, it will be made much more difficult for parents who wish to send their children to fee-paying schools to take financial precautions in advance to ensure that they are able to do so.
I hope that my noble friend the Minister will be able to give some reassurance on the point. It seems odd that any government, particularly a Conservative one, should go out of their way to make the problem of parents who want to send their sons or daughters to fee-paying schools much more difficult by removing a tax concession which has existed for a number of years. I am sure that it is a matter of carelessness rather than malicious intent, but I hope that my noble friend will have a look at the matter and will be prepared to indicate that the Government will give consideration to it. My noble friend the Minister was full of the concessions and improvements to be made but did not spend very much time on those additional areas where tax was to be imposed. These savings arrangements, which have been in operation for a good many years, are a very good example of that. It is a great pity to make those operations more difficult. I hope that my noble friend will be prepared to indicate either that the Government are reconsidering it or that he will go back to his financial colleagues and suggest that in the Budget the tax additions should be removed.
A number of matters of this kind arise interestingly in debating this Bill, but it is extremely difficult under the present system to have specific points discussed. However, the one or two points that I have mentioned are of considerable importance. I do not believe that they are particularly complicated. I believe that the Government, who are very properly reducing tax in a great many areas, ought to look carefully at those areas in which they are withdrawing tax concessions, since when a tax concession is withdrawn it must, in the nature of things, give rise to difficulties to those concerned. In the particular example that I have quoted—parents who desire to send their children to fee-paying schools—it is important that the Government should show sensibility and sensitivity.
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It is good that your Lordships' House has had an opportunity to discuss the Finance Bill, however briefly (and perhaps confusingly). I hope that in future there will be a greater opportunity to do so. Meanwhile, I ask my noble friend the Minister, despite the difficulties that he quite obviously faces, whether he is prepared to answer the various questions put to him as to concessions that may well be made on the Finance Bill. This is the moment to discuss it. With an election pending there is time and opportunity to make a concession or two that may be of great value to the persons concerned and may do something to assist the standing of the Government.
12.26 p.m.
Lord Desai: My Lords, it is always a great pleasure to follow the noble Lord, Lord Boyd-Carpenter, in a debate on the Finance Bill. He is correct and consistent in saying that we do not have enough time to debate the Budget. I tried partially to correct this earlier in the Session when I was lucky to be able to propose a general debate the day after the Budget Statement. It is my hope that such a practice can continue as a normal part of our debates so that, while we may not discuss the Finance Bill, we can discuss the Budget Statement at a fairly early stage. Perhaps the usual channels can look into that.
Another aspect to bear in mind is that the merger of the expenditure and taxation parts of economic policy has reduced the time allowed for discussion of economic affairs. In the days when we had an autumn expenditure Statement and a spring Budget we had two bites at the cherry and two occasions on which to debate it. Now we have only one Budget and one opportunity. When the Finance Bill comes along we have no way of discussing expenditure, unless we choose to do so. We have only the taxation aspects to discuss. The expenditure decisions are there only implicitly and not explicitly. I believe that whoever devised that great unifying scheme has done a disservice. Obviously, the Government have to anticipate tax cuts in November when the elections are held in June. That will not be an easy matter.
I should like to begin by discussing specific taxation, because that is what the Finance Bill is about. Later on, I shall remark upon general issues. I welcome the green taxes. It is good that we put more and more emphasis on taxation both as a matter of revenue raising and as a way of carrying out environmental improvements. Some noble Lords may have seen the calculations of Professor David Pearce of University College London. He has looked at the total social cost of private transport, which is enormous.
To the extent that we can divert people from private to public transport, it is all to the good. If we have to tax vehicles, that would be a good thing. The Minister said that the real cost of vehicle excise tax had fallen. I deplore that. There is no reason for doing that. If anything, the tax should at least be indexed, if not more than indexed, to follow the same principle as the Government have rightly followed with petrol.

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We have had debates in the past about pollution caused by cars. As we know, the bulk of the pollution is caused by a small proportion of the cars on the road. They are mainly four or five year-old cars. When the Government next think about vehicle excise duties, they should consider taxing older cars more heavily. They can do what they like about vintage cars. That is a frivolous problem.
By the same token, I welcome also the landfill taxes. Problems have had to be ironed out, as noble Lords have said. But, in general, if we can direct our taxation away from productive factors (labour and capital) and more towards the consumption of natural resources and despoliation of the environment, the better off we shall all be. That would be welcome.
There are other things to say about this issue. In a sense, what the noble Lord, Lord Boyd-Carpenter, said is one aspect of the matter. We should not worry about high or low taxation. I shall not worry about that. We want to know the overall impact of taxation on, for example, families. In the final analysis, does the Minister know? Let us take two-parent families with children. Does the Budget help them or does it not? That is the type of issue that should be addressed. He may not have the answer immediately, but I would appreciate it if he would write to me on that point.
As the Minister knows, his noble friend Lord Skidelsky has argued that the present taxation system is biased against families. I do not know whether or not that is true. It would be nice to have matters laid out in the Budget Statement. It might say, "Okay, this Budget has the following effects on different types of families (single-parent families, two-parent families, with or without children, the elderly and so on)." I know that at the moment we have the tools to do that. They have been produced by the economists of whom my noble friend Lord Bruce does not approve. It would be good if the Budget document showed what would he its impact on different social groups and social classes. It would also be good to know what would be the impact of the various environmental taxes on, say, the emission of greenhouse gases, or what have you. I should be grateful if the Minister would answer that point in his reply or write to me about it.
I welcome the fact that in the treatment of savings under Clause 73, we are progressing slowly from income tax towards expenditure tax. I should like income tax to be converted into an expenditure tax. That is the only logical and fair way of taxing, because what we want is not to tax income but to tax expenditure. To the extent that we can tax consumption rather than savings, we should have a more growth-oriented policy than previously.
I come now to more contentious items. As the Minister knows, I do not think there is anything such as low taxation or high taxation; there is adequate taxation. One should have enough tax to cover expenditure. We should stop having all these fantasies about real and deep cuts in expenditure, because there are none. They are basically cuts in projections. There has been a growth in irresponsibility in fiscal policy by constantly harping on cutting taxation and lower taxation, especially income taxation.
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We have let the public sector deficit get out of control. I invite the Minister to look at page 45 or page 75 of the Red Book. He will see that the path laid down in the 1994 Budget for a return to a balanced budget has slipped. It had slipped by the time the Red Book came out. It has slipped since. So much so that, according to the Maastricht criteria, we have a 6 per cent. plus ratio of deficit to GDP. There is no way—referendum or no referendum—that the Government responsible for taking this country into the single currency will be able to deliver a 3 per cent. budget deficit without excruciating pain. I am saying this right now: whoever is in charge will have to take drastic action. We have all this fuss about why we are not a tax-cutting party—the Minister's party wants to be a tax-cutting party. I should prefer it to be a fiscally responsible party. That is more important than cutting taxes. We cannot go on with a system whereby every day we promise that the day after tomorrow we shall be prudent, but in the meantime we shall, just this once, have a little extra bite at the cherry. We cannot go on in that way. That has been going on for far too long.
