Lords Sitting of 28 November 1996

Preamble
The House met at three of the clock (Prayers having been read earlier at the Judicial Sitting by the Lord Bishop of Newcastle.): The LORD CHANCELLOR on the Woolsack.

The Army: Bullying
Lord Ashley of Stoke Lord Ashley of Stoke asked Her Majesty's Government:
How many substantiated cases of bullying in the Army were dealt with by military police in the last year for which figures are available; and whether it is Army policy to pay compensation in substantiated cases.
The Parliamentary Under-Secretary of State, Ministry of Defence (Earl Howe): My Lords, there were four substantiated cases of bullying within the Army in 1994, the last year for which figures are complete. With regard to compensation payments, service personnel have the same legal rights as civilian workers to claim compensation from their employer. They are normally entitled to compensation if they can show that injury results from negligence on the part of their employer, the MoD.
Lord Ashley of Stoke: My Lords, I am grateful to the Minister for that reply. However, is he aware that, although the Ministry of Defence and the Adjutant-General and his colleagues condemn bullying, it still goes on, and probably in far greater numbers than is reported? There are two reasons why compensation should be paid: first, to reinforce the signal that bullying is unacceptable; and, secondly, because the people affected deserve it.
Earl Howe: My Lords, I entirely agree that bullying in any form is unacceptable. The noble Lord is right to say that the Army takes a serious view of bullying whenever it occurs. But I stress that the number of substantiated cases of bullying in a year is very few. Where it occurs I wholeheartedly concur with the noble Lord's view that compensation, where appropriate, should be paid. I am sure the noble Lord will agree that the basis for agreeing such claims should be four-square with that which applies in the civil sector.
Lord Williams of Elvel: My Lords, is the noble Earl aware that there is a good deal of anecdotal evidence—I do not say it is substantiated—that my noble friend is right in thinking that bullying is on the increase in the Army rather than on the decrease? Is the noble Earl aware also that, according to certain press reports in which we can place whatever credence we like, certain officers have been involved in such activities? In those
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circumstances, what are the sanctions that those who hold the Queen's commission face who may be guilty of such appalling behaviour?
Earl Howe: My Lords, I am aware of certain cases that have been reported in the press. I believe that the incidence of bullying in the Army is low. Occasionally episodes come to light and when they do they are dealt with firmly and thoroughly, whether it is a soldier or an officer who is involved. We are all aware of anecdotal evidence. Between 1990 and 1994—the most recent year for which figures are available—the number of violent offences committed by Army personnel fell by over 30 per cent. That is a clear indication that the measures to combat all forms of ill-treatment within the service are working.
Lord Williams of Elvel: My Lords, all that may be true. Can the noble Earl answer my question? What sanctions are available against those who hold the Queen's commission as officers who may be guilty of offences of this nature?
Earl Howe: My Lords, the penalties are exactly the same, as I tried to indicate. The problem is that soldiers are often reluctant to come forward, particularly if it is their own immediate superior who, in their eyes, is guilty of the offence in question. That is a matter that needs to be addressed. The Army is aware of that potential difficulty and has taken steps to ensure that all soldiers are made aware of the procedures open to them if they feel aggrieved.
Viscount Falkland: My Lords, is it not the case that the tendency for bullying, whether it be in a ship, a regiment or a school, is unfortunately part of the human condition? The problem is detecting it and taking the proper action to root it out. Those of us who served for any length of time in Her Majesty's Armed Forces know that it is up to a commanding officer and the machinery that he puts in place to do that. Is the Minister satisfied that that satisfactory way of dealing with the problem is now in place?
Earl Howe: My Lords, a lot of work has been done in the Army over recent years to address the problems to which the noble Viscount refers. The Chief of the General Staff issued a directive in December last year covering the Army's policy on sexual and racial harassment and bullying. In addition to that directive, a pamphlet on equal opportunities in the Army has been distributed to all regular Army service personnel. It provides guidance on the policy and the mechanisms available to service personnel should they wish to complain about sexual or racial harassment or bullying. That pamphlet is issued to all new recruits during their initial training.
Earl Attlee: My Lords, is the Minister aware that the Army's disciplinary machinery sends out strong signals to anyone convicted of those offences?
Earl Howe: My Lords, I am grateful to the noble Earl. He is quite right.
Lord Newall: My Lords, is my noble friend aware that many of us who joined the forces in the 1940s were attacked by our fellow members when we were in the ranks—whether at Sandhurst or elsewhere? It was quite normal and one certainly did not worry about it.
Earl Howe: My Lords, I believe there are varying definitions of bullying. I am sorry that my noble friend was the victim of what sounds like unpleasant behaviour.
Lord Ashley of Stoke: My Lords, will the noble Earl be chary of being misled by questions about bullying being normal? We are talking of vicious and sadistic practices which are well documented. It is unacceptable brutality by a small minority in the Army that we are discussing. Can I assume that the Minister agrees with his colleague in another place, the Minister of State, who said that the MoD takes bullying seriously but does not keep central records? In other words, the Ministry of Defence does not bother to find out what is going on; it simply does not know; it only appears to be taking the matter seriously. If it does not keep records, it cannot know what bullying is taking place. Why does not the MoD do something about it?
Earl Howe: My Lords, we do keep records; that is how I was able to answer the noble Lord's Question in the first place. This is not a subject of which I make light in any way, shape or form. Bullying in the Armed Forces, when it occurs—it occurs only rarely—is a serious matter which the services will stamp on at the first opportunity.

Millennium Project, Greenwich
3.9 p.m.
Lord Donoughue Lord Donoughue asked Her Majesty's Government:
What is the current estimated total cost of the millennium project at Greenwich and what amounts are estimated to be contributed from the respective funding sources.
The Parliamentary Under-Secretary of State, Department of National Heritage (Lord Inglewood): My Lords, it will cost an estimated £350 million to build and set up the millennium exhibition. The Millennium Commission intends to support it with a grant of up to £200 million, provided it is satisfied with the viability of the whole project. The balance is to come from private sector sponsorship. The Government intend to meet most of the site reclamation costs. English Partnerships is acquiring the Greenwich peninsula site, and will manage the reclamation work.
Lord Donoughue: My Lords, I thank the Minister for that Answer. Remembering the British Library, I am sure we are all very hopeful that the cost figure of £350 million will be achieved. Perhaps I may ask a question for the clarification of the House so the matter is quite clear in our minds. If the cost is £350 million plus overrun, which I believe is inevitable, funded by
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£200 million from the commission, leaving a £150 million shortfall as of now, will he tell the House how much money from the private sector is now firmly contractually committed? If there is a shortfall in the end, how do the Government budget to meet that shortfall? Are they anticipating that it might be met from public expenditure from the departmental grant?
Lord Inglewood: My Lords, the noble Lord asks a most important question, but I must go back to the original Answer I gave him. I explained that it was anticipated that it would cost £350 million to build and set up the exhibition. In addition to that there is the cost of operating the exhibition, which in turn will generate receipts. The proposal has gone forward on the basis that the cost of the operation of the exhibition will more or less be offset by the receipts received. In order to establish this more thoroughly, a business plan and budget is being presented by 11th December to the Millennium Commission. It will be the result of the combination of the grant, the sponsorship and the receipts that may be received from visitors and otherwise generated by the exhibition which will give the project its income. Offset against that has to be the cost of setting up and building the exhibition and running it for the duration. The Millennium Commission has said that it will spend up to £200 million from the money it currently has for the present period for which it will run and contribute that to the exhibition.
If there is to be any question of additional expenditure being required, bearing in mind the way in which the project has been described, it is the Government's intention, so long as the Government, the Opposition and the Millennium Commission are satisfied with the general robustness of what is proposed, that an order should be brought forward to extend the life of the Millennium Commission in order to enable it to collect sufficient money to meet any deficit that might arise under such circumstances.
Lord Donoughue: My Lords, this is an important and complex matter. I wish to thank the Minister. He is always helpful and his reply was very full. However, it lacked the figures for which I asked. How much is currently committed firmly by the private sector? Secondly, since he mentioned the very important factor of the extension of the remit of the Millennium Commission, is he aware that we on this side of the House—possibly a future government—are in no way committed to supporting that?
Lord Inglewood: My Lords, I do not have any figures to hand as to how much money has been committed in legal terms as opposed to pledged. On the noble Lord's second question, he was in a position to give your Lordships the information rather than I.
Lord Beaumont of Whitley: My Lords, does the cost quoted include the cost of disposing of 80,000 square metres of disposable pre-coated polyester over the Millennium dome at the end of 10 or 15 years, with its possible dangers of carcinogenic toxins and hormone disrupting chemicals?
Lord Inglewood: My Lords, I understand that the use to which the dome might be put at the end of the period of the exhibition—I remind your Lordships that the planning consent that is being sought is for a temporary use that will expire at the end of the year 2000—has not yet been determined. So no one is in a position to answer the noble Lord's question.
Lord Renton: My Lords, is my noble friend aware that before the millennium site at Greenwich was chosen an immense amount of care and thought was given to alternative sites? This is a very well chosen site and it is unthinkable that any replacement of the millennium project could take place. Will the Government give full support to its completion?
Lord Inglewood: My Lords, my noble friend is right about the considerable care that went into the selection of the site. I can reiterate that the Government are confident that the project will proceed and are giving it all their support.
Baroness Nicol: My Lords, did I understand the Minister to say in answering the very first Question from my noble friend that the Government are to meet the full cost of the reclamation of the site? If he did say that, it is not the answer he gave me last week when he told me that British Gas would be responsible.
Lord Inglewood: My Lords, the noble Baroness is quite right to recall the reply which I gave to her last week. An agreement was reached with Port Greenwich, which is a subsidiary of British Gas, to sell the site to English Partnerships. The statutorily required decontamination work which is necessary before it can be sold has been or is being carried out by Port Greenwich, which is paying for it. In addition to that work, before the site can be put to any long-term beneficial use—it is much bigger than the site required for the Greenwich millennium exhibition—a substantial amount of extra work of additional decontamination, reclamation and the installation of infrastructure and services is required.
Lord Elton: My Lords, as a considerable amount of public money is going into this project, will the Government require of the developers that the exhibition shall contain some obvious indication of what the millennium is celebrating, which is the 2000th anniversary of the birth of our Saviour?
Lord Inglewood: My Lords, the whole focus of the exhibition is to be the millennium and its significance for us. My noble friend is absolutely right about its very nature.
Lord McIntosh of Haringey: My Lords, is it not the case that the Minister has twice failed to answer my noble friend's precise question about how much private money has been contractually committed? Does not that question follow directly from my noble friend's original Question about the immense amount estimated to be
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contributed from respective funding sources? If so, should the Minister not have been able to answer that question, which concerns an issue of fact?
Lord Inglewood: My Lords, I have given a reply to the noble Lord. It was one which the noble Lord, Lord McIntosh, did not find satisfactory. I explained that this project was predicated on the basis that there would be £150 million of sponsorship which would be made available for the exhibition. I explained that I was not in a position now to give an exact figure for the amount of money that has been contracted rather than pledged.
Lord Avebury: My Lords, does the ownership of the land revert to English Partnerships at the end of the day? If so, if English Partnerships sells it at a profit, will the Government get back the £200 million of taxpayers' money that will have been spent on it?
Lord Inglewood: My Lords, the owner of most, but not all, of the 300 acre or so site at Port Greenwich is English Partnerships. If and when English Partnerships sells the site it will receive the receipts less 7.5 per cent. of the gross proceeds, which will go to British Gas. That was one of the terms agreed when the site was acquired from Port Greenwich by English Partnerships.

EU: "Better off Out" Publication
3.19 p.m.
Lord Pearson of Rannoch Lord Pearson of Rannoch asked Her Majesty's Government:
Whether they accept the findings of Better off Out?, recently published by the Institute of Economic Affairs, and, if they do not, whether they will commission a cost-benefit analysis of the United Kingdom's membership of the European Union.
The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish): My Lords, we believe that the United Kingdom must remain a member of the European Union. The European Union has been the basis of western European economic and political organisation in the second half of this century. As the Government said in their White Paper A Partnership of Nations earlier this year, the United Kingdom's role as a leading member of the EU is vital to our national interests. We do not therefore intend to commission a cost-benefit analysis.
Lord Pearson of Rannoch: My Lords, I am grateful to my noble friend for that reply. Since this highly respectable publication finds that the United Kingdom might be better off outside the European Union altogether, would not the Government at least be wise to analyse the benefits that we may receive from our access to the single market and set them against the calamities we suffer from our imprisonment within the Treaty of Rome? Without such an analysis, are not the Government like a foolish businessman who negotiates

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at the IGC the future of his company with a deceitful predator, not knowing the moment when he should get up and leave the table?
Lord Mackay of Ardbrecknish: My Lords, at least my noble friend suggested that the Government might be like a foolish businessman and not a foolish anything else, which rather worried some of us on the Front Bench. As I have said on a number of occasions, this is a difficult Question to deal with in the short time available at Question Time. Perhaps I may recommend to my noble friend that he looks at page 21 of the document he has asked me about. He will there see, as regards the costs and benefits, this passage:
"Some of these, such as net budget contributions and the cost of tariffs saved are, at least in principle, quantifiable. Other costs and benefits are real and substantial but difficult to quantify. In this category are the intangible (but real) benefits of having a harmonised single market, as against the costs of the regulation which goes hand-in-hand with the harmonised market under the European system. These categories of cost and benefit do not admit of ready quantification".
Lord Bruce of Donington: My Lords, is the noble Lord aware that the book in question is a very well-documented piece of work and that it certainly merits a specific answer from the Government, even though they may not wish to circulate it among their own officials? Is the noble Lord further aware that the content of this excellent work is fully justified in its historical context by the work of the noble Lord, Lord Beloff, a distinguished historian, whose book Britain and the European Union should also be read in conjunction with the book mentioned in the Question?
Lord Mackay of Ardbrecknish: My Lords, it is indeed an interesting book. As I have quoted a small part of it, I believe that your Lordships can see that it illustrates the difficulty of coming to a clear, bottom-line answer because set against the economic points I have made are points about political stability in Europe. Very few in your Lordships' House would find it easy to quantify the value of the political stability which the European Union has brought to western Europe.
Lord Campbell of Alloway Lord Campbell of Alloway: My Lords
Lord Taverne: My Lords, does the noble Lord agree that it is evident from this Question and many similar ones asked in this House and in another place that the real drive against progress towards monetary union comes from those who want us to leave the European Union altogether? Can the Minister convey to the Prime Minister that it is futile to make continual concessions to those who oppose closer co-operation and union because every single concession will be gobbled up and more will be asked for?
Lord Mackay of Ardbrecknish: My Lords, when the Government decide on issues such as whether to join a single currency, we shall not do so on the basis of what some of the advocates of joining or not joining may have as their underlying motivation. We shall take
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steps in what we believe to be the correct interests of Britain. The fact that the single market has worked and that we have had a great many advantages from the European Union without having a single currency is one of the arguments put forward by those who say, "You do not have to have a single currency in order to have a single market".
Lord Campbell of Alloway: My Lords, I apologise to the House because earlier I was under the impression that it was the turn of our side to ask the next question. Is my noble friend aware that the real and essential benefit of the European Union cannot be measured in terms of cost but is the freeing of the soil of Europe from the miseries of another war?
Lord Mackay of Ardbrecknish: My Lords, I believe that my noble friend is in a far better position to make that point than I could ever be because of the experiences he had on the European mainland half a century ago. I believe that what he says is very valid and should be taken to heart by your Lordships.
Lord Jenkins of Putney: My Lords, is the noble Lord aware
Lord Eatwell Lord Eatwell: My Lords
Lord Jenkins of Putney: My Lords, let the Back Bench have a go!
Lord Eatwell: My Lords, while considering the issue of costs, does the noble Lord agree that the continuous noisy dissension in Britain's party of government over Europe has, by creating uncertainty, placed a considerable financial burden on British industry in the form of the 1.5 percentage point premium that British industry must pay for its money over and above the borrowing rate on the mainland?
Lord Mackay of Ardbrecknish: My Lords, I do not believe that the two things are in any way connected. As far as the Government are concerned, we believe that we should take the decision about economic and monetary union and the next step towards a single currency when the time comes to make that decision, and we shall take into account the interests of the British people. If the underlying point of the noble Lord's question is that his party would not do that, then I shall certainly welcome a clear definition of it.
Lord Jenkins of Putney Lord Jenkins of Putney: My Lords
Noble Lords Noble Lords: Next question!
The Lord Privy Seal (Viscount Cranborne): My Lords, with the greatest respect to the noble Lord, Lord Jenkins, I wonder whether your Lordships feel that we should give a fair crack of the whip to the next Question? I am sure that we shall be returning to the present one.

London Underground: Power Failure
3.25 p.m.
Lord Berkeley Lord Berkeley asked Her Majesty's Government:
What were the reasons for the failure of the London Underground system on Wednesday 20th November and what measures are being taken to avoid a recurrence.
The Parliamentary Under-Secretary of State, Department of Transport (Viscount Goschen): My Lords, this power failure occurred while engineers were testing a compressor at London Underground's Lots Road power station. London Underground, in consultation with Her Majesty's Railway Inspectorate, is carrying out an investigation into the incident.
Lord Berkeley: My Lords, I thank the Minister very much for that Answer. Is he aware that 30,000 people were reported to have been trapped underground for three hours and that many more were severely inconvenienced in struggling home that night? Will he confirm that there is only one power station which normally supplies the whole of the London Underground network? Can he explain why there are no alternatives available and, apparently, no workable procedures for bringing them in in a reasonable time?
Viscount Goschen: My Lords, the point is that, with this type of system, when the power goes off it can be restored in some cases relatively quickly. However, there are other considerations which must be taken into account. Checks have to be made, for instance, to make sure that no one has left a train and is walking down the electrified track. There are very strong safety considerations and procedures to follow.
Baroness Gardner of Parkes: My Lords, can my noble friend tell me whether everyone was evacuated perfectly safely and whether London Underground is to be congratulated on its handling of this incident?
Viscount Goschen: My Lords, a great many people were affected by this serious incident. But I can say that of the 276 trains involved, all but 32 of them were standing at platforms at the time of the power failure. The emergency lighting did work properly. Power was available from the national grid within approximately 15 minutes, but it was not brought into play because of the safety considerations that I mentioned earlier.
Lord Clinton-Davis: My Lords, bearing in mind the fact that there is huge reliance placed on the London Underground system by millions of people within the capital and that this has been the third major electrical fire over three years, is there not a case for a rather wider inquiry into this matter than the Minister has indicated? Does he agree that the inquiry should be totally independent and that it should be conducted into the causes of this incident and the possibility of any recurrence, bearing in mind the poor state of the
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infrastructure of London Underground? Does he further agree that the inquiry should also relate to the scale of the problem which might occur in the future?
Viscount Goschen: My Lords, I do not believe that the type of inquiry that the noble Lord is seeking is appropriate. There are procedures which come into play when such an incident occurs. The main thing is for the safety procedures to be followed. A full investigation conducted by the Her Majesty's Railway Inspectorate, which is the appropriate body, is under way. We feel that that is the best way of finding out exactly what happened on that day and of preventing its recurrence.
Lord Skelmersdale: My Lords, can my noble friend explain why, in this day and age, it is not possible to run London Underground entirely from the national grid and to use the Lots Road power station purely for an emergency?
Viscount Goschen: My Lords, I am always very interested to hear my noble friend's suggestions, but that is how the system has been designed. It is obviously extremely important for reserve power to be available. As I mentioned to my noble friend, reserve power from the national grid was available within some 15 minutes. Whichever system is used it is possible that there will be breakdowns, and when a new power source has to be introduced it is important to make sure that the safety procedures are properly followed.
Lord Clinton-Davis: My Lords, is not the Minister feeling somewhat complacent about this matter? Bearing in mind the fact that services are likely to be cut and speed restrictions introduced because of the poor state of the infrastructure—and that is according to London Underground—is it not necessary to look much more widely at this matter rather than to take the somewhat superficial stance with which this inquiry seems to be proceeding?
Viscount Goschen: My Lords, that is an entirely unjustified comment. The investigation is in no way superficial. It follows the rigorous procedures that have been introduced to deal with exactly such an incident. There has been a technical failure. The results of that technical failure were dealt with properly. What we now need to know is what caused that technical failure and how to stop it recurring.
Earl Attlee: My Lords, bearing in mind the need to control public expenditure and the fact that we are discussing a soluble technical problem and talking about an industry which has a stable demand, would it not be better to privatise the industry?
Viscount Goschen: My Lords, I am always interested to hear proposals for privatisations. As my right honourable friend the Prime Minister made clear during his comments in Bournemouth last month, following the success of the BR privatisations it may be appropriate to see whether the principles of privatisation can be extended to London Underground. That is at an early stage.
Baroness Thomas of Walliswood: My Lords, once the investigation to which the Minister referred has taken place and we have seen the results, would it not then be sensible and perhaps feasible (in the light of what might come out) for the Government to consider whether alternative switching or alternative sources of energy might be desirable? If that is the case, and bearing in mind the Government's increased interest in public transport, does the Minister suppose that the Government might be prepared to promote the funding of such an interchange system? It is plainly the case that millions of people rely on the Underground system every day of the week. It is probably the single most important part of our public service infrastructure.
Viscount Goschen: My Lords, many thousands—indeed, millions—of people rely on the London Underground network. That is why it is so important that the progress that has been made on improving the service is continued. The PFI is now used to fund projects within London Underground. I am sure that the inspectors' report will be examined carefully so that we can discover the main root of the problem.

Sundays (Dancing and Licensing) Bill [H.L.]
3.32 p.m.
Viscount Astor: My Lords, I beg to introduce a Bill to except music and dancing from the Sunday Observance Act 1780; and to amend the Licensing Act 1964 in relation to the permitted hours in premises used to provide entertainment on Sundays. I beg to move that this Bill be now read a first time.
Moved, That the Bill be now read a first time.—(Viscount Astor.)
On Question, Bill read a first time, and to be printed.