We do not have to balance the £50 billion, which we once saw two years ago in the borrowing requirement, but £32 billion is not a small sum of money. If the gross projection is not fulfilled, the projected PSBR for the next year will be higher in money terms and higher in proportionate terms, because the growth projection will not be according to what the Government fantasise. Therefore we shall be once again at 5 per cent. or above in terms of the ratio of deficit to GDP. That is nothing of which to be proud.
We no longer live in Keynesian days when the deficit had good positive effects—multipliers and all that. We live in different times. Deficits are not good. That is shown by the fact that the yield on gilts that the UK Government have to pay is more than 1 percentage point above what the German and American Governments have to pay. That is basically the extent to which our fiscal policies are costing us extra money. I should like a firmer commitment from the Chancellor—I have no hope that he will give it—in the next Budget that he will get hold of the problem and do something about it.
Unlike the noble Lord, Lord Ezra, I do not worry about inflation getting out of control. I am not worried about M4. I have never been a monetarist and never shall be. One of the factors which makes inflation lower has nothing to do with fiscal monetary policy. It has to do with the fact that we are now in a much more global world, and the price of manufactures is falling world-wide, because of the entry of Asian countries into the manufacturing world.
As long as the economy is open to those competitive forces we shall benefit from low inflation. I worry much more about any deviation from openness in the economy in relation to low inflation than about M4 and so forth. The M4 statistics are now so distorted that even Sir Patrick Minford, who was another high priest of monetarism, has stopped believing in M4. Fashions change. However, I believe that the inflation figures, such as they are, are not a cause for concern. I know that the Government are puzzled about the fact that

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manufacturing employment has stayed up while manufacturing output has been flat. That is an interesting problem to which I once offered an answer. I know that the Government carefully read all that I write. They should perhaps reread what I wrote about a month ago. There is an idea that we are switching from exports to domestic goods. That has a bigger effect on employment in manufacturing than on output.
When the Budget was first introduced I said that it was precipitate to have given a tax cut. I maintain that view. I maintain the view that the slippage in PSBR is not accidental and should have been foreseen. However, to the extent that it was not foreseen, I hope that the next Budget will not again rely on cosmetic projections of expenditure and try to run away with tax cuts, but will tackle the problem of the budget deficit. In that respect, future generations will be paying the cost of the present generation's frivolities. I believe that we should take the matter seriously and not politically.
12.40 p.m.
Lord Cockfield: My Lords, like my noble friend Lord Boyd-Carpenter, I welcome the opportunity of debating these matters. The noble Lord, Lord Bruce of Donington, taxed my noble friend Lord Mackay of Ardbrecknish with delivering a subdued speech. I have never heard the noble Lord, Lord Bruce of Donington, himself deliver a subdued speech, at least not in the 17 years which have expired since he took his place on the Benches opposite.
I was a little perturbed that, in listing the important objectives of policy to which the Government are committed, my noble friend on the Front Bench put inflation at the end of the line. He repeated that in his final paragraph. I am sure that that was merely to accommodate the elegance of what he was saying rather than that it had any psychological importance. Nevertheless, it is a matter of considerable importance, and it is inflation that I propose to discuss.
I wish to begin by referring to an exchange which took place in your Lordships' House on 13th March, following the publication of the minutes of the meeting between the Chancellor of the Exchequer and the Governor of the Bank of England. In trying to be helpful—that is always a mistake, but I shall later explain exactly why I did so—I said to my noble friend:
"Why is it that every time they agree to reduce the rate of interest, the rate of interest on the Government's own borrowings goes up? Why was it when on the last occasion the rate of interest was reduced to 6 per cent. the yield on the Government's last issue of gilts promptly went up to 8.3 per cent.?".
My noble friend Lord Mackay wisely said that he did not know. I always admire a Minister who says that he does not know. Apart from the fact that it is true, it saves the subsequent embarrassment of having to try to produce reasons for something which is wrong.
I am sorry that the noble Lord, Lord Peston, is not in his place. I am sure that the noble Lord, Lord Eatwell, will convey my respects and best wishes to him. However, the noble Lord, Lord Peston, being unencumbered with the experience which comes from holding high office, promptly said:
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"My Lords, may I help the Minister by telling him the answer?".
I leave out a few words in the middle of his remarks because they were a compliment to me and I am rather choosy about where compliments come from. The noble Lord went on to say:
"essentially what the market is saying, as was apparent yesterday, is that it expects the Chancellor as soon as possible to reverse those cuts".
At that stage my noble friend on the Front Bench said:
"Perhaps I should say that the noble Lord [Lord Peston] is right".—[Official Report], 13/3/96; col. 847.]
Unfortunately, my noble friend was wrong in saying that the noble Lord was right because in fact the noble Lord was wrong. The reason why the yield on gilts went up was that the reduction in the rate of interest led the markets to doubt the Chancellor's commitment to his inflation target. Therefore, they had to factor in an additional insurance premium against the risk of the Government living up to their target.
It is most important that we should understand that that is what is happening. Inflation has been the bane of this country for the best part of 50 years, ever since 1945 and until a few years ago when the Government, in particular my right honourable friend Mr. Kenneth Clarke, the Chancellor of the Exchequer, decided that the time had come when something serious must be done about it. Inflation destroys the competitiveness of British industry; it destroys the competitiveness of our exports; it destroys investment; it destroys savings; and it creates great social tensions. We can see that clearly by looking at the history of this country under successive governments. I wish to underline that because, if anything, Labour Governments were worse than Conservative Governments, so they can take no pleasure whatever from anything that I am about to say—
Lord Graham of Edmonton: Oh!
Lord Cockfield: My Lords, perhaps I may remind the Opposition Chief Whip that in the past Chief Whips never intervened in debates on the ground that they did not know what the debates were supposed to be about. That was a very wise course indeed.
However, the record rate of inflation was scored by a Labour Government. I did not wish to rake up the past in that way but I was provoked into doing so by the sub silentio intervention of the noble Lord opposite. Inflation is the bane and the blight of this country's economy, and that of many other countries too. It is absolutely essential that the Government maintain both their nerve and commitment in that respect.