Dangerous Dogs (Amendment) Bill [H.L.]
The Viscount of Falkland: My Lords, I beg to introduce a Bill to amend the Dangerous Dogs Act 1991; and for connected purposes. I beg to move that this Bill be now read a first time.
Moved, That the Bill be now read a first time.—(The Viscount of Falkland.)
On Question, Bill read a first time, and to be printed.

City of Edinburgh Council Order Confirmation Bill
Read a third time, and passed.
Edinburgh Merchant Company Order Confirmation Bill
Read a third time, and passed.

Horserace Totalisator Board Bill [H.L.]
Lord Kimball: My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.
Moved, That the House do now resolve itself into Committee.—(Lord Kimball.)
On Question, Motion agreed to.
House in Committee accordingly.
[The CHAIRMAN OF COMMITTEES in the Chair.]
Clause 1 [New corporate powers for the Horserace Totalisator Board]:
Lord Kimball Lord Kimball moved Amendment No. 1:
Page 1, line 8, after ("bets") insert ("on any event").
The noble Lord said: I shall not weary the Committee because this is purely a technical amendment to make it perfectly clear that the Horserace Totalisator Board will not be able to take bets on the British National Lottery. Amendments Nos. 1 and 2 are both technical amendments to that effect. I beg to move.
The Earl of Courtown: I am most grateful to my noble friend Lord Kimball for bringing forward this Bill and tabling these amendments. I am glad of the opportunity to record that the Government fully support the Bill and the amendments.
On Question, amendment agreed to.
Lord Kimball Lord Kimball moved Amendment No. 2:
Page 1, line 9, leave out ("on any event") and insert ("except bets on the outcome of any lottery forming part of the National Lottery for the purposes of Part I of the National Lottery etc. Act 1993").
On Question, amendment agreed to.
Clause 1, as amended, agreed to.
Clause 2 agreed to.
House resumed: Bill reported with amendments.

Economic Situation
3.37 p.m.
Lord Mackay of Ardbrecknish Lord Mackay of Ardbrecknish rose to move, That this House take note of the economic state of the nation.
The noble Lord said: My Lords, in moving this Motion, perhaps I may say how much we are looking forward to the three maiden speeches today. I seem to be drawing maiden speeches to the debates in which I take part. I do not know whether that has something to do with the debates or whether it is because I seem to have to participate in quite a lot of them. Nonetheless, we are looking forward to the maiden speeches of the noble Lords, Lord Paul and Lord Whitty, and to that of my noble friend Lord Home.
Turning to the subject of the debate, which is the economic state of the nation, the aim of the Government's economic policies is to maintain steady economic growth, low inflation and responsible public finances so that living standards carry on rising year after year. Those policies are working.
The British economy is now well into its fifth year of sustained growth. We have already enjoyed a stronger, longer and steadier recovery than any other major European economy. Independent forecasters expect Britain to be the fastest growing major European economy this year, and next year too.
While unemployment on the continent climbs to levels not seen in my adult lifetime, unemployment in Britain has been declining steadily. It has now reached its lowest point for over five-and-a-half years. On the standardised basis published by the independent OECD, we have a far lower unemployment rate than France and Italy, and a lower rate than Germany for the first time in recent history. The figures are well worth repeating. According to the latest standardised rates, the UK had an unemployment rate of 8.1 per cent. in September. That compares favourably with Germany's rate of 9 per cent., also for September, Italy's 12.2 per cent. for July and France's 12.5 per cent. for September.
During the recovery, three-quarters of a million jobs have been created, giving us in this country a higher proportion of people in work than any other major European economy. And unlike in so many previous recoveries, inflation has stayed low and earnings growth has remained moderate. Inflation has been consistently below 4 per cent. for over four years—the longest run since the days of ration books and price controls almost half a century ago. This has allowed interest rates to fall to historically low levels. Mortgage rates are at their lowest levels for a generation, halving typical monthly mortgage payments since 1990.
Meanwhile, the balance of payments has strengthened in the recovery despite weak demand in our principal European markets. Export volumes are up by almost one-third over the past three years. Record income from our overseas investments has given us the best overall trading performance for almost a decade. Britain is Europe's number one exporter of computers, TVs and semiconductors. We are a world leader in financial services. We have current account surpluses with the United States, Japan and the tiger economies of South East Asia.
Contrary to the stories we hear so often from the Benches opposite, Britain is outperforming its main competitors and climbing up the international league tables that really matter. Japan was the only major industrial country to achieve faster growth in GDP per person over the last international cycle. Judging by our performance so far in the current cycle we are set to do even better this time round. It is not just the Government who say that the British economy has been transformed since 1979. Listen to what the sober-suited men at the IMF and OECD had to say earlier this year:
"The UK's recent economic performance has been enviable … the strong overall performance has been the result of sound economic policies … inflation performance over the past four years has been remarkably good".
They say that the Government's reforms have made Britain a more flexible and less inflation-prone economy.
Compare that with what the same organisations said about us back in 1979. The OECD spoke of high inflation, double-digit interest rates, deteriorating
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competitiveness and low profitability. Unfortunately, I am not allowed to reveal what the IMF said. The then Labour Government did not dare publish its report. One of the clearest signs of the transformation of the British economy is the fact that Britain is now the number one destination for inward investment into Europe. Noble Lords have heard me describe on a number of occasions from the Dispatch Box our success story. Hardly a month goes by without news of another major international company deciding to expand capacity and create new jobs here. Just a few weeks ago we heard that BMW was investing £400 million in a new engine plant in the West Midlands. Last month Hyundai announced a £2.4 billion investment in a new microchip plant in Fife, Scotland. In the summer we had the largest-ever single Korean investment in Europe—a cathode ray tube and semiconductor plant in South Wales. In addition, in the North East Siemens has invested £1.1 billion on Tyneside.
What brings these companies here? Ours is a uniquely competitive and dynamic economy at the heart of Europe. It is one of the least regulated markets in any industrial country. It imposes one of the lowest tax burdens on business. Industrial relations have been transformed since the winter of 1978–9 and the bleak days of 1979. Profitability is at higher levels than in the 1970s and even the 1980s. We have the lion's share of Europe's most successful quoted companies. Our labour overheads are among the lowest in Europe. It is worth spelling them out. For every £100 in wages the wage overhead costs in the United Kingdom add £15. In Germany, they add £31, and in France, £41. Having the lowest labour overhead costs plays an important part in the success story of our economy and the way in which we are reducing unemployment. I venture to add that the absence of a minimum wage, the social chapter, red tape and a capricious windfall tax on business are also factors.
The Chancellor is determined that this economic success story should continue. He will not put it at risk either by letting inflation get out of control or by pursuing irresponsible public finances. He will not put party interest before the national interest. That was why a month ago he decided to raise interest rates pre-emptively to nip in the bud any emerging inflationary pressures now that the economy is once more gaining momentum. That was why in this week's Budget he took the tough but necessary decisions on taxation and spending and tightened fiscal policy to reinforce the PSBR's downward path towards balance at the turn of the century. That is why independent forecasters share the Government's confidence that sustained growth with low inflation will continue.
Growth has already picked up since the first half of this year. The service sector of the economy, which accounts for two-thirds of national output, continues to grow at a very healthy rate. There is increasing evidence that manufacturing is emerging from a period of stock adjustment and weak overseas demand. We expect the economy to grow by a healthy 2.5 per cent. in 1996 as a whole and by a still more impressive 3.5 per cent. next year. We expect inflation to fall to 2.5 per cent. next year, helped by low input prices, moderate earnings

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growth and strong competition in the high street. That prospect of healthy growth and low inflation is one that other major European economies would give their eye teeth for.
Consumer demand is growing strongly, underpinned by the highest levels of consumer confidence for over eight years. But this recovery is not just about more confident consumers. We expect exports and investment to grow in a balanced way too. The climate for investment is excellent. Already total investment has risen faster since 1979 than in France, Germany or Italy, and about six times faster than under the last Labour Government. So far this year, business investment is up 6 per cent. on a year ago. The latest surveys from organisations like the CBI and the British Chamber of Commerce bear out our expectation that business investment will grow strongly over the coming year.
Exports will benefit from strong growth in our main export markets. Although the British economy will be growing faster than most of our main competitors, we expect the current account deficit to remain close to balance with a deficit of around 0.5 per cent. of GDP, sustainable by any standards.
The cornerstone of the Budget is responsible public finances. No country can expect to run a large budget deficit for long without getting into trouble. Under the last Labour Government the PSBR reached almost 10 per cent. of national income. We all remember what happened. Inflation and interest rates soared and the economy collapsed. Money which might have been spent on public services was instead wasted on servicing the national debt. That was why 20 years ago today the noble Lord, Lord Healey, was locked in negotiations with the IMF. By contrast, when my noble and learned friend Lord Howe launched his onslaught on the massive levels of borrowing we inherited at the beginning of the 1980s the economy recovered and did not look back.
That is why the Chancellor has given priority in each of his four Budgets to reducing public borrowing. Already the PSBR has been halved over the past three years. The measures in this year's Budget reinforce the downward trend in borrowing. We now expect the PSBR this year and next to be below the levels we were forecasting in the summer. At 2.5 per cent. of GDP the PSBR next year will be far lower than in any year of the last Labour Government. Our debt burden will remain one of the very lowest in Europe. We expect to eliminate borrowing altogether by the year 2000. We have done that before and we are on course to do it again.
The key to lower government borrowing has been tight control over public spending. Despite the unexpected costs of the beef crisis, there are measures to cut spending by a further £7 billion in this budget, thanks to lower inflation, lower unemployment and a relentless drive for greater efficiency in the public sector. Public spending for next year will be some £24 billion lower than was projected when the Chancellor was appointed. Next year the Government will achieve their aim of getting the overall burden of public spending below 40 per cent. of national income.
We have re-examined and refocused our spending priorities in order to find more resources for the front-line services that people care most about. There is more money for hospitals, fulfilling the Prime Minister's pledge to increase year by year the real resources committed to the NHS. There is more money for schools to ensure that standards carry on rising; and there is more for the police, putting an extra 2,000 officers on the streets next year and 2,000 more the year after.
We are not just spending more. We are improving the quality of services and the value-for-money with which they are delivered. The private finance initiative is tapping the expertise and resources of the private sector in ever more imaginative ways. A year ago we had £1.5 billion worth of deals. Now we have £7 billion in services as diverse as schools, roads, hospitals, railways, prisons and government office buildings. As the IMF says in a forthcoming report, the PH should increase the efficiency with which public services are provided, extend the scope for innovation and produce genuine cost savings. Britain started the worldwide privatisation bandwagon in the 1980s. I am confident that PH will be one of our most successful exports in the years ahead.
Another way in which we are safeguarding the interests of the ordinary taxpayer is by stepping up the fight against smuggling, fraud and tax evasion. We are spending over £800 million over the next three years in order to save nearly £7 billion in social security, tax and other areas.
I expect we shall hear in the debate some cynical comments about the Government's motives for cutting tax rates. There is still a fundamental difference of principle between speakers on these Benches, who believe that the most successful economies of the future will be low-tax countries with small public sectors and deregulated economies, and those on the Benches opposite who believe in high public spending. Whereas the Benches opposite usually talk about how much the Government are "giving away", we talk about how much less the Government are taking from the taxpayer.
I make no apology at all for a Budget that leaves ordinary people with more of what they earn, boosts incentives and encourages the enterprise which creates wealth and employment. Already Britain has one of the very lowest tax burdens in Europe, thanks to the much tighter control on public spending we have maintained since 1979 compared with other countries. Within a balanced and affordable tax package this year, the Chancellor was able to reduce the burden of income tax on every taxpayer. He is increasing allowances, widening the 20p band, and cutting the basic rate to 23p, a full 10p lower than the basic rate in 1979 and the lowest for 60 years. That reduces the burden of income tax on every taxpayer and is another big step towards making 20p the basic rate for everyone. When we can afford to go further, we will.
The Budget means that a family on average earnings will pay £120 less in taxes next year. With earnings growth, they should be £370 better off in real terms next year; over £1,100 a year better off than at the time of the last election; and over £5,000 a year better off than

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when this Government first came to power in 1979. Living standards stagnated between 1974 and 1979. The true measure of this Government's achievements is that living standards have risen during our term of office.
Business gains too. The Budget gives business what it has been asking for—a strong economy, with low inflation and low interest rates, so that firms can expand and invest with confidence. Three million businesses and self-employed people will benefit from the 1p cut in the rates of income tax and small business rate of corporation tax. Over a million small business properties will benefit from a freeze in business rates. And all employers will benefit from the cut in employers' national insurance contributions that is already due to come into effect in April.
This is a Budget which will let people and businesses keep more of what they earn and which protects the ordinary taxpayer by stepping up the fight against fraud and tax evasion. It is a Budget which spends more on the services people care about while keeping public spending as a whole under the tightest control. It is a Budget that keeps public borrowing on a clear downward path and takes no risks with inflation. Above all, it is a Budget that will sustain the economic recovery and so keep living standards rising, year after year.
Moved, That this House take note of the economic state of the nation.—(Lord Mackay of Ardbrecknish.)
3.54 p.m.
Lord Eatwell: My Lords, I am sure that noble Lords on all sides of the House are grateful for this opportunity to debate the state of the nation's economy shortly after the Chancellor's Budget Statement. I hope that this innovation by the Government will prove permanent so that noble Lords opposite will next year have the opportunity to welcome Dr. Gordon Brown's first Budget.
We also of course have the pleasure of looking forward to the maiden speeches of my noble friends Lord Paul and Lord Whiny and the noble Earl, Lord Home.
The terms of the Motion encourage us to take a longer term perspective. It refers to the state of the nation rather than merely concentrating upon the immediacy of the Budget measures. That is right, and entirely appropriate for your Lordships' House. So I can put the Minister's mind at rest. I shall not be making cynical comments about the Government cutting taxes this year, not least because the overall tax burden has gone up, not down, this year because of the arrival of tax increases which were announced last year.
Nonetheless, although I do not want to concentrate entirely upon the Budget, I cannot resist following the Minister's example of quoting from the Budget speech:
"The strength and durability of the economic upswing … compares favourably not only with our own past, but also with the economic performance of other countries".
It goes on:
"growth in the UK economy is likely to continue to outpace that of most countries, particularly in continental Europe".
Then, again:
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"Our economic performance has been transformed: so have our prospects for the future".
I have been a little deceitful. Although they may sound the same, those quotations are not from Mr. Clarke's speech on Tuesday, they are from the Budget speeches of the noble Lord, Lord Lawson, in 1988 and 1989. We all know what happened next. Those two Budget speeches contained a total misreading of the true economic state of the nation—a misreading that resulted in budgetary measures that are today universally recognised to have been totally irresponsible.
Those Conservative Budgets of 1988 and 1989 precipitated the longest and deepest recession which the British people have had to endure since the war, ruining businesses and families. Yet, it was exactly the same phrases; exactly the same boasts that we heard from the Chancellor on Tuesday and from the Minister this afternoon. Perhaps the Treasury could at least hire a new speech writer.
Let us remember that at the time of those Budgets, so clearly disastrous in the light of hindsight, the noble Lord, Lord Lawson, made a net public sector debt repayment. I am glad that the Minister focused on that. The noble Lord, Lord Lawson, was not raising the national debt by £20 billion a year as the Government now are. The noble Lord had not run the biggest deficit that the British people have ever had to suffer in peacetime as this Chancellor has done.
At the time of what the Chancellor described yesterday as a
"recovery now in its fifth year"—
a phrase again echoed by the speech writer, the Government are still borrowing. That is unprecedented at this stage of the cycle.
For year after year now we have been offered this weary claim from the Red Book:
"The Government's fiscal objective is to bring the PSBR hack into balance over the medium term, and, in particular, to ensure that when the economy is on trend, the public sector borrows no more than is required to finance its capital spending".
We have pointed out on several occasions that that statement is internally contradictory. That does not seem to bother the Treasury, but it is an affront to the intelligence of noble Lords to be presented with that so-called fiscal objective every year when every year, just like middle age, its attainment retreats before us.
In the Red Book published in November 1993, just three years ago, balanced PSBR was to be achieved the following year (in 1997-98); by November 1995, two years on, the balance had retreated two years to 1999. Now in this year's Red Book it retreats again to the financial year 2000-2001. Under the Conservatives virtue is always kept three years away.
But of course that persistent deficit reveals not just incompetence in the management of public finances but the underlying structural weaknesses of the British economy today. That is why one of the Chancellor's statements, echoed again this afternoon, was such as to send shivers down the spine of anyone who cares about the economic state of our nation. He said:

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"I expect consumers' expenditure to continue to be the main engine of growth next year … I expect consumer spending to grow by 3 per cent. in 1996 as a whole",
that is above the rate of growth of GDP,
"But it has been strengthening through the year. So I expect stronger growth to continue, with consumers' expenditure rising by more than 4 per cent. next year".—[Official Report, Commons, 26/11/96; col. 155.]
The Red Book shows that it is to accelerate further after that. In other words, at this stage of the cycle, when investment should be taking the lead, when the total output should be growing faster than consumption, the Chancellor is content to have consumption grow faster than GDP. He is content to recommit the error of the noble Lord, Lord Lawson, of allowing the share of consumption in GDP to grow, crowding out investment and crowding out sustainable growth. I am afraid that the investment story told in this Red Book is as dismal as ever.
Once again, looking back over a series of government statements, we are confronted with optimistic forecasts and grim reality. In 1993, we were told that next year business investment would grow by 3¾ per cent.; it grew by less than half that. In 1995, we were told that next year business investment would grow by 3¼ per cent.; it grew by 1 per cent. Today, the noble Lord has boasted of investment growing by 6 per cent., but he did not point out that last year we were told that it would grow by 9 per cent. Now we are told that next year business investment will grow by 9¼ per cent. Those are fantasy figures produced by a government which can no longer distinguish between fantasy and reality; a government fooled by their own made up figures. Given their low level of investment, what happened yesterday? The Government imposed their own windfall tax on the public utilities by cutting capital allowances in the public utilities from 25 per cent. to 6 per cent.
Then the noble Lord mentioned the flow of investment into the UK; a flow for which we are all grateful and to which many Labour councils around the country have contributed by encouraging industrial development in their areas. But the noble Lord failed to point out that the flow of investment out of Britain is greater than the flow of investment in.
The Government's record is no better with respect to public investment. We might at least expect that they know what they are doing. Last year we were told that public sector investment would be £21.7 billion in 1995-96. In reality, it is £1 billion down. Then we were told that in 1996-97 public sector investment would be £20.5 billion. That is £1 billion down too. These sharp, real-term cuts in public investment are matched by the farce of the PH, which we are told today, in glowing pale blue, will fill the gap. The Red Book is very helpful this year because whenever there are forecasts of variables which the Government want to, let us say, present in a favourable light, they are coloured pale blue. When there is a piece of boasting about Government policy, that appears on a blue background too. When it is coloured blue you know they are fibbing!
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What of the PH of which the Minister boasted? PH out-turns are at half the promised level. Only the forecasts are high. Last year I suggested that PFI means "probably fictitious investment". Now we know the truth; PFI means "pure fantasy and invention". In the Chancellor's Budget Statement last year he said:
"my right hon. Friend the Secretary of State for Health has announced today that a £35 million deal is going ahead to modernise two hospitals for the South Buckinghamshire NHS trust".—(Official Report, Commons, 28/11/95; col. 1062.]
That was pure fantasy. That was a year ago and today no deal has been signed. Indeed, instead of the hospital deal a month that we were promised last year, only one contract has been signed for Norfolk and Norwich. That deal, which happened to be signed fortuitously on Monday night—the night before the Budget—has not yet been properly financed. The fall in public investment is not only serious in itself. Public investment is a key element in cutting business infrastructure costs and leveraging in private investment. No wonder manufacturing investment is stagnant; no wonder private sector investment is growing more slowly than in any recovery this century. It is not only the Government's failure to invest in Britain which is undermining the private sector recovery; it is also its macro economic stance.
Much was made by the Chancellor in his Budget speech about the superiority of Britain's economic performance over that of our near Continental neighbours. We have heard more of the same from the noble Lord today. One might think that that is one up for the Government, but then what do they do? They propose to imitate the policies which have so damaged economic prospects in the heart of Europe. There are high real interest rates. The noble Lord referred to low interest rates but does not appear to realise that what matters to industry are real and not nominal interest rates. Now we have a rising exchange rate. In place of the franc fort we now have the pound fort. The rising pound will have the same consequences here as across the Channel, which is damaging for trade, squeezing profits and bad for investment.
The underlying weakness of our economy, the weakness which the Tory consumer-driven recovery cannot hide, also derives from a failure to invest in education and training. In 1978-79, 5.4 per cent. of GDP was spent on education. Now it is down to 5 per cent. of GDP, which is a difference of £2.2 billion. What happened in the Budget? Spending on schools is down £73 million this year. The noble Lord's figure was a deception because he mentioned the increase in planning totals and not out-turns. The out-turn is to be cut. Nursery education has been cut by £56 million; there is £34 million off the TEC training programme; and £20 million cuts in capital spending in higher education. Boosting consumption and cutting education, that is the Tory way.
But when we consider the long-term strength of our economy there is another quite different aspect of the Government's policy which we must take into account. We cannot ignore the long-term damage being done to economic performance by the Tory acceptance of growing poverty in this country. Nothing can acquit the