It is necessary to look at how important those figures are. There are two ways in which one can look at them. One can either say that, with inflation running at its present rate of 2.9 per cent.—however, the Government produce so many different figures that one can always toss a penny and hope that it comes down heads up, in particular if it is a two-headed penny—and a rate on long gilts of 8.2 per cent., one has a real rate of 5.3 per cent. Long term, at least over the past 100 years, the real rate of interest has fluctuated on one side or the other of 3 per cent. Therefore, we in this country are sustaining and bearing

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the burden of a real rate of interest which is at least 50 per cent. higher than the real rate of interest which exists in the economy as a whole. One can look at the matter in various other ways.
Incidentally, I am sorry that the noble Lord, Lord Stoddart of Swindon, is not in the Chamber today. I always welcome the opportunity, which rarely arises, of complimenting him on what he says. He has repeatedly drawn attention to the fact that the real rate of interest in this country is excessive, and indeed it is. It impacts directly in terms of hard cash on the public-sector borrowing requirement. In turn, inflation reacts on all kinds of other expenditure because so many social benefits and other benefits are tied to the rate of inflation. Therefore, it is desperately important that the Government maintain their policy on this matter.
I wish briefly to refer to another matter which is closely linked with inflation and which attracts a great deal of interest. It is the lack of the feelgood factor. Whenever you have a straightforward problem for which there is a very simple explanation, you can always rely on economists to provide very long, intricate and often misleading explanations of what has happened. But the real answer is that inflation is just like any other drug of addiction. When you take a shot, you are on a high. When it wears off, you have an appalling hangover so you take another shot of the drug. You go through that again and again. Each successive time that you have a shot of the drug of addiction, whether it is one of a banned substance or inflation, you go through exactly that cycle.
For example, you can see that in relation to the unemployment figures. Every time you have a shot of inflation, it produces a higher peak of unemployment than was produced the time before. When you decide finally that you must come off it, the withdrawal symptoms are quite horrendous. At present we are seeing the withdrawal symptoms as a result of the determination to eliminate inflation from the body politic. That is exactly what we are seeing. We must live through that. We have had two generations who have become used to the drug of addiction and we must now get them off it. That is another reason why it is important that the Government should adhere to their targets on that front and, indeed, if anything, improve upon them.
Because there is plenty of time, I propose to turn to another point, which is a finance point but not perhaps related directly to the Budget; that is, the meeting of the 14 gentlemen of Verona which took place last night in:
"The uncertain glory of an April day".
My excuse for mentioning this is that one of the subjects which the finance Ministers discussed is what is to be done about the "ins" and "outs" when there is a single currency.
I very much regret to say that, unfortunately, we put the item on the agenda. But I wish to spend a few moments looking at that. Those of us who believe in a single currency—and according to the press reports,
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13½ finance Ministers at Verona agreed with a single currency—do so because we believe that it is in the interests of both the European Union and our own country. We may be wrong but, nevertheless, that is what we think. If you then see somebody depriving themselves of what we think is a great benefit there to be taken, you do not get critical of them; you do not upbraid them; you do not send for the police. If somebody shoots themselves in their foot, you sympathise with them. That should have been the attitude at Verona, but it was not.
There was discussion of what you should do about what was described as competitive devaluation. I do not know whether any of those gentlemen live in the real world, but, as Mr. Lamont discovered when he had that slight altercation with Mr. George Soros, it is not Mr. Norman Lamont who sets the rate of exchange but Mr. George Soros and the market. It cost Mr. Lamont £1.5 billion—or to be more exact, it cost you and me £1.5 billion, because the taxpayers have to pay that money—in order to bring home that lesson. If you have open markets and no exchange control and freedom of movement of capital, which we have now had in the European Union for a good many years, what governments can do about manipulating the rate of exchange is very limited and transitory. You do not really need to do anything about it other than sympathise with the people who follow mistaken policies.
I wish to take an interesting example of that because it shows how much misunderstanding there is on this matter. Frankly, the general position is that devaluation and a weak currency are a burden and a detriment. A strong currency increases your competitiveness and makes the economy stronger.
While I was mulling over what I should say to your Lordships today, I found a report in the Daily Telegraph for which the headline reads:
"Strong franc cramping L'Oréal style".
Of course, L'Oréal is a very prominent French company and according to the Daily Telegraph the strong franc was cramping its style. However, I then turned to the Financial Times. Your Lordships should remember that the Financial Times is writing for the people who are putting their money where their mouth is. That is an important distinction. They are not economists but are writing for people in the markets, in the real world, who are dealing with real money. The Financial Times states:
"L'Oréal produces 11th year of growth".
It refers to the group's 11th year of double-digit growth. If that is the penalty that must be paid for a strong currency, I can think of a large number of companies which could well do with a problem of that kind.
But I make that point simply to reinforce my general argument that a strong economy, despite the fears that seem to have been produced by some of the gentlemen of Verona, and a strong currency, are good and not bad. I hope that the Government's determination on those points remains firm.
12.58 p.m.
The Earl of Harrowby: My Lords, perhaps I may take up 60 seconds of your Lordships' time to speak in the gap. I apologise because what I have to say is almost certainly out of order, but it is not often that one has a Minister representing the Treasury within hearing range.
The point that I wish to make to your Lordships is that we have the filthiest currency and the filthiest notes in the whole of the developed world. I served for 43 years in one of the clearing banks and I made that point to the authorities. I was told that we could not afford anything better. Two days ago, we had a debate on tourism. I doubt whether the Government have done a cost-effective exercise. It makes an extremely bad impression on tourists. I hope that my noble friend the Minister will be prepared to take up with the Treasury that simple issue.
I conclude by saying how much I agree with every word that my noble friend, Lord Cockfield, said.
12.59 p.m.
Lord Eatwell: My Lords, I begin my remarks by apologising to the House for my late arrival for the debate. I had not anticipated the expedition with which the House dealt with Northern Ireland matters and I apologise to the Minister.
Having heard the attacks on economists from all sides of the House today, I wonder whether I should have turned up at all. However, it was worth turning up because I am sure that the whole House is grateful to the Minister for yet another elegant summary of yet another long and complex Finance Bill. His presentation was, as we have come to expect, clear, concise and gently misleading. He managed to present an image of economic competence and command where this Bill presents mismanagement and confusion. He painted a picture of an economy in rosy-tinted good health whereas the reality is a faltering and distinctly unbalanced recovery. As they say on the stage, "It's the way he tells 'em".
The Finance Bill is not only long, it seems never to have stopped growing. When consideration of the Bill began in another place in January, it was, as was mentioned earlier by my noble friend Lord Bruce, just 480 pages long—already one of the longest Finance Bills in history. During its passage it grew by 13 per cent., the Bill before your Lordships' House now having 462 pages. If the Government were as successful in growing the economy as they are in growing their legislation we might all be better off. That might seem to be a trivial comparison—a "cheap shot" as our American cousins say—but this overgrown Bill and Britain's struggling economy are not unconnected.
The Bill contains some of the most ill-thought out, most muddled, and hence, most potentially damaging financial legislation that has ever been brought before this House. Only a government machine which could have produced the shambles and waste of the poll tax could also have produced this legislation. It is worth examining it closely to see exactly why the Bill has grown to its current size.
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On 26th February, while the Bill was in Committee in another place, the Government introduced 166 amendments which dealt with the taxation regime involved in "loan relationships", set out today in Chapter II of the Bill under Clauses 80 to 110. The amendments were produced at the very last minute, published just the day before they were due to be considered, without any notice and without any briefing notes. The performance of government Ministers in Committee was both embarrassed and embarrassing.
Loan relationships cover a vital area of the financial interconnections between firms and the relationships between firms and banks. The declared aim of this section of the Bill was the simplification of the taxation of profits and gains arising from such interconnections and to close loopholes which encourage abuse. Those are worthy aims. Yet what we have before us today is a chapter which is ill-thought through, conceived in haste and born in chaos.
The same may be said of Chapter V of the Bill, which represents yet another attempt to get self-assessment right. The Minister told us that it was the "last tranche" of legislation on self-assessment. I would advise him not to take a small wager on that matter. Just as last year, the Government are further amending the legislation on self-assessment, even as that legislation has come into effect, 20 days ago. So far as concerns millions of Britain's small businesses, self-employed and professional people, it is doubtful whether there has been a more significant contribution to human misery than is manifest in the Government's handling of the fundamental change in the taxation system. The legislation is a muddle, the rules are arcane, and the responsibilities and penalties for mistakes which apply are imposed on the general public in a manner which is entirely unreasonable and unfair. Not only that, it actually puts taxes up too.
I would be most grateful if the Minister would explain what is the £850 million increase in taxation which is attributed in Table 5b.2 of the Red Book to "self-assessment". Exactly how is that increase in taxation being brought about? As self-assessment is a matter for the self-employed, that must be an extra £850 million of taxation levied on the self-employed and hard-working people of this country. They deserve an explanation. Therefore, on loan relationships and on self-assessment this is the Red Tape Finance Bill.
Yet, there is no reason whatever why either of Chapters 2 and 5 should be in the Finance Bill at all. Both pieces of legislation are entirely to do with the management of taxation and have nothing to do with the actual raising of taxation. Neither actually belong in a Money Bill. Both could have been contained in a tax management Bill which would not be a Money Bill. By placing the legislation in a Money Bill the Government have both placed it under the necessarily restricted timetable of the Finance Bill and have ensured that your Lordships' House had neither the opportunity effectively to debate such measures nor to amend them in Committee. The Minister owes us an explanation as to why that device of preventing the House commenting on the legislation effectively has been used.

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We also need an explanation of what is happening to the Government's finances. As has been said by other noble Lords, the borrowing figures released last Thursday revealed a PSBR in excess of £32 billion, over 10 per cent. up on what was forecast just six months ago. Let us remember that only 18 months ago, in the Budget delivered in November 1994 which set the financial stage for 1995–96, the Government were forecasting a PSBR of just £21 billion. So borrowing is yet another growth area for this Government. For example, can the Minister tell the House exactly how much the national debt has increased since April 1992, the date upon which the present Administration took office?
However, even more interesting than the Government's addiction to debt are the explanations which the Treasury offered for this increase in the PSBR. In the Financial Times of 19th April, the Treasury is reported as admitting that a substantial part of the oversight was due to nearly £3 billion less in tax being collected than had been planned in the Budget. About half the shortfall in corporation and income tax receipts could, the Treasury declares, be explained by forecasting errors and lower than projected economic growth. But the Treasury could not account for the shortfall in VAT receipts; nor did it reveal what it intends to do about the VAT shortfall.
On top of that VAT shortfall, we must now add, as my noble friend Lord Bruce and the noble Lord, Lord Ezra, pointed out, the bill for the refund of VAT which, according to the decision of the Court of Appeal yesterday, has been improperly levied on interest-free loans offered by retailers right back to 1973. The Paymaster General, Mr. David Heathcoat-Amory, is reported as saying that the Court of Appeal's decision could have "implications" for taxpayers. Can the Minister tell us just what those implications might be? More precisely, can the noble Lord tell the House exactly what is the Treasury's estimate of the taxpayers' liability if the decision of the Court of Appeal is upheld by the Judicial Committee of your Lordships' House? Are estimates of a new £5 billion hole blown through the Government's finances accurate? If not, what is the accurate estimate? Further, what do the Government intend to do about the VAT shortfall and the extra VAT levies that they must now pay back?
We are well aware that VAT is the Government's tax of choice. The VAT junkies—the noble Lord, Lord Cockfield, referred to the effects of addiction, and the Government are addicted not only to occasional inflation but also to VAT—can never come across a VAT rate without wanting to put it up. So how will they deal with their extra VAT bill?
It is particularly striking that the PSBR this year is £32 billion. Noble Lords will recall that that is just about the level of the PSBR which was contained in the Red Book of 1992, the Red Book on which the Government fought the 1992 election. We are all well aware that much of the Red Book is an elaborate work of fiction, but it is at least worth reflecting on the fact that, after four solid years of tax increases—increases in income tax, increases in VAT, increases in council taxes, new insurance taxes, new air travel taxes; an accumulation
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of tax burdens which, even after this Budget, has left the typical family £670 a year worse off—after all that extra revenue pouring into the Government's coffers, public borrowing is back exactly where we started.
Why should that be? With the share of taxation in national income higher than it ever was under a Labour Government and set to rise yet further, why should the Government still be piling more and more debt, as my noble friend Lord Desai pointed out, on the backs of future generations? The answer, of course, was contained in the Treasury statements to which I referred earlier: the poorer than expected performance of the economy.
Since the Budget there has been a clear deterioration in the performance of the British economy. That was made abundantly clear in the latest CBI industrial trends figures published on Tuesday; and, indeed, in yesterday's retail sales figures and in today's figures on engineering output. The CBI reports that industrial output is down, that exports are down, that new orders are flat, that 16,000 industrial jobs have been lost in the last quarter, and that 11,000 more jobs are expected to go in the next quarter. On top of that, as your Lordships will be aware, investment fell by 5 per cent. in the last quarter of last year, after a year in which investment rates were running little above the dismal levels of the 1992 recession.
In the face of their persistent inability to secure a decent competitive increase in Britain's share of world trade, and their truly appalling record on investment, the Government fall back on the hope of a consumption boom to try to pull the economy out of recession, hoping that the liquidity produced by building society sell offs and maturing TESSAs will do the job that the Government are apparently incapable of doing.