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Government of the shame of poverty. We have debated many times the fact that the poorest 10 per cent. of our population has suffered a 13 per cent. cut in real income since 1979. In those debates we have been subjected to the discreditable spectacle of Government Ministers attempting to explain away the figures. A standard argument of the noble Lord, Lord Mackay, has been to argue that the figures are misleading because the lowest 10 per cent. does not always comprise the same people. In a dynamic, ever-changing economy some people fall on hard times, we are told, and then they recover. Now we know the truth. Recent research has shown that the Minister is right. In fact, 50 per cent. of the lowest 10 per cent. escape into the next higher level band every year, but the next year 30 per cent. fall back again. There is a continuous churning between the very poor and the merely poor. Very few escape for long.
But what has this Budget done for them? The analysis by the Institute for Fiscal Studies, published in yesterday's Financial Times, is unequivocal. The richest 10 per cent. in this economy have been given a bonus from the Chancellor of £5.50 a week, which is enough to pay perhaps for an extra dessert. The poorest 10 per cent. in our economy have 50 pence a week taken away from them. What a contemptible exercise that is—giving to the top, taking away from the bottom. What is the source for that churning in poverty; people being in the bottom 10 per cent., getting out of it and then falling back in again? It is none other than the Government's own labour market policy—the Chancellor's "flexible friend".
We heard a lot from the Minister about the fall in unemployment. Of course, that is welcome, even though it is due to a consumer-driven recovery. But what the Minister failed to mention was the fact that since the general election there has been no increase in full-time or permanent employment—none. Any jobs have been temporary or part time. Many of those temporary jobs are the worst paid and without a minimum wage there is no protection for the vulnerable poor in Tory Britain. So the poor churn between temporary low paid jobs and the misery of impoverished unemployment. One in every five households in Britain has no one working at all. Is the Minister proud of that? Poverty in Britain does not just diminish us all; it weakens our economy too. It is not just the fact that in the absence of a minimum wage £3 billion of taxpayers' money must be spent every year on in-work benefits to subsidise bad employers who underpay their workers. That is £120 per week from every taxpayer to subsidise sweatshops and miserable poverty pay.
But that is not the only economic cost. Poverty is an insidious long-term disease which wastes the muscles of our economy. In Britain's poverty-stricken families, it is difficult to acquire motivation and skills and it is well nigh impossible to escape from that poverty. The more of our people who live in poverty so the more is the potential of our nation corroded away.
Noble Lords may feel that I have taken a rather negative view of the Government's economic performance. Therefore, I should make it clear that I am second to none in my admiration for the robust manner in which the Chancellor has sought to curb the insatiable appetite for deflation displayed by the Governor of the
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Bank of England. But I believe that it is important to understand how seriously unbalanced the long-term structure of the British economy has become. A couple of years of stable growth is not enough to overcome those long-term structural deficiencies. It is clear that the Government simply do not understand that. It is equally clear that next year a new Labour Government will inherit an economy desperately in need of long-term remedial care. That is where the core of our economic policies stands in need of more investment—in capacity, in people and in ideas. An essential part of that investment in people will be the attack on poverty.
This Red Book and the Chancellor's Budget Statement illustrate once again that this Government have no coherent economic strategy for investing in infrastructure, industry or the people of Britain. Public investment falls and all we hear are PH fantasies. Private investment is stagnant and what do the Government do? They cut investment allowances, raise real interest rates and glory in a rising pound. Skills erode and poverty corrodes while the Government cut spending on schools and hail poverty and insecurity as our flexible friend.
The Government who created the last recession are laying the foundations for the next. They have learnt nothing. They simply do not understand. The only decent thing for them to do is to go.
4.12 p.m.
Lord Ezra: My Lords, I am very glad that we shall hear three maiden speeches. I am particularly pleased that the noble Earl, Lord Home, has chosen this occasion on which to speak. I had the opportunity to work in association with him for a period and I am well aware of his great knowledge of economic and financial affairs from which the House will henceforth benefit.
The economy is now undoubtedly in better shape, as the noble Lord, Lord Mackay of Ardbrecknish, told us in some detail. There is no doubt that the recent Budget was more prudent than some of the Chancellor's colleagues may have wished. Therefore, those are two reasonably positive factors. However, it is right that we on this side of the House should draw attention to some of the problems which may lie ahead in order to counterbalance the rather more euphoric parts of the speeches we hear from the Government Front Bench.
Indeed, the Red Book, which has already been quoted extensively, refers to some of those problems. Paragraph 1.04 states:
"The main risks to the economy are that economic growth might be driven off course by a pick-up in inflation, or that high public borrowing might lead to unsustainable levels of public sector debt".
Obviously it goes on to say that the Government will do everything that they can to avoid those dire possibilities, but they are stated as risks.
I should like to examine some of the problems to which the noble Lord, Lord Eatwell, has referred already. I start with growth. As the noble Lord, Lord Mackay, reminded us, the estimate for growth in the current year is now 2.5 per cent. There was a time when that was thought to be most unlikely but there has been a substantial upturn in recent months and that figure

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now seems more reasonable. For next year, the Chancellor's estimate was 3.5 per cent. Therefore, that seems to be good. We are moving forward in growth. However, that would be in excess of the normal long-term trend of growth in the UK economy. Whenever we grow excessively, there is always the risk that we might be growing too fast.
The real risk underlying the figure is the one referred to by the noble Lord, Lord Eatwell; that is, that it is largely fuelled by consumption and the estimate of growth in consumption next year will be something in the order of 4 per cent. Therefore, that will be more than the rate of growth in total.
It is worrying to reflect, those of us who were in the House and drawing attention to it in the late 1980s, that we are beginning to see some, although not all, of the signs of that era. We are beginning to see that large growth in consumption; the expansion in the money supply; rapidly rising house prices; and unfilled vacancies because of lack of skilled labour. All those were elements in that situation and some of us are beginning to wonder whether this is the start of new difficulties.
It will be argued that that will not happen on this occasion because of the way in which inflation has been held. Therefore, it is right to examine the inflation situation. Undoubtedly, inflation has been held at a relatively low level in British experience for quite a time now, although it is not as low in most other European Union countries. But the last inflation figures in October for the underlying rate were certainly worrying at 3.3 per cent.; that is, nearly a percentage point above the Government's objective.
The Treasury claims—certainly the Chancellor claimed in his Statement—that that was just a blip and that the measures being taken by the Government would bring us back to the 2.5 per cent. level next year. Let us hope that they are right about that; but there surely is a risk, because of the way in which consumer demand and the economy is likely to rise above trend next year, that inflation could begin to take off once again. If that is so, the Government will have to move very swiftly to curb it by increasing interest rates yet again, which in turn would have a restrictive effect on industrial activity.
Another worrying aspect is the way in which public expenditure is being dealt with. All recent forecasts by the Government of public expenditure have been wildly wrong, as the noble Lord, Lord Eatwell, pointed out. We are now being told that the situation is under control and that the public borrowing requirement would be kept at £26.5 billion in this fiscal year and £19 billion in the following fiscal year. Coincidentally, that would enable the Maastricht conversion requirement of 3 per cent. to be met in 1997. No group in this House would be more pleased than the group which I represent if that were to come about. We should be delighted and we should try to do everything in our power to help in that desirable objective. Nevertheless, there are risks that that may be too optimistic.
For example, while there is extremely tight control of public expenditure at the same time it is proposed to spend more on health, education and fighting crime, all
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to be met by savings elsewhere and for the borrowing requirement to be reduced. That combination of circumstances seems to require some sort of magic formula to bring about all those things at the same time. There must surely be some risk that it might not work out as desired.
The noble Lord, Lord Eatwell, referred to capital expenditure. That is a subject to which I have referred on many occasions in economic debates. It is worrying to see that there is a continued erosion of public capital expenditure. For 1997-98, that is scheduled to be a bare £18 billion or just 2.5 per cent. of GDP. That is a lower proportion than any other country in the European Union. That substantially reduced capital public expenditure is, in the Red Book, offset by a major increase in the private finance initiative. We have already heard the views of the noble Lord, Lord Eatwell, on the matter. While I welcome the PEI as a very desirable objective, there is no doubt that it has met with many obstacles which have been recently aired, some of which the Chancellor of the Exchequer agreed to try to put right. However, there is no doubt that it has taken longer to materialise in the way in which the Government forecast than we might hope for. Therefore, we shall see a progressive diminution of investment in the public sector, even though many projects are crying out to be invested in.
We have a similar situation in the private sector. Until recently the investment levels have been particularly low, though, more recently, they have picked up. None the less, this Budget would have been an opportunity to stimulate private investment intentions. But, on the contrary, and unfortunately, the one investment measure that has been taken works in the opposite direction; namely, the reduction in the investment allowances on long-term investment. That means that the capital goods sector and those who use capital goods, especially the basic industries like the utilities, will all suffer very substantially. We are talking about large sums of money which will be transferred from these sectors, which have invested in long-term assets, back to the Government. It is regrettable that the only investment measure taken in the Budget is one of a negative nature.
I come back to the main thrust of the Budget. It was indeed a prudent Budget, but I personally very much regret that the opportunity was not taken for it to be much more of an investment budget in order to correct the weakness that we now have in the way in which growth is moving forward almost exclusively fuelled by consumption. Everyone is in favour of more consumption as it is the sign of a developing and growing economy. But we should be balancing that with a substantial increase in investment. Indeed, in the United States, which has levels of growth similar to our own—something around 2.5 per cent. at present—the major engine of growth is investment. That is something which we should seek to put right in future years.
4.22 p.m.
The Earl of Home: My Lords, I have two reasons for trepidation today. The first is the, I hope,

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understandable terror associated with a maiden speech. The second is the fact that I have chosen an economics debate in which to speak. Some of your Lordships may remember a much more famous holder of my title who confessed to a journalist, in an unguarded moment, that he needed matchsticks to help him with his appreciation of economics. On the presumption of, "Like father, like son"—and I am told that there is a family similarity—perhaps subsequent speakers may also recommend the use of matchsticks by myself. However, after 30 years in the City of London with all the benefits of modern technology, I sometimes believe that economic commentators rather over-complicate the issues and that perhaps a more simple approach to economics and finance could, in some cases, be beneficial.
The Budget Statement inevitably concentrated on the current financial state of the nation and I, like previous speakers, welcome the intention to take a long-term view for the future. Investors and industry need every encouragement to take the long-term view. One of the unfortunate trends of recent years is the requirement for the ever more frequent reporting of results, even by bodies such as the trustees of pension funds who, I would have hoped, could have afforded to take a longer term view on their decisions looking well into the future. Fund managers, who are under pressure to meet trustees on a quarterly or semi-annual basis, feel under pressure to make instant profits prior to the next reporting meeting with the trustees.
That situation creates an instability in the share price of companies in which those fund managers invest. An instability in the share price can indeed affect a board of directors faced with a decision on whether to spend very considerable sums of money on bidding for contracts, particularly those overseas. Frequent reporting of corporate results, with the understandable desire always to do better than last time, may well mean that exporters would rather pass up an opportunity for bidding because of the cost of bidding on their profits in the short term. I was for six years chairman of the Committee for Middle East Trade. On more than one occasion I failed to persuade British exporters to go for a job as the decision-making process in the Arab world can be slow. They could not afford the price of inertia by potential clients which could be damaging to the immediate profits of the tenderer.
It is not just in the export field that I believe short-termism to be a problem. The private finance initiative has already been mentioned today and was debated in some detail in the equivalent debate to this one last year and, indeed, in the debate on the gracious Speech last month. I am also aware, as has been made clear, that the PFI is not universally popular. It has been rechristened, "probably fictitious investment"; but there is nothing probable or fictitious about the time, effort and money put in by companies and investors tendering PFI projects. Concern was rightly expressed last month at the cost of bidding for these projects which take a considerable time to come to fruition.
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I was delighted that my right honourable friend the Chancellor of the Exchequer was able to announce on Tuesday that agreed deals under PFI had more than quadrupled. The measures that my right honourable friend announced recently will also help to speed up that process. However, I wonder whether even greater progress would be made, and more enthusiasm for the scheme generated, if more sympathetic treatment could be given to the accounting principles underlying bidding costs under PH. If companies were allowed, for instance, to capitalise some of their bidding expenditure and amortise it over a period, they might be more persuadable to live with projects which take a long time in gestation but which are very much in the national interest.
There was a time, as some noble Lords here will remember, when certain sectors of industry, in particular shipping and banking, were not required to publish their true profits. It was recognised then that factors outside their control could affect their business to such a degree that reporting results even over a 12-month period did not give a fair reflection of the progress of that company. Therefore, they were allowed to use hidden reserves.
I should emphasise that I am not advocating a return to those days, for I am all in favour of full disclosure on an annual basis. Nevertheless, I believe that the accountancy treatment accorded to bidding costs has, arguably, gone too far the other way. I know that the trend in that profession is against the averaging of profits and I have some sympathy with that view. However, given that the objective of producing accounts is to give the investor as much information as possible, we cannot at present see what the true cost of tendering actually is. If that part of the accounts which showed costs of tendering could be placed in a different section, it would be much more informative. The present system, whereby the cost of bidding for new projects is set against profits made on existing contracts, means that the investor cannot know what the true profitability of any one contract is and what the costs will be in the future. Time does not permit me, especially in a maiden speech, to elaborate on that point further. However, I trust that it is a point which may be considered in due course.
4.30 p.m.
Lord McConnell: My Lords, it is a great pleasure for me, on behalf of the whole House, to offer our congratulations to the noble Earl who has just spoken. It was a confident maiden speech from a banker showing his mastery of the subject. I hope that we shall hear from him on that subject and other subjects in the future. I was interested to hear him say, "like father, like son". I must say in all sincerity that the noble Earl's father was one of the nicest men that I have ever met. If the noble Earl is in the same mould, he will be a great asset to this House.
I wish to say a few short words on this subject with regard to one region of the United Kingdom. Surprisingly enough, that is Northern Ireland. I shall start by giving a little credit to the Government as

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the economy there is making good progress. Manufacturing output has increased by 15.6 per cent., whereas in the United Kingdom as a whole it has increased by 7.4 per cent. Our unemployment is now at the lowest level in 15 years. In the three years 1991-92 to 1994-95 exports increased by 48 per cent. The figure for the United Kingdom as a whole was 30 per cent. The year ended 31st March 1996 was the best ever for inward investment. We secured 35 projects with an investment of £32 million. Much of the credit for that should go to the noble Baroness, Lady Denton, who has worked extremely hard in promoting the economy in Northern Ireland.
Having spoken a few words of praise, I now mention two other subjects. One is the high price of electricity in Northern Ireland. That affects all industry. The regulator made recommendations for substantial price cuts. Those were refused by the Northern Ireland board and therefore he referred the matter to the Monopolies and Mergers Commission. A short time ago it was announced that some arrangements had been made to reduce the cost of electricity by 3 per cent. Nevertheless I am told that the regulator will still refer the matter to the monopolies commission. We look forward to hearing its decision as this is a matter of great importance to our economy.
The other matter which I wish to mention is the beef industry, which is of great importance to us. It has, of course, been badly hit by the BSE scare. However, in Northern Ireland we have a much more efficient and sophisticated system for tracing the origin of all animals than exists anywhere else in the United Kingdom. There is no reason for our meat to be excluded from the rest of Europe. I know that representations have been made to that effect but I urge the Government to continue to make the most strenuous representations to try to get this matter sorted out. I have said how well our economy is doing but if those two matters could be resolved it would progress even better than it has done in the past few years.
4.35 p.m.
Lord Paul: My Lords, it was just 16 days ago that I was introduced to your Lordships' House. However, the courtesy and kindness which your Lordships have shown me in this brief period encourage me to speak today. I come to this House conscious that the roots of my heritage and philosophy are not conventional to the membership of this august assembly. Yet, I believe your Lordships recognise that they symbolise a contribution to the new Britain which we are all engaged in constructing. There was a time when the strength of nations was measured by exclusion and exclusivity. Today we heed a larger truth—that there is more strength in diversity, more vigour in variety.
At this moment, I am also mindful that my presence among your Lordships signifies another convergence—the reconciliation and friendship between the land of
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my birth and the country which is my home. The underlying spirit in which Britain and India now relate to each other is a model for the world.
In its own modest way, my personal history reflects this. My family, who were ardent participants in India's independence movement, named me Swraj for their ideals of freedom and self-rule. Swraj means freedom—the eternal cry that resonated in my youth. However, had I known that one day I would have to address your Lordships and this House, I should have wished to be named "fearless".
After university in India, I continued higher studies at the Massachusetts Institute of Technology in the United States. At MIT I learned much about engineering, and much more about life. The two greatest things it taught me were always to aspire to excellence and never to abandon hope.
Thirty years ago I came to this country in search of medical treatment for my daughter whom we later, sadly, lost. For a while I abandoned hope. But that tragic beginning unfolded into a new life and a successful career largely because of the opportunities which Britain provides. These opportunities, leavened with the support which hard work and determination still receive in this country, enabled me to revive industries which were largely abandoned or downgraded some decades ago.
Britain is a country where responsible citizenship earns many rewards. Whatever pressures arise, let us not close our doors to those who bring their skills to these shores.
My attention today focuses upon the Budget which Her Majesty's Government have presented. Because of my long association with manufacturing industry I am especially concerned with those components of the Budget that address this sector of our economy.
I believe that in recent years manufacturing industry has received less recognition than it deserves. For me, manufacturing is the bedrock of the British economy. It is what first provided stable and permanent employment to the masses in this country and in this part of the world—and it still does. This is why I am disappointed that the Budget has not given any specific encouragement to the need for capital investment in industry.
Britain's manufacturing base is at a critical stage in its history. There has been a prolonged erosion of this plinth on which our economy stands. The principal components of industrial competitiveness need to be re-examined and their requirements re-assessed. Capital investment has been limited, and this has inhibited the acquisition of modern technology. We have to find ways to increase capital inputs and so to upgrade plants and facilities. Today, we risk falling behind western Europe and Asia Pacific, not only because our skills are inadequate but because our equipment needs modernisation.
Ours is not human failure. During the past decade or so, some of our shopfloor managements and workforces have demonstrated competence and achieved levels of

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productivity comparable with that of any economy. But their reputation for innovation and quality cannot be maintained without high technology.
Another issue close to my heart is that of entrepreneurial businesses. The small and medium-sized companies which were once the pace-setters of industrial Britain are now losing ground. While publicly quoted companies find it relatively easy to raise capital, it is much harder for privately owned businesses to do so.
The financial community and those who make financial policy should look at private companies in a different light because it is those businesses that are often the source of industrial innovation.
In the investment climate which now prevails, it is easier to raise capital for football clubs than for industrial ventures. This is cutting the lifeline of some of the potentially best and brightest British firms. High-flying financial engineering may be the trapeze artistry of the commercial world, but the small entrepreneur forms the safety net of society.
The human and social costs of industrial neglect will soon come to haunt us unless we move rapidly to reinforce and renovate the most basic parts of our economy. We must enthuse a younger generation about the benefits and excitement of an industrial career. We must develop an approach that looks forward to the time when British manufacturers will evoke the respect they once enjoyed in global markets. Given our traditional talents, it is surely not difficult to elevate our industries to world class excellence. But we can never achieve this with policies of indifference.
I have worked on the shop floor; and I have managed large enterprises. I know the hope which the growing industrial economy brings to working men and women. We have an obligation to rekindle those hopes because I passionately believe that what is good for British industry is good for Britain.
4.43 p.m.
Lord Young of Graffham: My Lords, on behalf of all in your Lordships' House I congratulate and welcome the noble Lord, Lord Paul, on his contribution to our debate. He is a notable addition to your Lordships' House and is welcome here for many reasons. He is a successful industrialist who formed his own group some 30 years ago. He is a past president of the British Iron and Steel Producers Association. He is also that rarity perhaps in your Lordships' House: an engineer with a Master's degree at MIT; and, finally, he represents that great store of talent who arrived on our shores and has added so much to the wealth of our nation.
It has been some years since I last spoke in your Lordships' House. There was a time—there may even be some in your Lordships' House who might still recall it—when I would be here on a regular basis swapping statistics with noble Lords opposite. As I recall it, what a wealth of difference of interpretation we would get out of precisely the same figures. The noble Lord, Lord Williams, is not in the Chamber. He had the greatest difficulty in seeing the glass as anything but half empty whereas I would persist in seeing it as half full.
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However, I shall not indulge in statistics today. First, I suspect that we shall have far too many of them. We have had them already from the noble Lord, Lord Eatwell. Secondly, I suspect that he and I will never agree on the same interpretation; and anyway that kind of debate will only end in a sterile recitation of figures.
However, there is one figure which is quite difficult to misinterpret. The public sector borrowing requirement (PSBR) had ceased to exist in the days when I used to come here. The national debt was being repaid at such a rate that on one occasion while I was at the DTI and concerned with such matters I had a complaint made to me by people in the City that their gilt departments were being downsized and in some cases were disappearing. That situation has certainly changed.
But I have no wish to indulge in nostalgia for the good old days, even for the eighties. Today the economy is in better shape than at any time in my lifetime. Never before have we had such a sustained period of low inflation coupled with such growth. We have had periods before when growth has equalled that of today, but in those days we were lagging behind the rest of Europe, not leading it. We have had periods before, admittedly short, where we have seen comparable low inflation, but never coupled with growth.
In case anyone in your Lordships' House should think that I am exaggerating—perish the thought!—perhaps I may say in my defence that precisely the same claim was made recently by the Governor of the Bank of England. He is, I believe, in a position to know, and I hope that your Lordships' House will accept his judgment. It is a remarkable claim, and occasionally, as today, it is worth examining exactly how we came to be in this virtuous position.
In those days of yore when I would be sitting in a rather more prominent position than today, I would have the responsibility for answering questions on behalf of the Government. I would attend on your Lordships, often every day of the week while the House was sitting. Every few weeks, more regularly than the cuckoo in spring, I would be asked exactly the same question; and every few weeks I would give a similar answer. The question was simple: when were we going to enter into the ERM? The answer was not always the same, for as I seem to recall I had two answers and I was never sure which was the right one. I would either say, "When the time was right", or, "When the time was ripe". Either way made little difference; the meaning was the same.
Some months after I stood down—there is no connection between the two—the answer changed and we entered the ERM with disastrous results that do not need repeating this afternoon. Perhaps I should remind the noble Lord, Lord Eatwell, that this was the principal cause of what followed, and not the preceding Budgets of the noble Lord, Lord Lawson. The recession that ensued was the steepest that I have known and the carnage among small and medium-sized firms the bloodiest, as we endeavoured to synchronise our economy with that of Germany. That came to an unhappy end, but the economy rebounded back with the results that are all too obvious today. But this time it I came back with a difference.

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Our unemployment became a leading indicator not a lagging one. For the first time on record, unemployment reversed at the first sign of the economy improving. In past recoveries it always took some 18 months to two years of recovery before employment began to respond. I believe that this was the final proof of all the benefit of the labour market reforms of the 'eighties. It was not just the disappearance of strikes in the private sector, nor, as I heard my right honourable friend the Deputy Prime Minister claim in a speech last night, that the figures for strikes were now lower than they had been for 100 years. It was that our versatile and flexible workforce was responding to the demands placed upon it.
This time, manufacturing industry and exports initiated and led the recovery. For once, retail sales lagged, not led. Inflation remained low, against the forecasts of all the pundits. Foreign investment continued to pour into this country. As the Japanese tide receded a little, it was followed by Korean and Taiwanese investors. Then, surprise, surprise, along came the Germans, followed by the French. We all know about BMW, but it is merely the most prominent. Today, there are 1,300 French companies that have set up on our shores and 1,600 German companies. Occasionally noble Lords opposite should ponder and ask why.
Across the Channel our partners in Europe, on whom we depend so much for nearly half of our total exports—over half if we ignore invisibles—continued in their quest for a political holy grail of a single currency; and we watch them continue to slide into economic recession, and now industrial chaos.
What hoops have they jumped through to reach this theoretical heaven? In order to reach the mystical 3 per cent.—a figure unconsidered before Maastricht—the French Government actually persuaded the Commission bureaucrats that by transferring £4.5 billion of cash and assets from the state-owned France Telecom to the Government and assuming precisely that amount of pension liabilities the Government had reduced their borrowing by that figure. One minus one equals one! No wonder we are so worried about our education system, for we do not teach that sort of maths in our schools today. Perhaps that is the Euro-maths of the next century.
If our auditors had allowed me to take such steps in the days when I was responsible for Cable & Wireless, we should have shown even better results—but not, I suspect, for very long.
So how long is the economy of Europe going to last as it continues to adopt policies for political, not economic, ends? How long will it continue with its rigid labour market laws that fly in the face of all the evidence of what the market requires?
Yet all that our partners in Europe can think of, and all that the bureaucrats in Brussels can plot, is how to ensure that we, too, suffer from this disastrous market rigidity. That nice Mr. Flynn boasts to the press how he will take away all our derogations and opt-outs by some legal chicanery that would simply not stand up in our courts. But to what end? To improve the lot of our
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workers? To heed a great cry of relief from our overworked people? No. It is simply to ensure that we suffer from disadvantages identical to those suffered by our partners in Europe.
If all things were equal, which they are not, I should merely take great amusement in what is happening across the water. It brings back memories of the 1970s and is a daily reminder as to how far we have travelled since then. It reaffirms, if such reaffirmation be necessary, how correct have been the policies that this country has followed in the past 17 years of Conservative government.
But all this is far too serious for such innocent amusement. We are continuing to grow in spite of, not because of, our partners in Europe. If we are to continue to maintain our relative standards of living in the next century then Europe as a whole must keep pace with the Americas and the Pacific Rim.
I am a Euro-enthusiast. I believe in a single market that will one day embrace over 400 million people. I believe in common standards, in open borders and in projects that reach across national boundaries. But I also believe in common sense.
I know that market rigidities work against the interests of those whom they claim to help. I know that the corporatism of the 1970s did not work. I also know that there is a great world out there, in the Americas and the Pacific, which contains our commercial competitors. They are not standing idly by, waiting for us to get our act together. I know that year after year the rest of the world is steadily becoming more and more competitive, while the rest of Europe is not.
That is why I congratulate the Government on the state of the economy today. I commend it to our partners in Europe. The once sick man of Europe is sick no more. We have shown the way. In the interests of all the citizens of Europe, I hope that they follow.
4.55 p.m.
Lord Whitty: My Lords, it is with great trepidation and diffidence that I rise to speak in this debate—diffidence because, as already demonstrated, there is an enormous amount of economic erudition in this House. That has been ably expounded in the remarks of my noble friend Lord Paul, and the noble Earl, Lord Home. I say trepidation because I feel that in this place the weight of history is upon me. It may be that I am a little over-sensitive to the weight of history. Those noble Lords who read the more arcane pages of the Sunday newspapers will know that, despite my long years of service for the Labour Party in Walworth Road, I declined to take the title "Whitty of Walworth", which was much urged upon me, on the ground that the only person in English history known to have that title was the perpetrator of the murder of Wat Tyler. I wish to see my elevation to this House as the culmination of the Peasants' Revolt rather than its demise.
I am reminded that more recently, at the turn of this century, three of my four grandparents were in service to former Members of this House. Such is the psychology of the British class structure that they would be absolutely delighted to see me cross the threshold

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here. I believe the same to be true of my mother, although I have to say that she would probably also fulfil the adage that "behind every successful man is an extremely surprised woman".
I fear, however, that my father and grandfather would not share the same delight. They were Socialists of the old school—part Methodist, part Marxist. I must tell the House that their view of history and their vision for the future did not give a very prominent or positive place to this House. They wanted to change the world; and so indeed do I. But I hope that this House can help to change the world. This House has a justified reputation for being able to scrutinise policy in more detail, with greater expertise and in more depth than the other place. More importantly, it can take a longer view.
Few politicians setting policy, let alone Chancellors, six months away from a general election can afford to look much beyond a five-year timescale. Their visions and ambitions are limited by the electoral cycle. That is not to say that your Lordships are without ambition; but I venture to say that you are perhaps without the illness that should attend it—the fever of a five-year electoral cycle. Hence paradoxically it is this House in its present form, and I hope in any transmogrification that may follow a future government, that can help us to take a longer view and change the world.
The short-termism referred to by the noble Earl, Lord Home, affects seriously the annual Budget ritual. Chancellors of whatever political view have to gear their budgets to immediate fiscal and political judgments and have at best only vague and elusive medium-term targets. I therefore welcome this wider debate.
When we moved a few years ago to a unified Budget process, taking public expenditure and taxation decisions together, I hoped that it might lead to more strategic, long-term discussions about our economic and social priorities. In fact, we have less forward planning and more of a focus on immediate and, frankly, at times quite marginal manipulations of tax rates. So at this great annual stocktaking we look forward just one year, two years or, at best, three.
In the traditions of the maiden speaker I will not comment on the overall balance of the Budget. Nor shall I respond to the comments of the noble Lord, Lord Young, about European social policy. I will deal with more limited areas of direct concern to me: first, employment—sustainable employment; secondly, environment—sustainable development. On both issues the short-term decisions of Government crucially determine the long-term future and on both we are in danger of taking the wrong decisions. It surely cannot be right that in the next three years expenditure in real terms on the aggregate level for training and education and for environmental protection is due to decline in absolute terms and as a proportion of total spending. If noble Lords do not believe that, they should look in the Red Book, table 5.7, augmented by a very useful press release from the Department of Environment and a slightly less useful one from the Department of Education. I am not surprised that the sub-editors of the Daily Mirror refused to print that material, but it is there.
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It is true that sustainable employment requires a flexible labour market, but we may have differences about how that is to be attained. I do not believe that it can be done by reducing job security, restricting trade unions and reducing wages. As my noble friend Lord Eatwell pointed out, that form of labour market leads to the absurdity of £3 billion of taxpayers' money being used to subsidise low wages. If that money could in some way be redistributed over time to provide for a truly flexible labour market, to provide skills and life-long training, child care, and so on, we could see sustainable employment into the next century. In fact, as the tables show, we shall see a 7 per cent. reduction in total expenditure on training and education by the millennium year. That is not the way to go into the next century.
We face even more crucial issues with regard to the environment. In my view, it is almost the prime responsibility of this generation to reverse the spoliation of the planet that has taken place since the industrial revolution. It is the job of governments, acting together in Europe and beyond, to put resources into environmental protection and energy-saving, to agree regulations and to put in place tax structures which will lead companies and individuals to take decisions themselves which are less damaging to scarce resources and less open to use of dangerous materials. Our Budget should be part of that strategy. Yet over the period to the year 2000 expenditure on environmental protection is due to drop in real terms by 19 per cent. and on health and safety by 12 per cent. That is not a forward strategy to protect the environment.
The balance of taxation can also have a very important impact on consumer choice and hence on pollution and conservation. I welcome the shift on fuel tax announced in the Budget which moves a little way in the right direction. Indeed, this aspect of the Budget reflects part of the recent recommendations by your Lordships' Select Committee on Science and Technology. However, we need a more fundamental and radical strategy without any increase in the overall tax burden. There surely ought to be a consensus that over time taxation should be shifted away from work and on to the causes of pollution and away, as they say, from goods and on to bads. I hope that this is not too partisan a point. I would say that the Secretary of State for the Environment—I may have to whisper it among his friends sometimes—has a very high reputation in Europe for being both "green" and sensible on these environmental issues, but the Treasury appear to have won on this one.
I believe that previous generations of both politicians and business leaders have failed lamentably to preserve and nurture the fabric of this planet. That neglect is a reflection of the ignorance and indifference of millions of individuals throughout the globe. We all want to use a car, when we could use public transport; we all went on using aerosols year after year when we knew the damage they were causing to the stratosphere. At the end of the day, it is the responsibility of the governments of the world to take the long view and to

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give a lead. I hope that this House, with its own longer view of matters, can at least point them in the right direction.
5.5 p.m.
Lord Cockfield: My Lords, it is my very great pleasure to congratulate the noble Lord, Lord Whiny, on a most interesting, valuable and at times amusing maiden speech. I take great care to avoid referring to it as a "witty" maiden speech, but nevertheless it was, on those grounds as well as others, very well received by your Lordships.
The noble Lord has great experience in the fields of industrial relations and political organisation. He will bring great experience to your Lordships' debates and we look forward to hearing from him on many an occasion in the future.
My great regret about all three maiden speeches that we heard this afternoon is that there were not significantly more members of your Lordships' House present to hear them. We should all have gained from that.
The Motion on the Order Paper is expressed in very wide terms, but today I propose not to be tempted down various byways—or indeed highways—but to stick very much to the Budget and some of its implications. It was a very good and responsible Budget, an unexciting Budget but all the better for that. It breaks with a long tradition indulged in by all political parties of engaging in electioneering Budgets, which have always ended up in pain and grief.
With regard to the detail, it is a good thing that my right honourable friend the Chancellor of the Exchequer has decided to take significant action against tax avoidance as well as benefit fraud. I deliberately say "tax avoidance"; it is a legal activity but that does not mean that it is a morally defensible one, which is a very different matter indeed. The extent of tax avoidance is reaching the stage where it poses a serious financial problem as well as perhaps a social problem. We may at the end of the day have to go down the path which has so often been advocated by the noble and learned Lord, Lord Simon of Glaisdale, of having a general anti-avoidance provision, otherwise we shall end up every year with more and more legislation on this kind of matter.
The Exchequer itself is not free from blame because, by constantly introducing new schemes, new measures to meet special pleading from self-interest groups to try to gain popularity in one direction or another, the whole of the tax system has become cluttered with what the Prince of Wales would describe as "carbuncles". This has provided a happy hunting ground for the tax avoidance industry.
It is important to ask ourselves what reduction could be made in the standard or basic rates of income tax if all these special reliefs, allowances and gimmicks were swept away. It was the practice at one time to show the actual cost of such measures, but what matters is what the figure would be if translated into pence on or off the basic rate of income tax. In other words, whenever the
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Chancellor of the Exchequer gave a special relief to an interest lobby, he would have to say, "That means that for the rest of us there will be an extra penny on income tax". If he was obliged to do that, I wonder if some of these devices would be welcomed with quite the enthusiasm with which they are welcomed at present.
If we made a major effort to clean up income tax—as we tried to do on a good many occasions over the last 50 years in which I have been involved in these matters—we could make a very substantial reduction in the basic rate of tax, certainly to 20 pence, possibly even below that figure.
Unfortunately my noble and learned friend Lord Howe of Aberavon is not present. I should like to congratulate him on having landed himself with the Herculean task of translating the tax law into plain English, as we used to describe it, or—to use the phrase we used when looking at this in the days of Stafford Cripps—to turn it into law which was, to quote the Book of Common Prayer, "understanded of the people". However, I still feel some reservation about the order of priorities. The first thing to do is to cleanse the Augean stables rather than going in for painting and decorating. In order words, we really do need to clean up the tax before we start trying to write it into simpler English.
Despite the fact that I regard this as a very good Budget, particularly in the present circumstances, I still have a sense of unease about certain matters. The PSBR this year is estimated to come out at £26.5 billion; next year it will be £19 billion—an improvement. But we must remember that inflation is essentially a monetary phenomenon and the PSBR is the Government's contribution to inflation. At the top of the economic cycle one would hope that the Government, instead of adding to the pressure on intlation, were in fact reducing it by running a smaller PSBR than we have done. There is an improvement; I do not want in any way to decry the extent of it, but there is still a long way to go.
I have some doubts also as to whether the inflation target of 2.5 per cent. at the end of the lifetime of this Parliament will be met. As was said a little earlier by the noble Lord, Lord Ezra, the Chancellor himself explained away the high figure of 3.3 per cent. for October by saying that it was due to "exceptional" causes. I have a suspicion that if the figure of 2.5 per cent. is met next April it is likely to be due more to a statistical quirk than to continued progress in the actual underlying figures. I regret to say that that somewhat sceptical view is shared by the financial markets.
It is the third time that I have raised this point; I spoke of it last on the occasion of the debate on the Gracious Speech. Since then the position has got marginally worse—there is no connection between the two, of course. But yesterday, on a 10-year government bond, the yield in the United Kingdom was 7.48 per cent.; in Germany it was 5.79 per cent.; the French figures are the same and the Dutch figures are even more favourable to the Dutch and more unfavourable to ourselves. The differential of 1.69 per cent. is simply because the financial markets do not trust the anti-inflationary credentials, not only of this Government but of any government.

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That point is extremely important—I hope the Opposition realise this—because, however worrying the position is as of now under the present Government, it would be much worse under a Labour Government. There is little chance, if a Labour Government came into office, that they would be able to raise money on a 10-year bond at less than 9 per cent., and it could easily be more than that. I wonder whether Mr. Gordon Brown, who is promising at any moment to tell us about his "tax and spend" policies, has taken that factor into account because it is a serious factor. Of course, Mr. Brown plays his cards so close to his chest that I doubt whether even he knows what is on his cards.
The other point I should like to make is this. I have an uneasy feeling that we are coming towards the top of the economic cycle. There is a cyclical movement in the economy with an upswing being followed by a downswing. It has always been so. It seems to be the way the economy works. It is almost like the heartbeat of the economy. All attempts made by successive governments—going back to 1945 because there is nothing new about this—to try and control those fluctuations in the economy have made matters worse and not better.
I am not for a moment saying that action ought to be taken to try and deal with the prospective downswing in the economy. But we need to be aware of the possibility that by the time we reach the end of next year we will find the economy in decline. This has nothing to do with the Government or even with the Opposition; it is a natural progression of events. We need to take that into account in the way we look at the development of the economy in the future.
One thing gives me particular unease in that regard. When one looks at the figures in the Red Book one finds that when they come to project the future, what they are doing—it is perfectly understandable; it is what all forecasters do which is why traditionally they get these things wrong—is assuming the continuation of favourable trends and making the assumption that unfavourable trends will turn favourable. Some of that may be right but it goes beyond credence that all of those assumptions should prove to be correct. We need to be rather wary, therefore, about next year.
I want to come back for one moment to the question of the possibility or risk—whatever one calls it—of there being a Labour Government after next May. Quite frankly, the Labour Party, while well intentioned (I give it that; I make no bones about that) is totally inexperienced. So much of what it says is merely a re-run of failed policies of the past. It will not carry any confidence in the financial markets. I sympathise with it in the problems that it will face; let not noble Lords mistake my intentions. I am not on this occasion being critical of the Labour Party; I am giving it an alibi in advance—it will need it.
If there is a Labour Government next May the effect unfortunately will tend to push this country down the economic cycle. I do not specifically blame the Labour Party for that, except in so far as it is the Labour Party—but that is a different matter. I hope that it will not take what I am saying ill; I am just trying to help it in looking at what the future may hold. But let me leave that point.
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I want to conclude by saying this. In the months or years ahead—there is no point in deceiving ourselves about the problems we will have to face—neither the country nor the party will be able to find an abler Chancellor of the Exchequer than my right honourable friend Mr. Kenneth Clarke. There are some members of our own party who might also bear that in mind.
5.19 p.m.
Lord Clark of Kempston: My Lords, I add my congratulations to the noble Lords, Lord Paul and Lord Whiny, on their maiden speeches and endorse the congratulatory remarks made by my noble friends Lord Young and Lord Cockfield on those two maiden speeches. Also, I entirely agree with what the noble Lord, Lord McConnell, said about the father of my noble friend Lord Home. I had the privilege of serving under him in another place. One could not have known a nicer man. He was always very kind to me, as he was to everybody.
We are talking about the Budget. As my noble friend Lord Cockfield indicated, it is a fairly neutral Budget, but I think it will be effective. I shall not go into its full details, but it helps the family with the increase in allowances; and it certainly helps small businesses, particularly with the freezing of the business rate and the slight reduction in the national insurance contribution. The basic rate of income tax is reduced to 23p. As my noble friend on the Front Bench said, that has come down from 33p over the length of this Parliament. Corporation tax is 23 per cent., which must help economic competitiveness. As my right honourable friend the Chancellor of the Exchequer said in another place, after the Budget the average family will be some £370 a year better off. We should also remember that millions of workers do not pay income tax because the threshold has been increased. About 7 million workers will be paying tax at the lower rate of 20 per cent.
There has been criticism concerning the council tax. But critics should look at the structure of many local authorities. Most are Labour and some are Liberal Democrat. If the council tax increases by more than what my right honourable friend agreed in the Budget, it is up to local authorities to be more ruthless in prudent financing.
The Budget has increased the amount of public money—public money means taxpayers' money—for health. Expenditure on health has increased by 75 per cent. since the Government came to office. This year, expenditure on education is increasing by £830 million. Over the period of this Government expenditure on law and order has increased by around 50 per cent.
We should look at the overall position of the economy. The last OECD report is highly complimentary of the prudent and efficient control of the United Kingdom economy. The International Monetary Fund came to the same conclusion. The economic policy of this Government is a success story. Even on employment the ILO has said that while unemployment is rising around the world only in the UK is unemployment falling. As my noble friend the

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Minister pointed out, one of the reasons why our unemployment is falling is that our unit costs of production are lower. The unit costs of production for any industry depend not only on what one pays the workers but also on what additional costs there are. My noble friend gave some examples. In Germany, for every 100 units paid to the worker, 32 units are added for social costs. In France, the figure is 41; in Italy, the figure is 44. Therefore, it is no small wonder that our unit costs of production compare favourably, because our unit costs amount to only 15 units on a 100 unit salary.
The noble Lord, Lord Eatwell, mentioned the minimum wage. What he did not say was that if one has a minimum wage one has to consider the knock-on effects on other wages. If one sets the minimum wage at one level and thus narrows the differential for the higher paid, the higher paid will also want an increase in salary or wages. That is where the minimum wage will create unemployment.
Investment has been mentioned. Why is investment coming to the United Kingdom? It is simply because we are extremely competitive. I agree with my noble friend Lord Young that some of our partners across the Channel are jealous of our competitive position. That is why they want to force the social chapter and a minimum wage on this country. If the Government were to accept that, our competitive position would be cut away.
The noble Lord, Lord Eatwell, referred to the public sector borrowing requirement. I agree with my noble friend Lord Cockfield that it is worrying. Of course it is worrying if the national debt increases. I wish to remind your Lordships of what has happened in the past. The last Labour Government came to office in 1974 and went out in 1979. They doubled the national debt in just under five years. Since 1979 the national debt has doubled—in fact, it has more than doubled—but under the Conservatives it took 13 years for the national debt to double. We have to get this into perspective. Before the Labour Opposition denigrate what is happening with our public sector borrowing requirement they should examine their own record. I am not excusing the national debt, but one must remember that in 1979 the cost of servicing the national debt was much higher than it is today due to the reduction of the basic rate.
One has to take into account that in the borrowing requirement there is a capital requirement which is put into revenue. I have long advocated, not only here but in another place, that we should go back to the old system of below and above the line expenditure. That gives a far more accurate position.
One of our other competitive advantages is that we have fewer strikes now than we have had for 100 years, whereas the strike record in France, Italy and even Germany is extremely bad.
Production and exports are rising. My noble friend Lord Cockfield hinted that we have to look at the rate of sterling. We do not want sterling to be so strong that it will affect our exports. The strength of the economy is also increasing in invisible earnings. Tourism is
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booming in this country. Last year, 24 million people visited this country and spent £12 billion. The City of London does more business than New York and Tokyo put together. That of itself is proof positive in my view that we have a very strong economy.
One of the jewels in the crown of our economy is the growth in the small business sector. It has increased from about 2.6 million companies in 1979 to about 3.6 million today. I congratulate my right honourable friend the Chancellor on giving help to small businesses because it is through the building up of such businesses that we can reduce the level of unemployment in this country.
Finally, I reiterate that it is a neutral and not a giveaway Budget. One of the differences between this Budget and the one which Gordon Brown suggests he might bring in is that the recent Budget has been costed. The nearer we get to a general election—and my noble friend Lord Cockfield hinted at this—the more pressure there will be on Mr. Blair and Gordon Brown to cost what their policy will entail. They do not like to do that. That is why I believe that, in many cases, Opposition spokesmen try to run down the economy. Not once have they spoken about our achievements. There is far too much doom and gloom as far as the Opposition is concerned and it should cease.
5.40 p.m.
Lord Desai: My Lords, before I get to what the noble Lord, Lord Clark of Kempston, said, perhaps I may congratulate my noble friends, the noble Lords, Lord Paul and Lord Whitty, as well as the noble Earl, Lord Home, on their excellent maiden speeches. As the noble Lord, Lord Cockfield, said, many more noble Lords should have heard them. I am glad that I was here to do so.
I was going to make a sober and balanced speech. I have been recently "outed" as an admirer of the Chancellor. I was going to try to make a sober speech. I like the noble Lord, Lord Clark of Kempston, very much, but he said a few things which I cannot let pass. I refer to the government debt. If the noble Lord looks at page 67 of the Red Book he will see that the proportion of debt to GDP at the time that the Labour Government took office in 1974 was 60 per cent. Let us forget who was in power before that and let that pass. When the Labour Government left office it was 45 per cent. Within five years the Labour Government had reduced the debt—GDP ratio by 15 percentage points. We are now back to about 45 per cent. or slightly above that. It goes up and down like a yoyo. I do not believe that the Labour Government can be accused of doubling the debt. If we had doubled the debt while reducing the GDP ratio, we would have achieved a GDP growth which would be absolutely fantastic, but I do not believe that we did that. However, we did reduce the debt.
I also like the Minister very much. He spoke about taxation. It is very interesting that people believe that when the Labour Government were in power taxation was almost intolerable. As a proportion of GDP, in the last full year of the Labour Government 1977-78, there was a tax-GDP ratio of 35.25 per cent. I take these