Now that may happen. My noble friend Lord Desai has suggested that such factors may indeed produce growing demand this year. The noble Lord, Lord Mackay, has quoted on a number of occasions an article to that effect by my noble friend, but he has quoted it in a manner which clearly suggests that he has not read it. Had he done so, he would know that there is a sting in the tail of my noble friend's analysis. My noble friend points out that the only factors which are likely to give a boost to the economy this year are on the side of consumption—not investment or exports, but consumption. It is the familiar Tory road to economic ruin—a consumption boom. So even if there is an upturn this year, it will not be the sort of recovery that Britain needs which provides the secure foundations of competitive investment on which an economic future can be built.
But even that might not happen. Yesterday's numbers for high street sales show a very small increase. But why not? Why is the recovery not occurring? Why has the economic growth this year faltered? Why is investment stagnant and exports down? The CBI survey provides the answer: lack of confidence. It is lack of confidence in this Government's economic policies which lies behind the failure to invest. It is lack of confidence in this Government's economic policies which is leading to a haemorrhage of investment flowing out of Britain.

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The Government boast of the inflow of foreign investments into this country but fail to mention that that inflow is vastly exceeded by the outflow of investment from this country.
It is a lack of confidence among consumers. Consumers know that this Government's employment policy is a policy of insecurity. When you know that the Government are committed to making your job flexible, to reducing your security of employment, then you are naturally reluctant to make large expenditure commitments.
It is lack of confidence which is holding the British economy back—a lack of confidence in a Government who have consistently failed to produce an economic policy which will fit Britain for the challenges of the modern global economy. This Finance Bill is more of the same, entirely inadequate to the task of economic reconstruction which Britain needs.
This Government are a burden on the British economy. Their very presence in office is holding the British economy back. The conclusion is clear to all—one does not need to be an economist. No elaborate analysis is required. Sustained prosperity will not return until this Government go.
1.15 p.m.
Lord Mackay of Ardbrecknish: My Lords, as usual in these matters, we have had an interesting debate. I am grateful to all noble Lords who thanked me for bringing forward the Bill today and for my opening speech in which I explained its provisions.
Perhaps I may begin on an equally pleasant note by saying that I read the Financial Times this morning. I am not sure whether this is true; I am not an entire believer in everything that I read in newspapers. But perhaps I should congratulate the noble Lord, Lord Eatwell. I am told that he is to take over as head of Queen's College, Cambridge, next year. I had better not speak of his economic career or I shall fall foul of the noble Lord, Lord Bruce of Donington. The article tells me that one of his perks is to live in the president's lodge on the banks of the River Cam in buildings dating from 1460. I have said previously to the House that I would not particularly like to have been a student of the noble Lord, Lord Eatwell, if I had read economics (which I did not do). But if the noble Lord wishes to entertain me and to give me a lecture about economics at dinner in the president's lodge on the banks of the River Cam, it might be an invitation that I should be unable to turn down.
However, as I congratulate the noble Lord, I find this fact interesting. This is a promotion for next year. He is looking after his career move next year. That suggests to me that he takes the same view as Members on this side of the House about the results of the next general election. Therefore, I congratulate the noble Lord on his wisdom in looking into his crystal ball. I also congratulate him in all seriousness on his appointment.
The noble Lord, Lord Eatwell, as usual, conjured up as bleak a picture as possible of the British economy. The time which elapsed between his description and that
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of the noble Lord, Lord Bruce of Donington, meant that few noble Lords other than myself—I was taking notes—would relate the two speeches. I do not have to remind the noble Lord, Lord Eatwell, that the noble Lord, Lord Bruce of Donington, does not think much of economists; I believe that that message was received loud and clear by all the economists in your Lordships' House. The noble Lord, Lord Bruce of Donington, suggested that we should cheer up: that we have substantial assets in our country. Perhaps the noble Lord, Lord Eatwell, could take a little advice at least on that score from his noble friend.
I turn now to a number of matters raised by noble Lords. I begin with two points mentioned by the noble Lord, Lord Eatwell, which were not referred to by anyone else, as regards some of the detail in the Finance Bill. The first concerns loan relationships. I freely accept that those are not subjects about which popular television programmes would be made. The noble Lord suggested that we rushed the legislation and did not think it through. This is a major simplification of the part of the corporation tax code dealing with debt issued and held by companies. The reform has been widely welcomed. The clauses in the Bill were subject to wide consultation. They were well received and well supported by all sides in the Commons. Extensive government amendments in the Standing Committee, which the noble Lord criticised, sought to address all the major points made in representations on the detail of the proposal. As amended, I believe that this part of the Bill should not prove to be contentious.
As regards the self-assessment portion of the Bill, I take note of the noble Lord's advice to me not to put wagers on no other legislation being required. I believe that there is a difference between fine tuning and tranches of legislation—if I may slightly cover myself for the future.
The noble Lord referred to the figure of £850 million for 1998–99 in the Red Book. He suggested that it represented a hidden tax rise for the self-employed coming from self-assessment. The figure of £850 million in the Red Book is there mainly to cover the rises in profits which we expect to come between now and 1998–99 to be available for taxation at that time. It is not a measure of an increase that we expect to come from self-assessment but rather from increasing prosperity and success from this portion of business.
Lord Eatwell: My Lords, if the noble Lord will forgive my intervention, perhaps I may ask a question on that. But, first, I thank the noble Lord for his kind words at the beginning of the speech.
I wonder whether the noble Lord has slightly misread his brief on the £850 million increase. It is due to an increase in profits taxation, not to a projected increase in profits. It is entirely due to the fact that profits will now be taxed on a current year basis instead of a past year. That raises profits taxation. It is not a projected increase in profits.
Lord Mackay of Ardbrecknish: My Lords, I believe that I said "mainly". I was about to say that profits from the self-employed are to be taxed, as I would expect the

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noble Lord to say, quite correctly, on a current year basis, just as employees are now, rather than on a previous year basis. Therefore tax has to be paid sooner. Since profits are assumed to be rising, there will be a cash flow yield to the Exchequer. I believe that we are nearly agreed on that.
The noble Lord, Lord Eatwell, the noble Lord, Lord Ezra, and the noble Lord, Lord Desai, raised the point about the PSBR and the recent reports suggesting that the income from taxes is rather under the projections and therefore that the PSBR may be larger than projected. I wish to make a number of points. First, the PSBR is still on a downward trend. We see in the various figures that the Government's spending—it is an important aspect of the calculation which ends one up at the PSBR—is very close to budget forecast. We believe that continuing tight controls of that spending will ensure that the PSBR continues to come down.