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figures from the Red Book. I am not making them up. In 1996-97 it will be 35.75 per cent. What is half a percentage point between friends? I do not want to push this matter too far, but I do not really believe that if one considers the Labour Government's tax-GDP ratio it will look much worse. There is Table 4A.9 on page 88 and it is all there. In 11 out of the 18 years of this Government, the tax-GDP ratio was higher than at the highest level under the Labour Government, but we shall not go into all that.
Lord Clark of Kempston: My Lords, I am most grateful to the noble Lord for giving way. I am reading from the Bank of England Statistical Abstract (1996 edition). Perhaps I may remind the noble Lord that in 1974 when the last Labour Government came to office, the national debt was £46.574 billions and when they left office in 1979 the figure was £99.844 billion. Those are the figures that I have. I believe that I am right in saying that in the four or five years of the last Labour Government the national debt doubled.
Lord Desai: My Lords, I was saying what was equally true, according to the Red Book. As a percentage of the GDP, the debt went down. There was the question of the oil price shock and also a bit of inflation, as noble Lords may remember. It is like all statistics—we are both right. We are looking at the figures in a slightly different way.
I come to the present Budget. I believe that I said last year at about this time that that Budget could have been much worse, but, thank God, it was not! The Chancellor resisted all fantastic talk of deep cuts in expenditure, because they never happen. We did not have a give-away Budget and that much I concede. I am still worried that, in the fifth year of recovery, as my noble friend Lord Eatwell and many others have said, we are running a deficit. The reduction in the PSBR projected for next year is really a matter of smoke and mirrors. There will be £2.5 billion taken out of contingency reserves and £560 million from the spend-and-save provision, which is a fantasy figure. There will be £1 billion saved through selling off the student loan portfolio and some revenue from the sale of Ministry of Defence houses. When those figures are added together there will be about £19 billion of PSBR, but it may be less or more—as much as £22 billion or £23 billion.
We have had this situation in the past in that forecasts of the PSBR have not always been met. This year's actual spending total is in excess of the spending forecast as of last year. We have to believe that next year's spending will come in at the forecast figure, that the revenue will meet the forecast figure and that growth will be as much as expected.
What happened to growth last year? The forecast was for a GDP growth of 3 per cent. and inflation growth of 2.5 per cent. I remember saying at the time—and this can be found in Hansard—that I did not believe in a figure of 3 per cent., but perhaps 2.5 per cent. I believe at the time the figure of 3 per cent. was too much. We have had GDP growth of 2.5 per cent. and we have exceeded on inflation.
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Next year we have been promised real growth at 3.5 per cent. and 2 per cent. inflation. I am worried that we may now be in a very delicate situation, as we were in 1987-88, with the economy overshooting. Nominal growth may come in at about 6 per cent. to 6.5 per cent. with inflation at 3 per cent. or 3.5 per cent. The growth in the GDP will be 3 per cent. or more. Good growth is always welcome, but that may be accompanied by real signs of the danger of inflation. I am not an inflation hawk, but I feel that that is the danger. Therefore, as we have read from the accounts from many City analysts after this Budget, interest rates may go up and not down. That is a danger sign that we have to face.
Until very recently I used to say how prudent and careful the right honourable gentleman the Chancellor was. While the Budget is not as bad or as electorally cynical as many urged it to be, when it comes to judgment I would have preferred a tighter Budget on balance than what we have. The tightness of the current Budget should have been more transparent than it is. I am a little worried about moving sums of money around, which is not quite sound. We may be spending more than has been suggested, and we may be collecting less than we think.
I believe that we are now in real danger. I do not say that from any strong partisan feeling—although I have such feelings—but I repeat that I believe that we are in as much danger as we were eight or nine years ago. The Chancellor may well have to take pre-emptive action soon over interest rates. This time he may have to increase them not by a quarter of a percentage point, but perhaps by half of one percentage point or even more. That is very much the logic of the Budget.
I am distressed by a violation of the golden rule. Page 99 gives the figures on government capital formation. It turns out that for this year and for next year the PSBR exceeds government capital formation. That is a danger sign. I am not against government borrowing. I have never been against it, but that borrowing must be matched by capital formation. If it is not matched, that level of debt is a danger sign. At the top of a cycle when the economy and the growth rate are supposed to be accelerating, it is dangerous if the British economy projects a 3 per cent. PSBR: GDP ratio. This is the time when we should be projecting a surplus. However, we are not making any such projection and once again the economy is consuming too much. That is a structural defect of the British economy. Nothing is being done to check the growth in consumption. I hope that none of my prophecies will come to pass, but I am worried that the Budget is a little too loose. It is not strong enough for me. It was called "an unexciting Budget"; I do not think that it was unexciting enough.
5.41 p.m.
Baroness O'Cathain: My Lords, acres of newsprint have been allocated to reviews of the Budget and, indeed, to previews of it. Most of it is not only repetitive, but also of little clarity to the people who just want to know the answers to the following questions: What is the fundamental state of the UK economy? How will government policies affecting income and expenditure affect them? Can they plan confidently for

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their own future in the light of announcements made by my right honourable friend the Chancellor of the Exchequer on Tuesday? Each of those three questions is being asked in factories, offices and businesses throughout the country, where people do not ask only about what happens to petrol and cigarette prices or to income tax; and those are the questions that I propose to address this afternoon.
In the debate on the gracious Speech on 30th October, I emphasised the importance of sustained economic growth and low inflation. I shall not repeat those arguments here; suffice it to say that a month further on, the economy is firmly on course to continue that path. That in itself will reinforce the increased confidence that exists among individuals and businesses in this country.
Individuals are mainly concerned with living standards. The Budget ensures that they go on rising year after year. We have seen many analyses of how the proposed tax changes will affect what is called the "average family". I ask myself whether there is such a thing as an average family. All I know is that year after year for 30 years or so I have given a cursory glance at those tables and never found my own situation detailed. Even the concept of a family on average earnings is difficult; I fear that it is yet another fairly meaningless economic category dreamed up by economists a long time ago. Be that as it may, the overall tax changes in the Budget will impact positively on all, with a consequent increase in living standards, and it is that which matters to the people as a whole.
Recently fears have been expressed that the growth in the UK economy is yet again relying too heavily on consumer expenditure. If I have one concern it is that the savings ratio, which was at a level of 12 per cent. for the first half of this year, is forecast to reduce to just under 9 per cent. in the first half of 1998. That is, of course, still a healthy level, but with real incomes rising and the savings ratio falling, consumer expenditure is forecast to grow by 4.25 per cent. in 1997. Being basically a very prudent person, I just hope that such an increase in consumer expenditure (although in the short term very beneficial to business and commerce) will be managed with skill—with the sort of skill that we have witnessed during the chancellorship of my right honourable friend Kenneth Clarke.
The true fundamental state of the UK economy is that we are in a much better position both internally and in our trading and business relations on the world scene than for as long as I can remember. Confidence is definitely on the upswing and business in general seems to be more upbeat than for a long time past. In addition, the perception abroad of the strength of the UK economy is the focus of admiration and envy among many other countries, as my noble friend the Minister said when he quoted what he termed "the sober-suited men of the IMF".
Noble Lords opposite routinely draw attention to what they perceive as a real problem in UK business; namely, the low level of investment. The noble Lord, Lord Ezra, the noble Lord, Lord Paul, in a memorable maiden speech, and the noble Lord, Lord Eatwell, continued the theme again today. However, what the
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noble Lord, Lord Eatwell, did not say was that since 1986 business investment as a percentage of GDP has been at a higher level than in any year of the last Labour Government and grew strongly in 1994 and 1995. To assist the noble Lord, Lord Eatwell, who I note is no longer in his place, perhaps I may draw his attention to chart 3:12 on page 30 of the Red Book. There has been a fall from the fourth quarter of 1995 to the second quarter of 1996, but even during that period business investment was still at a higher level than during the period of office of the last Labour Administration. In addition, latest investment intentions surveys remain substantially positive and it looks as though manufacturers have postponed, rather than cancelled, investment. Total business investment is forecast to grow by 6 per cent. this year and by 9.25 per cent. next year, considerably higher than the forecast of GDP growth in real terms of 2.5 per cent. this year and 3.5 per cent. next year, thereby ensuring that total business investment as a percentage of GDP is, and will be, on a continuing rising trend. I suggest to noble Lords opposite that their concern should be assuaged.
Government policies affecting income and expenditure are given in great detail in the Red Book—and comforting they are too. Let us not use the adjective "cautious" as a pejorative. Throwing caution to the winds would be both foolhardy and reprehensible. This Government are neither. Both private individuals and business can draw comfort from the cautious approach "steady as she goes".
Dealing with the third of my three questions; namely, whether both individuals and business can plan confidently for the future in the light of the announcements made in the Budget speech on Tuesday, I submit that with all the economic indicators pointing in the right direction and with the strengthening of our international reputation and international competitiveness, we can plan confidently for the future.
That is not to say that complacency should take over. There will never be a situation where some improvement cannot be made. There are still areas of economic activity where government policies seem rather strange—and that is putting somewhat of a gloss on it.
While reading the news releases from HM Customs and Excise, I was struck by that department's attempt to deregulate and simplify. There are seven specific measures for deregulation and simplification, but let us spend just a moment considering the most nonsensical situation that has developed because of the difference in duty on beers, wines and spirits between this country and the mainland of Europe. Before I make my point, perhaps I may emphasise that although the information that I shall give comes to me from my position as a director of Tesco, this is not a case of special pleading: Tesco has actually managed to profit from the nonsense. My concern is that the economy as a whole must be suffering as a result; the micro-economy of Kent certainly is, and small brewers, small shops and pubs are all affected.

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Because of the difference in excise duty we now have a ludicrous situation in which, even with the closure of the Channel Tunnel, the Tesco store in Calais had a turnover of over £1 million last week. Over 10 per cent. of the total volume of beers, wines and spirits in bonded warehouses in this country went to France and were repatriated the next day or so. Containers of French wine are imported into the UK. Within two days some of it makes the return journey to France and then a third journey across the Channel within a day or two. Years ago one scoffed at the stupidity of the common agricultural policy which resulted in well-travelled pigs passing between Northern Ireland and the Irish Republic. Every time pigs crossed the border they collected a subsidy—and those pigs crossed it many times. We expressed outrage at that pig migration. The beers, wines and spirits migration is not (as the pigs were) a fraud, but it is equally derisory and nonsensical.
Only 10 per cent. of the Calais sales are UK-originating (Scotch being a case in point), but this means that 90 per cent. of the sales of beers, wines and spirits mentioned falls into the "cross-the-Channel-three-times" category. Italian, German, Bulgarian, Hungarian and Romanian wines all become seasoned travellers. Even wine from the United States and the biggest-selling Australian wine Jacob's Creek are landed in the United Kingdom, travel to France and are then purchased by UK nationals. It travels back to the UK in the boots of cars or mini-vans. As to that, it could be said that we are up the creek!
It is not really a cause for amusement. The economy is suffering. What about petrol costs and motor vehicle wear and tear? Interestingly, research shows that frequently someone returns home from his or her office in Kent at about 5.15, catches the ferry at 6 p.m., and gets back from Calais with a boot full of booze in time for supper. I would be most grateful if my noble friend the Minister could undertake to pursue that particular bit of nonsense with my right honourable friend. Let us be consistent in our approach and make policy decisions that help all sections of the economy, including those greatly disadvantaged by the situation that I have just described.
In conclusion, the Budget—the annual analysis of the economic situation and income and public expenditure—gives me confidence that the Government are on the right track. That must be the strongest of all reasons for advocating that the electorate should back the tried and trusted management of the UK economy when it goes to the polls in 1997.
6.52 p.m.
Lord Haskel: My Lords, I congratulate the Minister on the wonderful picture that he painted of our economy. It was a masterpiece of trompe-l'oeil. Perhaps I may ask a few questions about the real economic state of the nation and the real economy, such as why our public finances are in such a poor state, why so much of our industry is uncompetitive in world markets and why our balance of payments is so negative. The Minister refers to the fall in unemployment, which is welcome, but why are most of the people going from the unemployment register into inactivity and not into new jobs? My noble friend Lord Eatwell told us about
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the study by the London School of Economics which recently recorded signs of rising poverty. It noted that one household in five of working age lacked someone in work.
Why are our long-term interest rates higher than those of our main competitors, apart from Greece, as the noble Lord, Lord Cockfield, reminded us? Is this not part of the economic state of the nation? Why is there a crisis in the National Health Service? Why is there chronic under-investment in education, scientific research and infrastructure, all leading to low morale and disappointment? Is this not part of the economic state of the nation?
The Minister spoke of profitability. Perhaps he and the noble Baroness, Lady O'Cathain, failed to notice the deteriorating sentiment among smaller quoted companies. During the first week of November eight chairmen were obliged to warn the market that profits this year would turn out to be below expectations. In the previous six weeks over 20 companies indicated disappointing profits. Those companies were in all sectors: engineering, printing, packaging and distribution. Last week some of our largest companies spoke of reduced profits because of the strengthening pound. Perhaps this is an indication that we are coming to the top of the economic cycle as the noble Lord, Lord Cockfield, suggested. Should the Minister be giving some kind of warning about public finances, too?
The noble Baroness, Lady O'Cathain, attempted to assuage our concerns about investment. I am afraid that my concerns are not assuaged. Perhaps the figures that the noble Baroness quoted are correct, but the fact is that they are not enough. This was the very point to which my noble friend Lord Paul referred in his excellent maiden speech. Many noble Lords have spoken of the substantial forecasting errors made by the Treasury. Companies use the Government's investment forecasts to plan their own investments. When investment forecasts in the Red Book speak of 6, 7 or 8 per cent. and investment turns out to be 1 per cent. it takes a good deal to persuade companies. Investment is too risky and they will find it less risky to import.
My noble friend Lord Eatwell reminded us that we were promised a balanced Budget by the year 2000. In 1992 we were told that the Budget would be balanced in the medium term. I presume that that is about now. Of course, there is no chance of that being realised. When it comes to the real economy we cannot trust the Government either to forecast it or to manage it correctly.
The Minister also told us what his scenario would do for our competitiveness. The snag is that countries do not compete for business; companies do. Their competitiveness is a matter of excellence of product, productivity, technology, marketing, service and all the other aspects of managing a business. With great respect to the eminent economists on our Benches, few economists grasping at economic theory have ever successfully competed for an order. Companies with good products and services do that. Competitiveness is a matter for businesses and people; for example, people like my noble friend Lord Paul who told us what had to be done in manufacturing.

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The economic state of the nation is not a matter of macro-economics alone; it is a matter of people and the relationship between business and society. Here lies the difference between our view of the economy and the view of noble Lords opposite. As my noble friend Lord Whitty reminded us in his maiden speech, we recognise that the economy is both social and commercial. The Government see it purely as a commercial matter of exposing people to market forces. This view imposes a kind of servitude on the market, which is the exact opposite of the responsibility and independence expected of modern organisations. We speak about a fairer society which will motivate people at work and prepare them to cope with the pressures by training, and enabling them to move out of welfare and into work, not a society in which they are slaves to the economy.
The central principle that underpins Labour's vision of the economy is inclusion. Each and every person has a right to be involved in and to work for the success of our economy. We all know that people will get out of bed an hour earlier for this, but they will not get out of bed an hour earlier to improve the figures of some macro-economic theory. We believe that the economic state of the nation cannot be judged unless a judgment is also made about the state of our inventiveness, creativity, adaptability, ability for hard work and teamwork, the state of our education and employment practices and the National Health Service, too. If we harness the vitality, dynamism and talents of the British people the state of the economy will soar. We have the scientific, technological, business and artistic talents which we fail to celebrate because the Government put accountancy and economics ahead of these talents. But it is these talents which create the economy, not the other way round.
Financial and physical assets can be copied by our competitors. What our competitors cannot copy are the talents of our people and their willingness to make the extra effort and find the extra time to discover better ways of producing our goods and services.
Not only do the Government neglect people in their economic calculations, they also change the basis of their theory. The Minister will remember that two years ago he was preaching the virtuous economy—the virtue of stable house prices, of low growth in consumption, of low interest rates, low imports and strong exports. I well remember my noble friend Lord Desai, ever a seeker after truth, grudgingly congratulating them on their virtue.
But now the Government are celebrating the opposite, and noble Lords opposite are still calling it virtue: rising consumption, rising house prices, rising interest rates, rising imports, weak exports. One can only assume that the cause of this celebration is not economic virtue but the forthcoming election.
The Minister's rosy picture may apply to a minority. The majority believe they deserve to be better off after working longer hours and paying more tax. It is dishonest to assume that the Minister's picture applies to us all. The true state of the economy is that it is good for the few at the expense of the many.
6.1 p.m.
Lord Selsdon: My Lords, I was about to say "Hear, hear!" to much of what the noble Lord, Lord Haskel, said. I say a strong, "Hear, hear!" to everything that his two noble friends in front of him said. I hope that they will feel inclined to join these Benches some day.
After having had for many years the privilege of speaking on economic debates in this House, I wondered what new I could say. I wondered why it was that I got almost everything wrong. I thought that it might be my age, because I still find myself some five years below the average age of your Lordships, even after 33 years. It means I have climbed a very small way up the levels. I suppose therefore that being below the average I am below par and somewhat mediocre. Much of this country's economic activity over 50 years has been mediocre.
My first training in this world came, I suppose, from my uncle, Stafford Cripps—a really great man—who used to lead me at a young age on his pony and explain why he was reducing the value of the pound because it had been reduced already. He was one of the greatest economists that we have had, and a great man for the Labour Party. He had, as Churchill pointed out, a conflict between career and conscience. In those days conscience was extremely important, because of the sad and parlous state of the nation and the divisiveness over the many years.
Over that time in listening to these debates—I have almost always tried to listen to every speech, because I was brought up in your Lordships' House to believe that that was courteous—I have learnt a great deal. But I made one mistake. I think I was brought up on Keynes. Then I was seduced briefly by Milton Friedman and then attracted by Professor Laffer. There were not many economists around. Therefore anyone who said that he was an economist appealed to me. The Labour Party attracted the gurus from the East, and the Conservative Party, anxious not to replicate it, brought in the spin-doctors from the West.
Economist after economist made predictions. In those days in the City of London there were not such things as analysts or economists. People did things on the back of an envelope or by the seat of their pants. Now, every time anything is said or written, an economic commentary appears on television or radio within seconds. All the time over the past 33 years those people have been wrong. Then I remembered that Keynes once said:
"Practical men, … are usually the slaves of some defunct economist".
I thought today that I might try to see whether I could be a practical man, and think where I could go.
I read the Red Book. I also read Mao's red book. I have read Colonel Gaddaffi's green book. I have read many such books and looked at many papers. I then found a new friend—a friendly friend with whom I tried to make contact yesterday. I followed on from Wedgwood Benn's white heat of technology" up to this modern communications age, with my right honourable friend the Deputy Prime Minister putting us on line. He is called, "http://wwwhm.treasury.gov.uk". He would

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not respond to me, because I am afraid that I was so far behind on my technology that my internet said that I could not get hold of him. So I had to ring someone abroad to ring me back, because I wanted to see whether I could find anything new other than what was published.
We are provided with so much information and economic data now that we cannot assess it, and almost all of it is in the past. So, what of the future? What of the present? I found myself agreeing with part of what the noble Lord, Lord Eatwell, said today. He has relaxed since he has spent longer in your Lordships' House. His statements on the economy are sometimes less aggressive. There was a period when I thought we had got it wrong. I believe that it was Talleyrand who said that there are two sorts of people in life—the shearers and the shorn and one must always be on the side of the shearers. It was Bernard Shaw who at the same time said that if you were going to rob Peter to pay Paul it was better to be on the side of Paul, because then you would always get the support of Paul.
That was a division within society, and I think my party and the Government got it wrong. We became so concerned about inflation that we forgot that people had been conditioned to inflation. Suddenly without really intending it—it was not with a bad intention—we sheared everyone in a short period of time by hiking interest rates so far upwards up above the rate of inflation, when interest rates, almost for the first time in history, were above inflation. Normally they were below. Therefore that, to some extent, like pregnancies, fed inflation.
We wiped out many of the new-dawn businesses that had been set up on borrowed money because one could do nothing without borrowed money. Then suddenly the success of that policy enabled us to bring interest rates down very rapidly indeed. Then other people complained. There were those who had savings and pensions who were expecting yields of 10 per cent., 12 per cent., or double digit yields. They were unhappy. With that, deflation took place. History will show that we had a period of great deflation when practically everyone in the country had a net reduction in their personal wealth of at least 20 per cent. much of it due to property prices.
The punishment for all that was for the middle-aged group and, to some extent, those who were just about to retire off the top of their businesses. The results, on the other hand, have been significant and outstanding. There is no doubt that we have about the strongest economy in Europe and that the investment and moves are going in the right direction. I have a number of worries, but I have a guru of my own who always tells me after the event how he got it right, whereas at the time he always tells me he is going to do something that turns out to be wrong. He is foreign. He said, "Your Government have always made my life difficult. I sold my business and placed the money in long-term investments with a good yield, and I found that I could live on the interest. Then you brought the interest rates down, and I found that I could not even live on the interest". You know what my conclusion was? We have to invest.
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When one has a low rate of inflation, a stable political situation and a relatively good economy, that is a time when investment is attracted naturally, when people look for capital growth again instead of just the yields. That is happening now. We have attracted more investment in this country in real terms than at the time of the Industrial Revolution. At that time much of the investment was foreign investment. Much of the technology was foreign. At present most of the investment is foreign investment and a lot of the people who are making it and participating in growth are foreign countries, or foreign individuals who have established themselves over here.
I find that encouraging. I also find it encouraging that we are major investors abroad, because where we invest trade follows and investment often follows trade itself. I see a good situation. Every time I speak in these debates, I usually ring 10 or 12 friends. Each year I find that one or two of them have died. I tend to believe that the oldest ones are the wisest. Now I ring younger friends. Last night and this morning I made a couple of dozen calls and everyone was bullish and supportive of us. Some who have socialist feelings are beginning to feel sorry for the Labour Party because they cannot see how it can produce a better economic policy than that which we have at the moment.
I still have one worry. The noble Lord, Lord Ezra, and I have shared it for a long time. The noble Lord, Lord Paul, raised it too. It is the manufacturing sector. I do not believe that we can do without that sector because, at the end of the day, if we have only service industries we must service someone else's manufactures.
Our manufacturing sector had a pretty sharp shake-up and—the noble Lord, Lord Haskel, may not agree—it is now very competitive. I say that in my capacity as President of the British Exporters Association. I know that when our manufacturing sector competes and tenders abroad it is competitive. The problem is that the base was so eroded that often when we seek to bid for a range of equipment in particular projects we do not have the capacity to manufacture half of it. For example, I am working on some shipbuilding projects and, much to my surprise, discovered that the British can manage to produce only about 50 per cent. of the equipment in a ship. We no longer produce the big main engines. There are many such examples throughout industry.
That is sad because industries are alive and well and order books are full. Investment has been taking place and the fear about capacity is not as great as it was. However, I am worried about the differential. At the moment I work with a nice little bunch of engineers. They are bright, young and old people who charge out at £25 an hour. I also have to work with some legal friends in the City who advise me that they charge out at £250 an hour. I know that I would rather do without the latter and that I could not possibly do without the former. But our system is so complex and the service charges are great.
All in all, things are extremely good. To a large extent, I agree with what was said by my noble friend Lord Home on the PEI and finance from the private

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sector. One of the great benefits of privatisation has been the freedom that that has given enterprises to raise their own money wherever they wish on whatever terms they wish. However, we still have a difficulty. As a result of the lags and leads and the ups and downs of our past economy, the raising of long-term money in this country is difficult. It is far easier to do that on the Continent and elsewhere. But things are pretty good.
I wish to conclude by turning to my great-uncle Stafford and quoting from something which Douglas Jay wrote about him. He stated:
"It was his supreme and rare merit that he knew the difference between a good argument and a bad one".
On this side of the House, my noble friend has a very good argument. I do not say that noble Lords opposite have a bad argument; I say that at the moment they have not put forward any argument which could replace the argument of my friends.
My noble friend on the Front Bench has a good case and he made a good speech. I suggest that he goes back to the great American saying:
"He who whispers down a well,
His goods so desperate to sell,
Does not earn as many dollars
As he who climbs a tree and hollers".
Please tell the world what we have achieved.
6.14 p.m.
Lord Griffiths of Fforestfach: My Lords, it is a great pleasure on Thanksgiving Day to follow such a lively and witty address and to endorse the sentiments which my noble friend expressed. It is an honour to be in your Lordships' House today and to listen to three excellent maiden speeches. I am sure that I speak on behalf of everyone in saying that we look forward to more contributions from the three noble Lords who delivered those speeches.
The Motion is that we take note of the economic state of the nation. A great deal of what I wanted to say has been said but I wish to make three reflections. First, as one reads the Red Book and the Chancellor's Budget Statement, one cannot help feeling that the economy is extraordinarily strong and moving in the right direction. I asked myself the question: assuming that I had been invited by officials of the IMF or the European Union and had been told about a country in Europe which was in its fifth successive year of growth; which had projected growth of 3 to 3.5 per cent.; inflation down to less than 4 per cent. and coming down to 2.5 per cent.; rising employment; falling unemployment; which was a magnet in attracting foreign investment; and where business productivity was rising, what would I make of such an economy. Frankly, I believe that it would be mean and niggardly of the Opposition Benches and lacking in any objectivity not to say that the economy at present is performing outstandingly well. That is a fact. I do not believe that that is simply the result of some blind economic cycle; as though it is somehow a law of nature that sometimes one does badly but does well at other times and that it so happens we have the fortune to be doing well.
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I do not normally make party political points in your Lordships' House but I am afraid that on this occasion I cannot resist doing so. I believe that since 1979 we on these Benches have had a specific set of policies which we have sought to implement sometimes with failures, as in the late 1980s and on public expenditure control in the early 1990s, but in which low inflation was the cornerstone of a successful economy; in which we made low taxes and not public expenditure the engine-driving growth; in which we reduced the public sector through privatisation, PFI, market testing, contracting out, competitive tendering and so forth; and in which we had a reform of the labour market that has given us flexibility. That is no accident, and I am proud to speak from these Benches today because I believe that the success of our policies is a vindication of Conservative economic strategy.
Secondly, having listened to the Chancellor's speech and reading it in the Red Book, I believe that it is a responsible Budget, as everyone must agree. It is not a pre-election fiscal give-away. It is, in fact, fiscal tightening. The public finances are set to move in the direction of public expenditure as a proportion of income coming down and of PSBR coming down.
Today many noble Lords have said, "But we have heard all this before. We have had targets for the PSBR which have been set and targets for the PSBR which have been missed. Why should we have any confidence this time?". The noble Lord, Lord Eatwell, stated that with great eloquence. I believe that the key to the Chancellor's strategy is, first, a determination not to slash public spending but to control it and, secondly, a belief that the economy will grow at more than 3.5 per cent. next year. That seems to me to be absolutely critical.
I asked myself whether the Chancellor is being hopelessly optimistic and I turned to table 3.8 in the Red Book showing the predictions of the Treasury and of the panel of independent forecasters. It shows that the Budget's prediction for GDP next year is 3.5 per cent. and the average for the independent panel is 3.5 per cent. The Treasury's prediction for inflation next year is 2.5 per cent. and the prediction of the panel of independent forecasters is 2.5 per cent. Therefore, it would be difficult to accuse the Chancellor of massaging these figures simply in order to present something which looks good.
Next, I should like to comment on a number of remarks which have been made this afternoon on the PFI. It has been said that if one looks at the numbers which are meant to come through the PFI, there is a great deal of optimism there.
The first point that I should like to make was made by my noble friend Lord Home about the cost of tendering. I declare an interest in that I am chairman of a consortium which is bidding for the DSS property. The PFI has been slow in getting under way in exactly the same way that privatisation was slow in getting under way. But now that it is really under way, I believe that it will gather speed at a great rate. I say that because the PFI has been a new departure for many government departments and civil servants. They have not

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encountered anything like that before and different methods have to be used. Obviously there has to be public accountability. The PFI has very strict criteria, not least, for example, in relation to the transfer of risk from the public to the private sector. Making sure that that takes place is a rigorous and lengthy process.
In addition, even when a department has chosen a preferred bidder, there is then the whole process of due diligence to be undertaken which takes time. Whoever is chosen to be the preferred bidder for the DSS contract in terms of buying property and providing facilities management, there are 700 individual properties involved. The department has done nothing like that before.
But the whole process has now gathered momentum and it seems that the figures which are included in the Red Book would in my judgment be credible. They start from a very low figure of something like £1 billion this year and next year it is only £2.5 billion and increases thereafter. But that is not something which is beyond our imagination.
Thirdly, as I read the speech and the Red Book, given that the economy is doing terribly well at present, I asked myself whether that is sustainable. I say that having worked at 10 Downing Street from 1985 to 1990 when I felt that we were seeing the economy turning in a very bad direction. To put it at its strongest, are we in a pre-election boom, not a fiscal pre-election boom but a monetary pre-election boom? I am surprised that in our debate this afternoon nobody has mentioned monetary policy or the monetary aggregates and it was dealt with fairly cursorily in the Chancellor's speech.
The question is: with the strong growth that we have at present, and the above trend rate of growth which is predicted for the next 18 months or two years, is it feasible to assume that inflation will not take off unless interest rates rise?
The Chancellor gave very concrete reasons for being confident about low inflation. He said that commodity prices, with the exception of oil, are fairly stable; that earnings growth is modest; and that producer price inflation is at its lowest level since the 1960s. He is absolutely correct on all of those issues. But as the economy has picked up speed recently, it seems to me that we have noticed some trends which are worrying; for example, there has been a sharp recovery in sectors like construction and manufacturing in which no previous recovery had been seen. Stocks have declined. Consumer demand is very strong and consumer confidence is back at its highest level since August 1988.
The labour market, according to the Bank of England's publication, is tightening. Unemployment is down; vacancies are up; and skill shortages are increasing. The gap between the hours on offer and the hours being demanded is narrowing. Money supply growth appears to me to be excessive. The growth of narrowing money is, for its fourth year, outside the Government's range and broad money is rising at about 10 per cent. per year. If one looks at the Stock Market and the housing market, it can be seen that asset prices are moving up.
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Therefore, the question is: is the current growth sustainable? I want to argue that it is. I do so because I believe that the Government have learned from their mistakes and will not repeat them. I say that for three reasons.
First, unlike in the late 1980s, the exchange rate is now free to move. In the 1980s we tied the price of sterling to the deutschmark. As a result, when people had confidence and wanted to invest in sterling, they ploughed in with funds which were immediately monetised, which created excessive growth in the monetary aggregates with the consequences which followed. At present, we do not have that. The exchange rate has risen and it is there as a safety valve.
Secondly, the Chancellor said that he is committed to raising interest rates when excessive monetary growth is clear. He is absolutely right to say that although we have had four years of excessive narrow money supply growth, the potential inflationary effects are not yet obvious. He has made a firm commitment that when they are, he will raise rates.
Thirdly, unlike in the 1980s—and I remember it so well from this point of view—we now have a more independent Bank of England, although not as independent as I should like, which is committed with vigilance to keeping inflation low.
For all those reasons, I expect that if the economy grows at the rate that it is growing, we shall have to see some increase in interest rates in order to choke off inflation. But that should not be said in any way to be a sign of failure. It will be a sign of the success and tremendous growth which is inherent in our economy.
Finally, I believe that it was a good Budget, one which has set the public finances in the right direction. It allows the private economy to grow but it requires—and we should say that frankly as the Chancellor himself stated—that any sign of inflation should be immediately nipped in the bud.
6.27 p.m.
Lord Monson: My Lords, most speakers so far today have been extremely virtuous in taking a broad view and steering clear of the nitty-gritty, by which I mean the detailed tax and excise duty changes proposed in the Budget Statement. I am afraid that given constraints of time I shall confine myself to that nitty-gritty, or at any rate to some of it.
Those same time constraints prevent one from elaborating on the many good things in the Budget—business rate relief for small businesses, for example, or the surprisingly little-noticed tax concessions, substantially increased by about 30 per cent. or more, for individuals who let out rooms in their houses or flats, which will greatly help students and others desperately seeking accommodation.
In passing, I should like to defend the Red Book—the Financial Statement and Budget Report—from the strictures of the noble Lord, Lord Eatwell. I praise whoever compiled the current edition because the wide page margins and the interesting graphs on almost every page make it unusually readable and useful.

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I shall concentrate on four specific defects, as I see them, in the proposed Finance Bill in the hope that some of those defects might be remedied in Committee in another place.
The first is the almost penal increase in air passenger duty. The increase will scarcely be noticed by business travellers, but for those on a tight budget it will increase widely-available cheap fares to Paris, Brussels and Amsterdam by 17 per cent. Low-season fares to Israel, Egypt and Cyprus will increase by more than 10 per cent., to New York, Boston and Toronto by more than 12 per cent. and to Turkey and Tunisia, two countries which are particularly dependent on the tourist trade, by a staggering 22.5 per cent. or, if one takes into account the fares which are hidden in a package holiday, by possibly up to 40 per cent. At present, weekends in Istanbul are offered for £89, of which the fare content cannot be more than £50. The tax increase is also bound to deter a number of foreign tourists from coming to this country. Since the end of World War II, ordinary people have been encouraged to broaden their horizons. This tax increase will slowly but surely lead them to narrow their horizons to some degree, which will be a great pity.
To go from air travel to alcopops is to descend from the occasionally sublime to the always ridiculous. Nevertheless, alcopops are a serious matter. Not only are they targeted at young people, but the fact that their alcoholic strength is disguised by the sweetness of the drink particularly endangers those young people after they have had a few drinks and decide to get into a motor car or jump on to a motorcycle, to say nothing of endangering other road users.
Traditionally, for various odd reasons, duty on drink in Britain has rarely been imposed pro rata to its alcoholic strength. Therefore, is there not a case for raising the duty on alcopops—certainly the stronger varieties—still further and for using the proceeds to reduce somewhat the duty on low-strength beers? I do not mean the high-strength beers and lagers favoured by lager louts, but those with less than 4 per cent. alcoholic strength by volume, which face the greatest competition from legal and illegal imports from France and other parts of the Continent.
The illegal importers—in other words, the smugglers—will certainly be rejoicing at the penal increase in duty on cigarettes which, frankly, I consider to be appalling. It will not affect the yuppie smoker; it will not affect me or, indeed, any other light to moderate smoker who travels abroad frequently; it will not even much affect the teenager who smokes perhaps half a dozen over a weekend to impress his or her friends. Those who will suffer will be the elderly, the retired or unemployed individuals of modest means for whom a cigarette is almost their only pleasure. What use would it be for them to give up their favourite pleasure, only to contract Alzheimer's Disease, given the fact that cigarettes help to keep that particular disease at bay, even if they do not improve people's health in other respects?
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There is also the revenue aspect to consider. The demand for tobacco is not quite as inelastic as some people imagine. If a large number of people are induced to give up as a result of this very steep increase, it could leave a large hole in the revenues of the Treasury next year which might have to be made up by an increase in income tax or, indeed, in VAT.
Finally, perhaps I may deplore the fact that nothing has been done to alleviate the unfair aspects of capital gains tax. Before some noble Lords on the Opposition Benches murmur, "Well, he would say that wouldn't he", let me say straight away that I do not agree with the Prime Minister in his zeal, at some distant unspecified time in the future, to abolish capital gains tax altogether. There is a very good case for continuing to treat short-term gains as income. There is even quite a good case for taxing fully indexed long-term gains, provided that they are taxed at a much lower rate than prevails at present. But that is not what we have at the moment.
It is common knowledge that pension funds, unit and investment trusts and, of course, many other institutions pay no CGT at all. By contrast, individuals are said to be liable at a top rate of 40 per cent. However, that is a false assumption: the overall real top rate is higher and has been higher ever since the removal of indexation relief on losses two or three years ago; and any portfolio is bound to contain a few losers. Even on the most optimistic of assumptions, no one expects the RPI to rise by less than 35 per cent. over the next 10 years. Indeed, many people, including myself, fear that it will rise by at least 50 per cent. as has happened over the past 10 years. As none of that inflation is currently allowable in the calculation of losses, I suggest that the real effective maximum rate on long-term gains is more like 42 per cent. or 43 per cent. in the average portfolio.
We are all very aware that the Chancellor of the Exchequer needs every penny that he can lay his hands on at the present time. But this need is not incompatible with modest CGT reform in the present Budget; indeed, quite the contrary. If an amendment were to be agreed in the other place which provided that all assets held for more than 10 years—in other words, acquired before the 6th April 1986—and sold in the current 1996-97 tax year would be subject to only three-quarters of the normal CGT rates (meaning effective rates of 18 per cent. to 30 per cent., rather than 24 per cent. to 30 per cent.) one could guarantee that the "take" of the Chancellor of the Exchequer from that tax this year would be vastly in excess of the estimated sum. Indeed, with luck, it should bring in sufficient extra revenue to meet the compensation due to the sportsmen and sportswomen who stand to lose their guns in consequence of the Dunblane massacre. Moreover, if similar concessions were to be made for 1997-98 and subsequent tax years, it would encourage much more investment in the risk-taking British manufacturing industries so eloquently championed by the noble Lord, Lord Paul, in one of today's three exceptionally fine maiden speeches.
6.35 p.m.
The Viscount of Oxfuird: My Lords, this House is enriched by its amateur membership which brings the reality of the outside world to our deliberations. There is no more perfect example of that than the three maiden speeches that we have listened to this afternoon. My noble friend Lord Home expressed some very pertinent points on the ability of the British financial institutions to take long-term views. The noble Lord, Lord Paul, whom I am very pleased to see is now sitting in his place in the Chamber, said much to remind us of the past. I hope that perhaps on another occasion we may find that we have one or two friends that we mutually enjoy from Calcutta, as I spent some time there. The noble Lord, Lord Whitty, gave us a speech of some distinction. Indeed, all three maiden speakers will be nothing more than a benefit to your Lordships' House, not only now but in the future.
This is a most timely motion and I join other noble Lords in thanking my noble friend Lord Mackay of Ardbrecknish for giving us the opportunity to review the United Kingdom's recent economic performance, and perhaps enabling us to count the blessings of being citizens of this country. This is particularly important following last Tuesday's Budget Statement which was, in my view, one of the most sensible and far-sighted Budget Statements in recent years.
The sustained and consistent policy that the Chancellor of the Exchequer and the Government have followed over recent years—a policy of establishing a stable, low inflation economy, free from the boom and bust of which I freely admit neither major party has so determiningly followed since the Second World War—is exactly what manufacturing industry in this country is seeking.
Some noble Lords may recall the remarks made by my noble friend Lady Thatcher during her Nicholas Ridley Memorial Lecture on Friday evening. In this debate on the economy, I believe that it is right to remind your Lordships of the main thrust of her message because if we do not take heed of it then we may not be looking at such a favourable combination of economic circumstances into the future. My noble friend said:
"Yesterday's socialism, characterised by militant trade unionism and burdensome state-owned industries has … almost certainly gone for good"—
The word "almost" has to be remembered—
"But in the form of a continuing tendency to intervene in people's lives for ends which are quite extraneous to the state's proper functions, it is very much present".
That is timely advice which I urge your Lordships and indeed our whole country not to forget.
I must confess that given the wealth of good economic news provided to us over recent months I had to resist very hard the temptation not to burden your Lordships with an avalanche of favourable statistics. I think others have got there before me. I find it exciting, however, that both the OECD and the IMF predict that the United Kingdom will continue to grow faster in 1996 and 1997 than any other major European Union economy.
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I also find it exciting that unemployment has fallen by over 900,000 since December 1992 and is now at its lowest for five years. As we all know, the United Kingdom has the lowest unemployment rate of any major European Union country. It is lower than that of Germany, lower than that of France, and much lower than that of Italy.
In a debate such as this it is possible to deal only with a small number of key points. I would, however, like to say a few words about that vitally important issue of exporting, which is something that I have been concerned with for most of my professional life and which is one of the strongest influences on the economic state of this nation.
It is also pleasing to note that UK exports are currently running at record levels and are expected to grow further, helped by growth in world trade and by the United Kingdom's strong competitive position. As has already been said, we now export more per head than both Japan and the United States. The United Kingdom is a leading exporter of high technology goods and is Europe's leading exporter of televisions, computers and microchips. As we have heard, exports rose again in August by I per cent. to £13.9 billion.
Indeed the UK economy as a whole is on a path of sustained steady growth and low inflation. The economy has been growing for over four years and productivity is now at a record peak. It is just not true—as was implied by some of the noble Lords who spoke in the debate on the economy that was initiated in your Lordships' House almost exactly a year ago by the noble Lord, Lord Desai—that our UK economy is heading for recession. Only yesterday evening the noble Lord advised me that we had reached the low point of the Kondratieff cycle, and it was his belief that the cycle would now deliver the improvements anticipated under the theory which, as noble Lords know, has a periodicity of 50 to 60 years. However, my noble friend Lord Cockfield has a different view.
Indeed, one senses a new mood of confidence in the boardrooms of this country's industrial enterprises, as is beginning to be evidenced in all sorts of ways.
I have had close involvement with the engineering manufacturing industry sector over the past 40 years—indeed, I started my engineering career, after a spell with the Royal Air Force, as an apprentice at the Ford Motor Company. I find it particularly exciting that we are beginning to see some of the outputs of the Action for Engineering initiative which was kicked off by my right honourable friend the Deputy Prime Minister in 1994 when he was still President of the Board of Trade.
One of the outputs of Task Force 3 of that initiative was to challenge engineering employers to invest more in the training of apprentices, technicians and junior managers and into continuous improvement of the skills of their workforces by way of continuous professional development.
I was delighted to read in the Financial Times last Friday a prediction by my noble friend Lord Trefgarne, the chairman of the Engineering and Marine Training Authority, that 12,000 young people would be taking up engineering modern apprenticeships in 1997, compared