As I think your Lordships know, we are considering why that undershoot has occurred. We shall consider with interest the conclusions of the group which is doing this work for us. My right honourable friends in the Treasury will then have to decide whether they need to take any steps to deal with any points that arise from the investigation into the reasons for the shortfall.
I have mentioned this point to the House on a previous occasion. On that occasion I was helped by the noble Lord, Lord Peston, who gave me a clear and elegant economic description of what I was fumblingly trying to explain in more mathematical terms, and that is that the PSBR is the difference between two large figures, so, inevitably, the error in the PSBR is quite a large error every year, and has always been so for every government. Noble Lords should bear that in mind before they start to think that the end of the world has come as regards the PSBR.
Because it is the difference between two large figures, and one of those is Government expenditure—I listened, as I always do, to the noble Lord, Lord Desai, when he discussed this—if one wants the PSBR to be zero in a short period of time, and to balance budget, one has to do one of two things. Either one must increase taxes or one must cut expenditure drastically. Over the past three years we have attempted, and succeeded, in cutting government expenditure by a total of £53 billion.
From time to time in your Lordships' House I make suggestions for savings in the large Department of Social Security budget, and my noble friends make suggestions for savings in their budgets. I notice that we are not often met with support from the party opposite, but I do not complain about that, except to say that, unlike the noble Lord, Lord Desai, the party opposite does not seem to be prepared to accept that if we go down its road of not containing public expenditure, we would have to go down the noble Lord's road of increasing taxation. Indeed, three or four years ago when we were faced with a difficult situation we had to increase taxation, which is against our natural feelings. However, we felt we had to do that in the interests of the economy. I have no doubt that the noble Lord, Lord Desai, approved of that. He might seek to give his Front Bench—both here and in the other place—
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lecture about the merits of that government policy because they do not seem totally to subscribe to it as they spend much of their time attacking us for having taken the difficult step of increasing taxation rather than see the PSBR expand further.
The noble Lord, Lord Eatwell, asked me about the national debt. I suppose we move onto that subject quite naturally from PSBR. The net public sector debt rose to around 44 per cent. of GDP in 1994–95 from 27 per cent. in 1991–92. Of course there was a stage when we managed to repay part of that money in the late 1980s. However, it remains well below the level of 49 per cent. that we inherited in 1979. It is expected to fall back again in the years ahead, as the noble Lord, Lord Eatwell, will see if he looks at page 70 of the Red Book.
The noble Lord, Lord Ezra, was concerned about rapid monetary growth although he was advised by the noble Lord, Lord Desai, that he should not worry too much about that. I think that the noble Lord, Lord Desai, has a point there. I would say to the noble Lord, Lord Ezra, that I agree that M0 and M4 are growing somewhat above their medium-term monitoring ranges, but there are other indicators that point to a much more subdued inflationary position. The Chancellor and the Governor take into account all the evidence before they decide the level of interest rates. I hope to return to the matter of inflation later. We expect it to remain low. We are enjoying the lowest run of inflation for almost 50 years. If the noble Lord, Lord Ezra, is being advised by the noble Lord, Lord Desai, and myself not to worry too much about M0 and M4, perhaps that comforts him for the weekend at least.
The noble Lord, Lord Ezra, mentioned the private finance initiative and the Government's own public sector capital spending. The PFI is not a device to reduce public investment; it is about harnessing private sector skills and making the Government the purchaser rather than the provider of public services. We believe that it will lead to better value for money. But, of course, by going down the PFI route one is also making substantial future commitments to buy services from the private sector. One has to take that into account when looking at the Red Book line on the public sector public expenditure position. We believe that the PFI is important, but I do not wish to delay your Lordships by giving many examples of PFI and how it is succeeding. For example, as regards my department, we hope shortly to announce a programme of co-operation between the Benefits Agency and Post Office Counters Limited to shift from the rather antiquated method of paying benefits by books and giro cheques to one using plastic cards which we believe will be much better for all concerned. That is but one example of the benefits of the measure.
Like the noble Lord, Lord Ezra, and my noble friend Lord Boyd-Carpenter I wish to discuss the landfill tax. Green taxes—as the noble Lord, Lord Desai, pointed out when he said that he approved of them—are discussed in this country. We are aware of the need to look after our environment. That is particularly relevant in a small country such as ours. We are surrounded by fish, as the noble Lord, Lord Bruce of Donington, reminded us.

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We are a small country with a large population. In the main we are a densely populated country. It is important therefore that we look after our environment. As I said in my introduction, the landfill tax has been widely welcomed. It seeks to help us conserve our environment.
The noble Lord, Lord Ezra, was worried about local authorities. They will benefit from the reductions in national insurance contributions. However, one cannot simply exclude local authorities from the tax because they use landfill sites a lot. They are principal waste tippers thanks to all of us and our consumption and our desire to have our dustbins emptied weekly. Therefore I do not think one can exclude local authorities from the landfill tax as that would send the wrong signal. But local authorities, like business—even those which use landfill sites heavily and dispose of much waste—must be sent a message that they must consider whether landfill is the best way to deal with their waste, or whether they can do more recycling and consider other ways (especially with regard to business) to reduce waste in the productive methods they use. This is a sensible tax and I hope it is one which will cause local authorities and business to sit back and think about the amount of waste they are disposing, how they can reduce it and whether they can recycle it.
The noble Lord, Lord Desai, asked me about the family and income tax. That reminded me of the debate which my noble fried Lord Skidelsky introduced a few weeks ago. The figures all concern averages, but the most common type of family with children and two earners, one full-time and one part-time, with joint earnings of around £25,000 a year, will be £280 a year better off as a result of the tax proposals in the Budget, whereas taxpayers as a whole will, on average, be £190 a year better off. Looked at from that point of view, the results of the Budget would appear to be skewed in what I think the noble Lord would consider to be the right direction in favour of families.
The noble Lord also asked me about converting income tax into an expenditure tax. I understand that this is a favourite of some economists and theorists but these proposals begin to stumble on various practicalities, for example as regards what one does with savings and investment. Does one make those tax deductible? There are also questions as regards the tax rate one would have to charge. I believe I was reprimanded by the noble Lord, Lord Eatwell, for being a VAT junkie. I suspect that if one were to shift to expenditure taxes, my dependence on VAT would increase considerably. These matters have to be balanced. There is a good argument for taxes on spending and that is why we in this country have gone over to VAT. However, as I said, the matters ought to be balanced.
I turn to one or two smaller, but still important issues raised by the noble Lords, Lord Ezra, Lord Bruce and Lord Eatwell. They raised the matter of the court case reported today under the headline: "Vat man faces multi-billion pay-back". In the judgment handed down on 25th April the Appeal Court reversed, by a majority, earlier decisions by both the VAT tribunal and by the High Court. In this particular case the Appeal Court
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concluded that VAT had been incorrectly charged on interest-free credit provided by finance houses. Customs are appealing the decision to the House of Lords.