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with 8,000 in 1996 and 6,000 in 1995. That is progress indeed, if from small beginnings. Engineering companies are only making that kind of major investment in work-based training because they are confident about the future and about the need to upgrade the skills of the engineering workforce to fuel the growth in the United Kingdom's manufacturing output.
We have an enviable combination of circumstances at this time in this country: low inflation, sound public finances and increasingly competitive business enterprises. Most objective evidence suggests that the growth in the United Kingdom's economy is set to continue.
I know that we have received over the past 48 hours a variety of analyses about the effect that the Budget will have on each of us. It has been a field day for the economists who have presented us with such a dazzling array of sometimes contradictory conclusions.
Indeed I am tempted to recall, as I confess I have done before in your Lordships' House, the words of the late George Bernard Shaw who said:
"If all economists were laid end to end, they would still not reach a conclusion".
The reality is that Tuesday's Budget was steady and prudent. It was deliberately crafted to maintain our economy in its present sound shape. It was also a fair Budget giving a welcome boost where it was most needed. I believe that Tuesday's Budget will help to reinforce the growing view that in the present Government we have a tried and experienced team who can be trusted not to tinker with our economy for short-term political gain.
Our economy is in good shape and we have just been presented with a Budget that will consolidate the gains already made and place us in an even stronger position for the years to come.
6.47 p.m.
Lord Harding of Petherton: My Lords, we have heard many excellent speeches from many distinguished people who have experience in business. That applies to the three excellent maiden speakers and everyone who has spoken before me. I am afraid that I have been only a soldier and a farmer. Perhaps I should not be speaking at all in this debate. However, I have always been interested in economics. The noble Lord, Lord Briggs, was my tutor at Worcester College, Oxford. I have read the Economist almost every week for 50 years. Therefore I am an interested observer.
The economy of the United Kingdom is in the best state that it has been for a long time, as many speakers have said. The reforms implemented by my noble friend Lady Thatcher and continued by my right honourable friend John Major have brought about that happy state. Let us not doubt that at all; it has not come about through luck. That is not to say that things are perfect—perhaps they can never be perfect—there are many things still to be done.
Government spending is still too high, and consequently the Budget deficit is still too high. The deficit is now coming down but this is due to increasing
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growth and therefore higher tax revenues. My right honourable friend the Chancellor of the Exchequer is to be congratulated on keeping a tight hold on spending during his term of Office. However, he has been able only to hold the line. Government spending is still rising, albeit slower than in the recent past. The deficit has not become so high solely because of the recession—as some people advocate—from which we emerged four years ago. In my opinion it is in large part due to loose fiscal policies from 1987 to 1992. A downturn will occur again some time. The business cycle has not been eliminated. Unless something is done about reducing government spending, the deficit will rise again when that occurs.
High deficits result in interest rates that are too high. That badly affects capital formation and economic expansion. The economic well-being of everyone in the country depends on the productive part of the economy, both manufacturing and service industries. High interest rates hit them hard. Reducing government expenditure is the hardest thing that that Government have to do. The public's expectation of better healthcare, education, and spending on law and order are much higher than they were even 20 years ago. People are living longer. We all want to ensure that we have a reasonable life in old age and infirmity. We all want to see that our children and grandchildren have the best education and training for the future. We must ensure that our Armed Forces are strong and well trained. Those all cost a great deal of money. This has to come out of tax revenues or has to be borrowed. The Government must not borrow too much. Not only does high borrowing make interest rates too high, it also burdens future generations.
High taxes are unpopular. People do not like seeing much of their hard earned wages and salaries taken away by the Government. Not only that, but high taxes have a bad effect on incentives to work. That is a vicious circle, as it increases social security spending. The hard answer is that people will have to spend more of their own money in future on health and education and other services that the Government now provide. I am afraid that politicians of all stripes are not facing that problem.
Those who cannot provide for themselves due to unemployment, long-term illness or disability, or for some other reason, must be protected. That is what our social security system should be about. Too much money is spent at present by the Government on those who could provide for themselves. In a benevolent dictatorship this would be much easier to do. But whoever heard of a benevolent dictator staying benevolent? I should be one of the first to rebel against him or her. Quite rightly, we all value our freedom and the ability to choose our governments and the policies they pursue. A dictator, however benevolent, will not restrict his or her laws only to taxing and spending. He or she would pass laws telling us what to do or what not to do on everything else. I do not believe that anyone in this country wants to live under an authoritarian regime such as Singapore.
In a democracy, it is extremely difficult to reduce government spending. The United States of America is a classic example. The Republicans, under the leadership of Newt Gingrich swept to power in Congress

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two years ago on that very platform. As soon as the middle classes in America realised that it meant that this was going to affect them, Newt Gingrich became the most unpopular politician in America. The Right-wing in my own party might bear that in mind. However, I agree with the Right-wing in my party when it urges that government spending should be reduced. It is the way in which it is accomplished and the rhetoric that is used to expound it from which I differ.
British people, especially women, are no different from Americans in being frightened by extreme right wing rhetoric. Government proposals for change must be explained quietly and properly, and the process must be gradual. That is all easier said than done. I have not had experience, as has my noble friend Lord Griffiths of Fforestfach, in 10 Downing Street. But I agree with him, even as an amateur economist and observer, about the threat of increasing inflation at present. In the past, governments have only acted too late. The rise in the money supply has been very high in the past year, as my noble friend said. Other indicators are showing a danger that in a year or less inflation will rise, and there is always a delayed action. Most people believe that one can deal with inflation at the time. However, one has to think in terms of two years hence. One has to consider the indicators now to see what one would do to stop inflation rising in future.
My right honourable friends the Prime Minister and the Chancellor have not been tested to stick to their promises that inflation will be nipped in the bud and not allowed to rise. I believe and hope that they will stick to them. Luckily, when he was Chancellor my right honourable friend Norman Lamont opened up to public scrutiny discussions about interest rates and inflation between the Chancellor and the Governor of the Bank of England. We all owe him a debt for doing so. It is now more difficult for the Chancellor to go against the Governor's strongly held advice than in the past.
The financial markets expect a rise in interest rates. I think that most economists agree that it is very necessary. In my humble opinion, it is no good waiting until after the election to raise interest rates. It will be too late and the rise would have to be larger than if interest rates were raised now. The Budget appears to have tightened fiscal policy. I have read opinion which differs on that. However, I have heard no such opinion in this House, and I prefer to believe what I have heard in this Chamber—the Budget tightens fiscal policy.
The high pound also helps to contain inflation. However, I do not think from all that I have read from experts and commentators that the high pound and the Budget are enough.
Raising interest rates would be very unpopular. Mortgage interest rates would be affected as well as overdrafts. A Conservative Government re-elected next spring (as I am sure it will be) would lose all credibility at the beginning of their term if they had to raise interest rates sharply after the election. Even if by some awful chance the Labour Government were elected, the Conservative Party would lose any public trust in competent, economic management and would find it hard to be re-elected if they were to raise interest rates immediately after the election.
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Inflation is a monetary phenomenon, whatever some journalists and others like to think. Other than putting up interest rates, there is no way to keep inflation in check when it looks like rising. If the Government were able sharply to cut back government spending, that would keep it in check as well but in a longer time frame. As I have explained before, that is not possible in a democratic country. Not only are the indicators turning from amber to red, but next year there will be enormous sums of money in the hands of building society investors. If the spending proportion of this year's windfalls is followed, between a quarter and a third of that money will be spent. That will increase inflationary pressures significantly.
The pound may go higher if interest rates are raised. It is high at present. Some exporters will undoubtedly suffer, but they will suffer far more if inflation is allowed to increase. I wonder whether, contrary to Treasury statements, some of the pound's rise is not because of hedging by financial markets against a proposed single currency. But I do not think that anyone really knows. Soames Forsyte's remark that,
"we should not worry too much about the economy; the pound is strong",
is still valid today.
I should now like to turn to the real economy, as did the noble Lord, Lord Haskel, and other speakers. Jobs, and the fear of losing them, the cost of living, the size of the weekly wage packet, poverty and homelessness, the healthcare that people have, the education their children receive, the disparity of incomes—the "fat cat" syndrome—are the things that politicians, bankers and financial people mean by the economy. Unemployment is the biggest worry of many people when the economic state of the nation is talked about. Unemployment is coming down. It has come down steadily for the past few years. However, it is still too high. It is 3 per cent. higher here than in the United States of America, although much lower than for some of our European partners.
There are some measures that the Government have not taken which could help bring unemployment down faster. The private rented sector could be regulated more than it has been. The Government have gone some way in that direction, but should go the whole hog. People cannot move to jobs if they cannot find accommodation. Doing that would produce howls from the parties opposite, but freeing the private rented sector completely would, over time, produce far more accommodation and would help bring unemployment down.
A lot of social security spending deters people from seeking work. As I have said previously, that needs careful thought and presentation.
Primary and secondary school education must be improved. Here I agree with Labour and the Liberal Democrats. However, their high-sounding pronouncements at national level are not followed by their party councillors in local government. Reducing large classes, although necessary, will not by itself improve the education of our children. Good teaching is the key. Bad 1960s-type teaching methods do not help; nor does the

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attitude of some teaching unions. The Government are trying their hardest. My right honourable friend Gillian Shephard is doing her best; but it is an uphill struggle.
Good education is vitally important for the economy of the future. So many manual and unskilled jobs are now done more cheaply in developing countries. We cannot match their low-wage economies in that respect, and should not try to do so. Our future lies in high-tech, advanced products. That needs a highly educated population. Improving education will help in the medium to long term. It will not help today; but it is vitally important.
Management in this country must improve. Managers must realise that their employees are their most important assets. Sometimes managers do not do enough to take their employees into their confidence and involve them.
In conclusion, I congratulate the Government on all that they have done to bring our economy into such a good state. However, there is still a lot to be done. I look forward to an election manifesto which will take the economy even further forward through the millennium.
7.3 p.m.
Viscount Chandos: My Lords, I thank the noble Lord, Lord Mackay of Ardbrecknish, for introducing today's debate on the state of the economy, building on the excellent precedent established last year by my noble friend Lord Desai and giving this House the chance to consider the implications of the Budget in the immediate aftermath of the Chancellor's Statement.
The powerful speech of my noble friend Lord Eatwell, who opened from these Benches, needs no comment from me, save to say that once again I am faced with the impossible task of trying to maintain his standard in winding up. I believe that most Members of the House await with interest, as I do, the Minister's response to my noble friend's analysis.
The quality of the debate was strikingly enhanced by the maiden speeches of the noble Earl, Lord Home, and my noble friends Lord Paul and Lord Whitty. I hope that I may bask in the reflected glory of the impressive speech made by my fellow but far more distinguished banker, the noble Earl, Lord Home, by claiming him as a distant kinsman—if that does not lead to his being immediately ostracised by all on his own Benches. His comments about banks' hidden reserves reminded me of my own maiden speech on precisely that arcane subject. I was delighted also to hear the noble Earl address the issue of short-termism, a blight which a number of noble Lords on the Benches opposite would, I suspect, deny even existed.
The contribution of my noble friend Lord Paul comes as no surprise in the light of his remarkable career as an industrialist and entrepreneur. There is a strong tradition of successful businessmen who have recognised that long-term economic success is more likely to be achieved by the approach taken by these Benches than it is by that of the Benches opposite. With every day that passes, more and more men and women with
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outstanding records in the business world are endorsing the Labour Party, as I am sure even noble Lords opposite cannot fail to have noticed.
I was also particularly interested in the comments by my noble friend Lord Paul on the importance of venture capital. There are very interesting studies in the United States which show that the vibrancy of the US capital markets has been a significant factor in the job creation that has occurred in the United States over the past 10 or 15 years, which has not been matched in Europe.
My noble friend Lord Whitty made a speech that was no less remarkable after a similarly outstanding career, not least with the Labour Party itself. I take particular pride, therefore, in paying tribute to the maiden speeches and the distinguished careers of both my noble friends and look forward to their frequent future participation in debates in this House, and also that of the noble Earl, Lord Home.
I am struck however on this, as on other occasions, by the essential absurdity of my welcoming to this House anyone whose membership has been earned through their own distinction, owing as I do my own position to nothing more than the premature death of my father—of which, by coincidence, this is the 16th anniversary. I confidently anticipate, therefore, that my noble friends Lord Paul and Lord Whitty will be active in this House long after I and other hereditary Members will have ceded our rights following the constitutional reforms to be introduced by the next Labour government. I hope that given those circumstances the father and grandfather of the noble Lord, Lord Whitty, would perhaps become a little less disapproving of his membership of this House. In turn, I hope that the noble Earl, Lord Home, whose father chaired what I believe was the last review by the Conservative Party of the composition of this House, supports that group's recommendations for reform, even if he quite clearly does not require the same matchstick based computing system as his father claimed to have used.
It is as a result of previous reforms that this House plays no detailed role in the passage of the Finance Bill, so that today's debate and the Third Reading, which in due course will give rise to a further opportunity to return to the subject of the Finance Bill, can concentrate on the broad overview of the Chancellor's well trailed Statement and its implications for the economy. In referring obliquely (and I hope diplomatically) to the embarrassing and regrettable leak of the Budget details, I feel moved to ask the Minister whether the inquiry will be restricted merely to the specific documents handed to the Daily Mirror or to the wider dissemination of information over a longer period.
The Financial Times, for instance, published in September what now seems a remarkably prescient article flagging the likely tax changes relating to profit-related pay. Should that not also be examined by the inquiry? Or might the investigators find too quickly and easily that the story emanated from a Tory, or Treasury, spin doctor? Will the Minister assess the extent to which that story might have led to an accelerated introduction of schemes between September and November, so actually increasing the short-term

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loss of tax revenues which the Chancellor has heroically threatened to claw back by the end of the decade—by which time of course, as all noble Lords know, the right honourable gentleman will either be sitting on the Opposition Benches or possibly acting as vice-president (public relations) for the European Monetary Institute. I look forward to hearing the Minister's reply with the same anticipation with which I awaited his opening remarks.
Those opening remarks did not disappoint me, as they did not disappoint my noble friend Lord Haskel. I never cease to be impressed by the eloquence and conviction with which the noble Lord tries to convey the Government's case, to present the carefully manipulated and selected statistics, to draw the most imaginative conclusions from the most unpromising material. It is a pleasure to watch a great artist at work; or perhaps not a great artist or actor but an impresario or theatrical producer. I realised as I listened to the noble Lord speaking earlier and presenting the same selective figures as his right honourable friend the Chancellor what I was reminded of. A West End theatre producer wakes up the morning after his new show opens and surveys the unremittingly bad reviews in every newspaper, every magazine, every journal. Pausing only to find his scissors and paste, he prepares the copy for the advertisement in the Evening Standard and the poster outside the theatre. "Unmitigated drivel", the doyen of theatre critics might have written; "It was a joy to leave the theatre. I urge you to avoid this play at all costs. Get a ticket to the South Pole rather than sit through this rubbish". "Unmitigated … joy. I urge you … at all costs … get a ticket", reads the resulting advertisement.
That is what the Government do in their presentation of disposable income trends over recent years: carefully choose the starting date; throw in the effect of economic growth as if that was due to the Government as opposed to being despite their economic mismanagement; artfully omit the extraordinary and unrepeatable effect over the last 17 years of the build-up of North Sea oil production.
Let me quote to your Lordships, without editing, without dots, without doctoring, the conclusions of the Institute for Fiscal Studies, from which my noble friend Lord Eatwell quoted earlier.
"The total tax burden, which had risen by around £18 billion, was cut by a couple of billion last year and another couple of billion this year. The net effect is still to leave nearly everyone paying more tax than in 1992".
That is the true achievement of this Government, not a £1,100 improvement in the average family's real income, more than all of which should properly be attributed to the efforts of the individuals concerned.
Just as the punters in the West End can spot a real flop, whatever the theatrical spin doctors manage to do with their selective editing, so, it is clear, the electorate can see through the equivalent work of the Chancellor and his colleagues on the Benches opposite. The National Opinion Poll survey for political context published yesterday shows that, even after the Chancellor's bravura performance on Tuesday, ordinary people do not believe the promises or the analysis of the
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Chancellor; they do not feel that they are paying less tax, nor do they trust the Conservatives not to raise taxes again in the future.
The most consistent theme that has emerged from all sides of your Lordships' House today is deep concern about the level of the public sector borrowing requirement at this point in the economic cycle. The noble Lords, Lord Cockfield, Lord Ezra and Lord Clark of Kempston, and my noble friend Lord Desai all joined my noble friend Lord Eatwell in expressing this concern with a striking degree of consensus, backed up, as the noble Lord, Lord Cockfield, pointed out, by the judgment of the markets and the price and yield movements of government bonds.
I say to the noble Lord, Lord Cockfield, that the threat to the Government's future borrowing costs has nothing to do with the identity of the party in office next year, which I confidently expect will be Labour, but everything to do with the fundamentally dangerous state of the public finances over which, as my noble friend Lord Eatwell so clearly demonstrated, the Government have year after year deferred taking the necessary action. "Lord make me chaste", they say, "but not yet".
The noble Lord, Lord Cockfield, also put his finger on the problem by identifying the tendency of forecasters—in this case, I am sure, actively encouraged by the Government—to assume a continuation of all favourable trends and the appearance of no unfavourable ones. I am reminded of a memorable passage in the definitive book on corporate greed in the United States, Barbarians at the Gate, a book which, incidentally, I believe has been included in the induction pack of every director of every privatised utility. The book describes the competing bids for the leveraged buy-out of the giant food and tobacco conglomerate RJR Nabisco between several different financial groups. Every time the bidding went higher, those highly paid investment bankers and analysts would simply revise upwards their revenue projections to ensure that the necessary rates of return could be projected for their investors. That is the technique which has been borrowed by noble Lords opposite in compiling the projections in the Red Book. The consequence of that, as noble Lords on every side of the House predicted, will be rising inflation and interest rates and another unnecessary and devastating recession.
I listened with interest to the speech of the noble Lord, Lord Selsdon. If I said that I did not agree with him, I do not know whether that would lead to a good argument or a bad argument. What I am absolutely certain of is that the argument put forward by my right honourable friends the Leader of the Opposition and the Shadow Chancellor and my noble friend Lord Eatwell for investment in education and the NHS and in jobs for the under 25s, financed by a monopoly utilities tax not an overall tax on capital investment by all of industry, is a good argument, and the electorate will shortly have the chance and the good judgment to confirm that.
The Chancellor of the Exchequer seemed, in making his Budget Statement on Tuesday, to suffer from an identity crisis linked to, and perhaps caused by, the festive season. He could not decide whether he was

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Santa Claus or Scrooge, so he decided he was neither. As the noble Lord, Lord Griffiths of Fforestfach, reminded us, today is the US holiday of Thanksgiving. I would suggest that the Red Book projections are, suitably, pumpkin pie in the sky. As for the Chancellor, he is a popular and pugnacious old bird. If he is luckier than many others of his breed to get through both Thanksgiving and Christmas, his time will come no later than next May.
7.17 p.m.
Lord Mackay of Ardbrecknish: My Lords, these are always interesting debates. The cast is usually pretty much the same, but today we have welcomed three newcomers. I hope they have not just taken this opportunity to make their maiden speeches but that they have put down a marker that they will return to these economic debates.
I was unsure as to the order in which I should take the three maiden speakers. I do it for no particular reason, but I will start with the noble Lord, Lord Whitty. He and I have three things in common today. Clearly, when we looked to see which ties we should wear this morning, we both came to the same kind of conclusion on colour schemes, but I think we have managed to avoid being exactly the same. The second thing we have in common is a long background in politics and political parties and their ups and downs. The third is that I suspect, although he did not say this directly, that he is perhaps the first generation of his family to have gone to university and obtained a university degree. One of the impressive things that I can say to him about education is that in 1979 something like one in eight school leavers had the opportunity that he and I clearly had a little earlier than 1979. The figure today is one in three. That is a measure of success in education that I am sure everybody welcomes.
The noble Lord also showed his interest in the environment. He will find that a number of Members of your Lordships' House share that interest. I should like to think that the package of tax measures put forward by the Chancellor to improve air quality by reducing the pollution poured out by vehicles will be welcomed by him. I believe in fact he did say that. Clearly the tax advantage given to lead-free petrol proved a driving force in the shift from ordinary to lead-free petrol. Now that we have discovered that diesel is not just as green, as my recollection tells me we were told it was, and that we have to watch the particulates, I know that the noble Lord will agree with the decision taken by the Chancellor to at least make the position neutral in relation to the two kinds of diesel.
There are other measures in the Budget to help reduce pollution in our towns and cities, of which I know the noble Lord will approve—though I suspect that he will join the little group of your Lordships who chide the Government, any government, about the fact that they are moving too slowly in that direction. There are always a number of competing pressures when one comes to make moves on environmental matters.
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I thought for a little while that I had mistaken where the noble Lord, Lord Paul, was sitting. He talked of the opportunities which Britain provided and about hard work and determination—all things we adhere to completely. He underlined the importance of manufacturing and in that he joins a number of your Lordships who make that their theme when they come to these debates. I refer to the noble Lords, Lord Ezra and Lord Haskel, and my noble friend Lord Harding of Petherton who have all mentioned that particular issue before. I agree that it is important.
Manufacturing is important to education. I fear that education has all too often downgraded the advantages of a manufacturing career, and that is particularly true perhaps for universities which tend to treat the engineering faculty as the bottom rung of the ladder. Perhaps it is at the bottom; it is the base on which everything else in our economy depends, though that is not the way many universities look at it when they take their view of faculties. But we do recognise the importance of manufacturing.
It is important also that we recognise that manufacturing has changed. I believe I know the background of the noble Lord, Lord Paul. There was a bit of a tendency, as I have said before from this Box, to think of manufacturing still in the production of large steel objects—for example, railway engines or ships. But manufacturing industry—the noble Lord indicates he agrees—is much wider than that. It ranges all the way from those products to the microchip and all the products that go with it.
Our manufacturing industry is in good heart. I mentioned in my speech inward investment, and that is investment in the manufacturing industry. Car production in this country has enjoyed a remarkable renaissance. It is not just the production of the car, it is also the production of the components that help to build up employment and prosperity. Indeed, production has risen by over 50 per cent. in this country over the past 10 years. As I mentioned in my speech, we are Europe's biggest exporters of computers, TVs and semi-conductors. Our pharmaceutical industry is extremely powerful, as are our iron and steel industries—an industry in which the noble Lord is particularly interested, I cannot resist saying, as a result of the privatisation of British Steel which is now one of the most successful steel companies in Europe.
Perhaps I may turn now to my noble friend Lord Home and say how welcome his speech was. He comes from a background in banking, which suggests to me that he will definitely not need his matchsticks. He and I both come from North of the Border so he will understand my fear that he may suffer from the old Scottish adage, "I kent his faither". To a certain extent we all do that when we go to wherever one's parents were perhaps famous or well known. His problem is that his father was well known and highly respected everywhere so that old Scottish adage will tend to haunt him a little. But after today's speech I am sure that your Lordships will agree that we can look forward to hearing many more interesting contributions from someone with such a splendid background in the world of banking and