The amount of money at stake, as stated in the press reports, has been widely exaggerated, and was not provided by Customs and Excise. Businesses whose circumstances are the same as those of the appellant, Primback, in this particular case may wish to make claims for tax overpaid. Such claims, however, will have to be supported by appropriate evidence. Customs will provide guidance on that in due course.
My noble friend Lord Boyd-Carpenter asked about recent reports about school fees plans. The decision on this particular matter is one entirely for the Charity Commission Board under Section 3 of the Charities Act 1993. That Act gives a right of appeal against the commission's decision to the High Court. I understand that an appeal is likely in the case of at least one of the five institutions concerned. In the circumstances I am sure the House will understand that I am not able to discuss the merits of the commission's decision.
I will pass on the remarks of my noble friend Lord Harrowby to my right honourable friends in the Treasury.
Perhaps I may address two final points. The first relates to unemployment, and was raised by the noble Lord, Lord Bruce of Donington. I remind him that he, and we, ought to examine the international comparisons, as well as the position in our own country. The Government are very concerned about unemployment. We are very pleased, and I sometimes wish that Opposition spokesmen would sound as pleased, at the monthly decline in unemployment figures. They are now down by over three-quarters of a million from their high point in the recession that has now passed.
We are still not satisfied. Youth unemployment in particular is bad; although the noble Lord, Lord Bruce, did not mention that. I shall not use the figures that are used internally in the United Kingdom; namely, the claimant count; I shall use the international comparison figures, published by Eurostat. The last figures I have that provide those comparisons put the United Kingdom at 8.6 per cent. as regards unemployment. For Spain, the comparison is 22.6 per cent.; Italy 12.4 per cent.; France 11.6 per cent.; and Germany 9 per cent. In other words, the other big players are not doing nearly as well as we are.
Lord Bruce of Donington: My Lords, I am most grateful to the noble Lord for permitting me to question him on this matter. Is he aware that the Eurostat figures are themselves based on figures provided by government? Is the noble Lord aware of a more detailed study by the Royal Statistical Society, a completely impartial body, which concludes that real unemployment is probably a million more than is stated in the current figures?
Lord Mackay of Ardbrecknish: My Lords, we have argued this point before. Of course the international figures are based on figures received from this country. However, they are not the same as the figures based on claimant count; they are based on different evidence, as

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well as claimant count, which comes through the three-monthly Labour Force Survey, which plays an important part in the compilation of these figures. It may not he the same report as that mentioned by the noble Lord, but one report I read recently stating that there was underestimation of unemployment in this country also earmarked exactly the same underestimation in most other countries. Therefore one has to take figures that are comparable, as these figures are. Quite simply, the position in this country is very much better than in most of our competitor countries in the European Community and indeed among all the big players.
Youth unemployment is a particularly serious matter. We are not good in that regard, and I have never pretended otherwise. It stands at 15.7 per cent. However, in Spain it is 41.8 per cent.; in Italy, 34.9 per cent.; in France, 27 per cent.; and the Germans do better, at 8.8 per cent. At 15.7 per cent., the percentage in this country is considerably below the countries quoted, except for Germany. We are trying to do our very best to tackle the problem in ways that are often explored across this Dispatch Box. The matter has to be viewed in an international context.
Le Monde recently commented:
"How does one interpret the incredible change in unemployment in Great Britain?"—
down, as I mentioned, by three-quarters of a million from its high point—
"If unemployment is dropping in Great Britain, it is because they have done everything to deserve it".
That says quite a lot from a French point of view about how successful we are being in coping with our unemployment problem.
The final point I wish to address is the matter of inflation, raised by a number of noble Lords. My noble friend Lord Cockfield quite rightly highlighted the question of inflation. He reminded the House of a question he asked me recently. I was grateful to him for appreciating that I accepted I did not know. The noble Lord, Lord Peston, then offered me some advice. I believe I went on to say that, as I found economists did not usually agree, I was not sure whether the noble Lord, Lord Peston, had offered me a totally agreed piece of advice. My doubt certainly turned out to be well founded. I asked three people in the course of the next two days, and received three or four different variations on the answer. They were sufficiently different to indicate that not everybody agreed on the matter. In addition, in March, for example, when we cut base rates, long-term interest rates increased around the world because of fears then about the strength of the US economy.
However, the real point that my noble friend raised related to the "drug" of inflation. He chided me for making inflation the last point in my short list. I assure my noble friend and the House that there was no pecking order in my list. It was done for the sake of elegance and all those other matters one takes into account when one writes a speech.
The battle against inflation is constant. It is never fully won. As the noble Lord, Lord Ezra, pointed out, some of our European competitors are still doing better
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than we are; he is right. Nevertheless, we are below the European average, which at least is something. The noble Lord reminded us that others do better than we do and therefore, in the same way as I suggested we did better than others on unemployment, I must take the same lesson.
I assure my noble friend that the Government are determined to stick to their anti-inflationary policy. As I said earlier, we are enjoying the lowest run of inflation for 50 years. That helps our economy. We are being more open and transparent about the monetary framework. However, I assure my noble friend that the number one objective of the Government is to continue to bear down on inflation. Keeping inflation within its target figures is our top priority.
My noble friend made a very good point when he said that, in large part, the lack of a feelgood factor was due to the fact that for almost all his adult life the drug of inflation had been drip-fed to the British people. Getting people off the drug of inflation is just as uncomfortable as are the withdrawal symptoms from other drugs. However, I assure him that we intend to continue with the withdrawal programme.
This country has the lowest inflation for almost 50 years; we have the lowest basic rate of tax for over 50 years; the lowest mortgage rates for over 30 years; and, as I said, the lowest unemployment rate of any major European economy.
The Bill before the House today shows that we are committed to low taxation and a tax system that raises revenues in ways that do the least damage to the economy and encourage enterprise. The Government are not prepared to take risks with the recovery. We are making real progress towards our goal of making Britain the enterprise centre of Europe. This Finance Bill ensures that the economy will continue to strengthen. It will improve incentives and boost enterprise. It is a Bill of action. It embodies our practices and our principles. I commend it to the House.
On Question, Bill read a second time; Committee negatived. Then, Standing Order No. 44 having been dispensed with (pursuant to Resolution of 16th April), Bill read a third time, and passed.

Trustee Investments (Division of Trust Fund) Order 1996
1.40 p.m.
Lord Mackay of Ardbrecknish Lord Mackay of Ardbrecknish rose to move, That the order laid before the House on 19th March be approved [15th Report from the Joint Committee].
The noble Lord said: My Lords, perhaps I should apologise to your Lordships for coming on again so quickly with another speech. However, noble Lords will be delighted to hear that this one is a good deal shorter than my two previous speeches.
I should explain that the second of the orders we are debating today, the charities order, revokes an earlier order made only last year, simply because the new trustee investments order before us today will cover all

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trustees, including charitable trustees. We shall thus have one order covering all trusts rather than two pieces of subordinate legislation.
The Trustee Investments Act 1961 extended the powers of trustees to make investments. The Act requires trustees who want to invest in shares to separate the trust fund into two parts, one of which must be invested in what the Act calls "narrower" investments and the other in "wider" investments. The first schedule, which has been amended over the years, sets out which forms of investment fall into the two groups. Broadly, "narrower" investments are fixed interest securities issued by public sector institutions and "wider" investments are a restricted range of shares listed on the stock exchange of countries in the European Economic Area.
The original Act required that the two parts that I mentioned should be equal in value when a trust fund was first invested. The order would change the ratio of 50:50 to 75:25, with trustees being allowed to use the larger part to buy "wider" range investments. My honourable friend the Economic Secretary to the Treasury announced the Government's decision in a Parliamentary Answer on 21st November last year.
I should draw your Lordships' attention to two points. First, trustees are bound by the Act only if their particular trust deed does not itself define their powers of investment; or, of course, if the deed specifies that the trustees are to invest as the Act requires. Trusts which are formed without deeds, usually in the case of intestacies, must be invested as the Act requires. As your Lordships may know, almost all new trusts have their own powers which are often far wider than those contained in the Act. Secondly, the original division of a trust fund is a once-for-all event. So, over time, a fund may come to hold a much higher proportion of its assets in the form of shares than when it was first invested.
The 50:50 ratio has come under increasing criticism. The main concern has been that inflation has tended to erode the real value of the "narrower" range of funds. It has been argued that the interests of trust beneficiaries would have been better served if more of the assets were in the form of equity investments rather than gilts.
The Deregulation Task Force on Charities and Voluntary Organisations recommended in 1994 that the Trustee Investments Act should be reformed to widen significantly the scope of trustees' investment powers. Using powers under the Charities Act of last year, my right honourable friend the Home Secretary changed the ratio for charitable trusts from 50:50 to 75:25 by an order which came into force in April last year. At much the same time, the Treasury published a consultation document proposing that that should be extended to non-charitable trusts. The Act does not allow the Treasury to go further than 75:25 by means of an order.
As the Government have already announced, we plan to consult widely on a more radical reform of the Act. I expect the consultation document to be published as planned by the beginning of next month. However, the Government decided that it would be wrong to allow the plans to produce a Green Paper to delay the useful, although limited, change before us today.
The proposal is widely supported by interested parties, and I hope that the order implementing it will similarly commend itself to your Lordships. I commend the orders to the House, and I beg to move.
Moved, That the order laid before the House on 19th March be approved [15th Report from the Joint Committee].—(Lord Mackay of Ardbrecknish.)
Lord Eatwell: My Lords, I am grateful to the Minister for introducing these orders to your Lordships' House. I was intrigued that he argued that there needed to be change because of the impact of high levels of inflation on those trusts which have a relatively low ratio of investment in equity. I wondered whether he was sending us a signal about the Government's expectations about the inflationary impact of their policies.
It is also worth emphasising the point made by the Minister; namely, that the regulations will apply to small trusts, although there may be many of them, which do not define investment regulations within their own deed of trust. It is understandable that the Government should lay down a basic investment rule for those trusts which do not define the possible bounds of their investments. But if the Government believe that those ratios are appropriate, why are they not applied to all trusts? I appreciate that trustees must be approved. But if there is a rule of thumb which the Government feel is appropriate for trusts without an investment strategy embodied in their deed of trust, why does that not apply more widely?
That raises a wider and even more important issue concerning the position of trusts which invest predominantly in the shares of one company. The Baring Foundation, for example, was just such a trust. Is it appropriate that trusts should be allowed to follow that form of investment strategy which has nothing to do with the defined objectives of the trust and everything to do with the control of the company whose shares are held? It is essentially an anti-competitive strategy, blocking the possibility of proper competitive scrutiny of the management and operation of the firm by blocking potential takeover. It may reasonably be supposed that it was exactly that block to competition and to scrutiny which contributed to management complacency, and management failure at Barings, and to the consequential losses to the Barings bondholders.
Will the Minister tell the House whether he regards the investments strategies which concentrate on the shares of just one company as appropriate? Are they not highly risky? Are they not, as I explained, anti-competitive? Should not the investment strategy of all trusts be suitably diverse and suitably balanced?
Lord Mackay of Ardbrecknish: My Lords, the noble Lord raises a much wider point, which we would be unable to deal with in the kind of secondary legislation that is before us today. The original Act gives the Government only fairly limited powers to make changes.
The noble Lord made the quite correct point that most of the trusts affected by what we are doing today will be fairly small trusts. Most trusts have in their trust deed

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their own rules for the balance of investments. What we do today will only affect those trusts where that formula is not on their deeds.
The more general point raised by the noble Lord, who reminded us of the position of Barings and the Barings trust, where all the money was invested in the same company, takes the discussion a good deal wider. I note his points about anti-competitiveness and so on, but perhaps I may say to him that we are about to issue a consultative document and we intend to have a fairly lengthy consultation period. Indeed, it will be lengthier than we might perhaps have liked because the Summer Recess will intervene. That will make it a fairly long consultation period and everyone will have ample opportunity to give their views.
We are looking at more radical reform and perhaps the noble Lord, when he sees the consultation document, might like to respond to it along the lines of his worries. But these are complex issues and I should prefer to ask your Lordships to wait to see the detailed case set out in the consultation document that we intend to issue at the beginning of May.
The basic principle of trust law in England and Wales—that trustees must take the same care as an ordinary, prudent man would take, if he were minded to make an investment for the benefit of other people for whom he felt morally obliged to provide—forms the
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basis on which, we believe, trusts ought to work. We plan to build on that. If the noble Lord is content, perhaps I can invite him to await the consultation document and then he can respond and make the points that he made to me as part and parcel of the consideration that we will then give to what we do in this field in the future.
On Question, Motion agreed to.

Charities (Trustee Investments Act 1961) Order 1996
1.50 p.m.
Lord Mackay of Ardbrecknish: I beg to move.
Moved, That the draft order laid before the House on 21st March be approved [15th Report from the Joint Committee].—(Lord Mackay of Ardbrecknish.)
On Question, Motion agreed to.

Rating (Caravans and Boats) Bill
Returned from the Commons with the amendments agreed to.
House adjourned at ten minutes before two o'clock.