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finance, another sphere of our productive economy which is extraordinarily successful both here and in the export markets.
I turn now to other parts of the debate. The most vigorous criticism the noble Lord, Lord Eatwell, made of my speech was that I ought to ask the Treasury to find me a new speech writer. I should let your Lordships into a secret. I thought that myself when I discovered that the speech writer had been a pupil of the noble Lord, Lord Eatwell. But I persevered and, between us and all the other pieces of information that came to hand, I like to think (as my noble friends have agreed) that we provided a robust defence of the Government's policy and a clear exposition of the true position of the British economy.
The noble Lord, Lord Eatwell, has heard me say before that I am not sure I would like to be a student lectured by him, unlike the enjoyment I would have being lectured by the noble Lord, Lord Desai. The problem is that the noble Lord, Lord Eatwell, keeps posing me questions and challenges but never gives me the answers. He never tells me what I should be doing and that worries me. I feel that a professional economist giving lectures ought to give some indication of what they feel they would do if they were in the Government's shoes. Perhaps the reason is the one explained by my noble friend Lord Cockfield; that is, that Mr. Gordon Brown keeps his cards so close to his chest that he does not even allow the noble Lord, Lord Eatwell, to see them.
Predictably, the noble Lord talked about borrowing, as did a number of your Lordships. He pointed to the fact that the public sector borrowing requirement is slow to come down, though, as I pointed out, it is predicted to come down and be in balance around the end of the century. The PSBR in the whole period of the last Labour Government, which covered an economic upswing in part, was never as low as it is today. What do I mean when I say the noble Lord should answer some questions? The PSBR is the difference between two figures—the amount of income one has and the amount one spends. If I want to do something about the PSBR, as the noble Lord, Lord Eatwell, suggested I should be doing, he ought to have told me how he would increase the income or reduce the expenditure. He never does that; not today nor on any previous day. While I do not mind him complaining about the PSBR—he and other noble Lords are right to point to the need to control it—he has a responsibility to say that his party will either increase taxation and where and how they will do it, or they will reduce government spending and how they will do that. That is important.
The noble Lord, Lord Eatwell, suggested that the reduction in capital allowances was a backdoor windfall tax. I am not sure whether or not that is a compliment. I do not believe it is a windfall tax. It proposes to reduce capital allowances on long-life assets from 25 per cent. to 6 per cent. a year and is designed to remove a distortion in favour of long-life assets. Other parts of the debate concerned the need to take a long-term view. For investments and assets with an economic life of more
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than 25 years, the depreciation allowed for tax purposes is brought more closely into line with commercial depreciation, and I believe that to be right and proper.
The noble Lord complained that in the tax changes in the Budget the largest benefits were being given to the better off. I suggested in my opening speech that that would probably be the line taken. It is giving in which we believe and not taking from people that which they have earned. That is an important difference between us.
One of the issues that inevitably arises in the debate—it did again today—is that the flexible labour market is really just a trick; that the reduction in unemployment is a trick and the increase in employment is a third trick. It is never actually said that the figures are not true, just that they are a trick. The trick is usually portrayed as the jobs being part-time, passing, not good and so forth. But it is important to bear in mind that both full and part-time jobs have risen significantly in this economy. People should remember when they attack part-time jobs that 85 per cent. of part-time workers, when interviewed, say that that is what they want; they want part-time not full-time jobs. That is what the flexible labour market gives them. That desire of those people who have part-time jobs would be threatened by minimum wages, the social chapter and the like.
The noble Lord, Lord Ezra, returned to a theme which he continues to pursue and other noble Lords have pursued. I refer to the question of weak business investment. My noble friend Lady O'Cathain rather countered that in part of her contribution. It is well worth saying that in the 1990s business investment in relation to GDP has been higher than in the 1980s, which was in turn higher than in the 1970s. Since 1979 business investment in relation to GDP has been very similar to that in most other major industrial countries. But what matters is not just the investment; it is the quality of the investment. The UK's business sector capital productivity has grown faster since 1979 than in any other major industrial country.
The noble Lord, Lord Ezra, was also concerned about repeating the mistakes of the late 1980s, with the consumer boom and so on. I thought that my noble friend Lord Griffiths of Fforestfach dealt with that point. I hope the noble Lord, Lord Ezra, found some of the points that my noble friend made, with his experience within government at the time, of considerable help. Consumer spending this time is not expected to grow at anything like the rate in the late 1980s; and, unlike the late 1980s, the balance of payments has recovered in this recovery.
I am particularly grateful to my noble friends Lord Cockfield and Lord Young of Graffham for speaking in the debate. Both are distinguished former Cabinet Ministers who sat in this House. I must say that having departmental Cabinet Ministers in this House is a tradition which we could perhaps resurrect. Both of them have long experience of business and commerce. Indeed, my noble friend Lord Cockfield has experience of the European Union. I could, I suspect, occasionally do with his help at Question Time, as the European issue keeps coming up there.

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My noble friend Lord Young of Graffham said that the economy is in better shape than at any time in his life. I wrote down those words. Corning from someone who has been successful in government and business, that is a good indication of exactly what is happening in the economy. He reminded me with some amusement that when he was in government he was always being asked when we would join the ERM. Well, they keep on asking me a slightly different question, but it keeps on coming up. He made an interesting point which underlined what I was saying about inward investment but underlined it in a different way because it underlined it looking at the Continent. He explained about French and German investment in this country. I am sure that we are grateful to him for his contribution.
My noble friend Lord Cockfield discussed tax matters and asked whether we could reduce the basic rate if we swept away all the various tax reliefs. We publish such information in Tax Ready Reckoner and Tax Reliefs. I am sure there is a copy in the Library. However, I shall not go into that tonight. My noble friend also pointed out that there are lots of twists—he called them carbuncles—in the tax system which acted in favour of tax avoidance. As my noble friend knows, the Chancellor has in this Budget taken measures to try to deal with many of the worst avoidance devices, such as those in the field of leasing and purchasing by companies of their own shares and of buying in foreign tax credits by multinational companies, devices on which we think we ought to try to bear down.
My noble friend Lord Clark of Kempston discussed the council tax. I wondered whether he was going to point out that Sir Jeremy Beecham, who is chairman of the Local Government Association, said that there would be a rise of at least 6 per cent. in council tax. Last year he said that there would be a rise of 10 per cent. The rise was 6 per cent. If my arithmetic on proportions is correct, 6 per cent. probably means 3.6 per cent. I think there has been a good deal of special pleading and squealing over this issue.
The noble Lord, Lord McConnell, pointed out the considerable success which the economy in Northern Ireland is having. That is partly due to the Government's economic policies. It undoubtedly has been due to the element of peace which has been restored to Northern Ireland and the confidence there. One can only hope that the IRA will realise the consequences of having a ceasefire in that many of the people it purports to want to defend have a far better chance of getting a job. The noble Lord also said something about beef. As I hope to return to Scotland this evening and be allowed in, I am not going to make any comment about the beef farmers in Northern Ireland. However, I shall certainly pass on his comments to my noble friend.
The noble Lord, Lord Desai, made an interesting speech. He talked about the overspending in the plans for this year. He asked why people should believe the plans for the future. An overspend of around £500 million is expected largely because of the unforeseen problems we have had with BSE which have been very expensive on the Chancellor in trying to help the farmers who have been affected by this problem.
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The noble Lord, Lord Haskel, repeated the theme delivered by the noble Lord, Lord Paul, in his speech and emphasised the importance of companies. He said that it is companies that compete for business, not countries. On this side of the House we always say that it is companies and businesses that create jobs; it is not governments. We are agreed on that absolutely. According to the FT's top 500 survey, we in the United Kingdom have the lion's share of Europe's most successful companies. A new study by Morgan Stanley shows that the UK is in second place behind the United States in the number of globally competitive companies.
My noble friends Lord Cockfield and Lord Griffiths, the noble Lord, Lord Desai, and others asked about inflation. They asked whether the inflation target will be met and whether I am confident it will be. The noble Lord, Lord Griffiths, answered some of these points from his experience of the 1980s. We believe that there are factors playing very much in our favour this time—low input prices, subdued earnings growth and vigorous high street competition. But I want to underline what I said in my speech. If there is a problem, the Chancellor has already shown that he is prepared to raise interest rates, if that proves to be necessary, in order to keep control of inflation. No one should be in any doubt as to his determination to do that.
My noble friend Lady O'Cathain spoke about cross-border shopping and the problems there. We understand the problem. It is one of the reasons why, for the second year running, we have frozen the duty on wine and beer and have cut the duty on whisky and other spirits which I shall not bother to mention to your Lordships. We are aware of the problem. However, it is a little like the question I posed to the noble Lord, Lord Eatwell. What do you do? Do you reduce the duty on this side of the Channel, with the problems that brings for the Exchequer and also some of the social problems that it can bring? Do you ask the French to increase their duty? I do not think we would get very far with that. Or do we do what we are trying to do—tighten up on the smuggling and the illegal moving of these products into the United Kingdom?
The noble Lord, Lord Monson, also dealt with that problem. He referred to alcopops and suggested that my right honourable friend the Chancellor should have raised the duty on alcopops even more. We shall be looking closely at that product because some spin-off problems clearly do come from it. My right honourable friend has shown that he is prepared to act if he thinks it necessary.
The noble Viscount, Lord Chandos, went back to all the arguments about taxing and whether people are better off. The fact is that people are better off. Because they are better off, they pay more taxes. That is why the Government can do many of the things we have been able to do—spend more money on education, as the noble Lord, Lord Haskel, wants us to do; and spend more money on the health service, as the noble Lord, Lord Haskel, wants us to do. But it is interesting. When they want us to spend more money on lots of other things, they still do not tell us where that money is going

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to come from. That is what is absolutely and completely missing from this debate and any other economic debate in which I have participated.
The Opposition criticise me. I do not mind that. They tell me where the Government are going wrong and they tell me what we ought to be doing. But they do not actually say what they would do and how they would balance this difficult problem of what you take in and what you spend. If they want to spend more on social security, fine; but they either have to get it from cutting some other part of spending or they have to get it by increasing tax. Money does not grow on a magic tree in Whitehall. I have not found it. None of my right honourable and honourable friends have found it in the 17 years we have been in government. I have to tell the Benches opposite that, in the unlikely event they win the next election, they will look in vain for that magic money tree.
I was delighted to hear that the noble Lord, Lord Selsdon, had got into the Internet. I am sorry to hear that he did not reach us. We had a quarter of a million what are called "hits" on Budget day, so our address was very popular. We are happy to be involved as much as we possibly can as a government in the new IT world which is so important for the success of the whole British economy.
My noble friend Lord Selsdon said that I should climb a tree and holler. I can assure him that I and all my friends in Government will be climbing as many trees as we can find and hollering as loudly as we can about the success of the British economy and of this Government.
On Question, Motion agreed to.

Political-Military Doctrines
7.40 p.m.
Lord Kennet Lord Kennet rose to ask Her Majesty's Government what is their view of the new political-military doctrines and new weapons systems which are being developed in the United States and being urged within NATO.
The noble Lord said: My Lords, we now face two possible futures in world affairs: one which we have usually preferred, aimed, even if roughly, at international law and justice, democratically supported through international organisations; and another, now emerging, which would require the increasing use of scarce resources for warlike purposes; the abandonment of international and treaty law; pre-emptive attacks on states deemed unfriendly; and the weaponisation of space: all these under the hegemony of a United States that believes it has the right to police the world.
The second future is the work of the American techno-military bandwagon that lacks both the steering wheel of political thought and the brake of informed, democratic consent. These are harsh words and I shall attempt to justify them.
Who today are our enemies? It is not difficult to create enemies. Russia could become our enemy. We insisted on pulverising her dirigiste economy in two years flat, and now, although we informally undertook
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not to expand NATO eastwards, we are planning to do just that. We appear ready to offer the nuclear guarantee to all the new NATO members from Finland round to Kazakhstan. That is encirclement.
Add destabilisation budgets to help raise suspicion; let opaque intelligence remain misleading; rogue states—Iran, Iraq, Libya and North Korea—are those that are not pliable, and that is the truth of the matter. But their few proven acts of terrorism are not usefully met by multi-billion arms procurements. Israel also commits murders abroad, invades its neighbours and shows contempt for international law and opinion. It is not for that demonised. On the contrary, it is showered with military and other goodies.
This year the United States Secretary of Defense, William Perry, wrote in the introduction to his latest report on the US counterproliferation initiative that,
"The United States seeks first to cap and then reduce and, eventually, eliminate, regional capabilities to produce nuclear, chemical, biological weapons and the missiles that deliver them … Reducing this risk is an absolute priority of the United States".
He also threatened "disproportionate retribution" against Iraq if it rebuilt the legitimate defences which US Tomahawks destroyed last September.
Now, anything disproportionate in war is unlawful, so that was strong language from a Defense Secretary. But it is now being dramatically surpassed at the semi-official level. One text in this stronger form is an article by Dr. Harlan Ullman in the October issue of the journal of our own Royal United Services Institute. It gives an account of a book due shortly from the US National Defense University, put together by several recently retired US generals and admirals, together with Dr. Ullman and a retired Pentagon official.
Its central thesis is taken up in a lecture given by our own Commander-in-Chief Fleet at the same institute last month and due to be published in the journal's next issue. Both writers reject international law, considering preferable the pre-emptive use of force by the United States.
FCO and MoD Ministers—bless them!—in answer to the Written Questions, have distanced the Government from those views. Still, if our own Commander-in-Chief Fleet is tempted to flirt with them in the company of his colleagues and juniors, we must raise the alarm.
What are these ideas? Dr. Ullman introduces a concept he calls "Rapid Dominance" to be achieved through the application of shock and awe. He offers the services of his group,
"in attempting to rise above bureaucratic and other constrictions in deriving a concept and doctrine for military power. Defence",
he writes,
"heavily regulated by government, remains ponderously slow in churning out new products".
So he offers a,
"world where force has the greatest relevance in achieving broader political and policy ends".
In a nutshell,
"we believe this ability to impose massive (or selective) shock and awe, in essence to be able to 'turn the lights on and off of an adversary as we choose, will so overload the perception, knowledge and understanding of that adversary that there will be no choice except to cease and desist or risk complete and total destruction".
Admiral Sir Peter Abbott, our C-in-C Fleet, after advocating "proactive measures" as opposed to "defence in its classic sense", and including "pre-emptive deterrence" and "retribution" concludes:
"Above all, we must continue to encourage and support the USA in its efforts to police the world … The Royal Navy has a pivotal role to play".
In parts of Washington, I fear that these views are no less than routine. They lurk behind the new US unilateralisms: starving the UN, the World Bank and the WHO of funds, and then accusing them of disobedience and inadequacy; claiming extra-territorial jurisdiction; breaching treaties; weaponising space; re-weaponising Bosnia; further weaponising the Middle East and the Far East and Afghanistan.
Here are the doctrinal and political corollaries of the Defense Counterproliferation Initiative to which I now turn, as I have turned before in this House. It is the continuation of President Reagan's star wars. That was designed to protect the American people from nuclear attack: the new capabilities could be used to subjugate the world. They all depend on the weaponisation of space, and they tend to be automatically triggered against automatically identified targets.
In their crazy variety these wished-for weapons remind one of what palaeontologists call the "Cambrian Explosion" of about 500 million years ago. After millions of millennia of boring single-cell organisms, life suddenly burst into a productive frenzy, creating bizarre species by the thousand. There were then about 100 phyla, compared with our 32 today. Most gave up the ghost before the arrival of the dinosaurs. If only a 20th of these new Cambrian weapons systems came to deployment, there would be little for humanity to do but sit and cower, shocked and awed.
There are, in this scheme of things, more than 100 types of unmanned aerial vehicles (UAVs) under design. There is a burrowing munition (perhaps needing a small nuclear warhead), dispatched from a UAV, capable of entering a mountainside within which a chemical or biotechnology "facility" has been identified from space as suspect and going off only when it reaches the right chamber.
Seven boost phase intercept systems were being developed at one time. These would automatically shoot down any missiles their sensor/triggers in space deem ought to be shot down by directed energy or kinetic weapons within two or three minutes of their launch—or better, pre-emptively, before launch. The US President would of course be out of the loop, and allied governments even further out of it.
Here is the latest: last week the 5.5 billion dollar attack laser aircraft programme was announced by Boeing, which seems finally to breach the 1972 ABM Treaty: first, strike aircraft to attack pre-emptively, before the offending missiles leave the ground;
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secondly, this new Boeing laser-bomber, to attack during the boost phase, within 80-140 seconds of launch; thirdly, the US Navy's exo-atmospheric anti-missile missile called Upper Tier; and fourthly, Patriot, or PAC-3, for last stage "point" defence. (That is the Patriot which did not shoot down any Scuds in the Gulf War.)
Within the US industry, arms races are now run between firms—and branches of firms—and between branches of the US Armed Forces: decoys versus stealth versus sensors; ballistic missiles versus anti-missiles; manned aircraft versus unmanned aerial vehicles versus electronic and navigation warfare; everybody versus hackers.
My Lords, what is the Government's present position on all this? We know they have received two reports on the UK's own possible needs for ballistic missile defences—neither of which they intend to publish; and one on NATO's needs from the NATO senior proliferation group. In fact, they also have a fourth: that is Volume 2 of the inquiry into terrorism legislation by the noble and learned Lord, Lord Lloyd of Berwick. I shall not detain your Lordships with the relevance of that, but it is relevant.
Back to Washington: last spring, John Deutch, the rather new Director of the CIA, became aware of the extent to which the computers on which these weapons systems subsist are vulnerable both to the information warfare which is being developed in some parts of the Pentagon itself for use against others, and to the uncontrollable hackers out in the big world. He pointed out that the electron is the precision-guided weapon par excellence: it can be aimed directly,
"at the command and brain structure of our military systems and our military forces";
nor does he rule out an "electronic Pearl Harbour". Instantly, President Clinton set up various bodies to look into all this. The military-industrial complex shuddered. Probably Mr. Deutch will not become the next US Secretary of Defense.
There is said to be some hurry in NATO; and "accelerated" decision meeting on BMD next month. The reason for this is not any ballistic missile threat, but that next year comes the mandatory quadrennial review of all US defence expenditures. The US industry would dearly like to be able to say, "The NATO allies really like this: they will buy lots and lots!" US allies in the Far East are also being drummed up to join in, and our Government should be discussing the situation with them.
What we should say to the US is this, "Wait a minute. We already buy vast quantities of weapons from you. You want us to pay 80 per cent. of your multi-billion dollar NATO enlargement—alongside our own EU enlargement costs. We will also have to pay when the Russians reactivate their responsive defence spending. And all the time we are filling in as best we can the gaps left by your gigantic debts to the United Nations and the world's poor. We simply don't go along with this one."
I cannot do better than end by suggesting that the Government—this one or the next—repeat to Mr. Clinton the words of his predecessor, the United States most experienced soldier—President Eisenhower:
"In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex",
and
"in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite".
Today, all decent Americans, together with us in Britain, and in Europe, and our fellow human beings everywhere, are threatened quite precisely by the projects emerging from the military-industrial complex and the scientific-technological elite, and by the doctrines that seek to justify these projects. And so, my Lords, I ask my question, as on the Order Paper.
7.54 p.m.
Lord Desai: My Lords, although there are no longer many noble Lords present, we should nevertheless be grateful to my noble friend Lord Kennet for tabling this Unstarred Question. My noble friend has raised a very important matter. He is acting like an early warning system. He has seen the early signs and, although what he has described may or may not happen, we should be aware.
During the past 50 years we have been subjected to all sorts of doctrines. The one that I remember most clearly was that of mutually assured destruction—the acronym being MAD. We have been subjected to fads and fashions and, unfortunately, the result has been large defence expenditure.
Before I make my main points, perhaps I should say that the path that the Government have followed with regard to defence expenditure has been very sound. We now spend less than 3 per cent. of our GDP on defence. I have welcomed that on previous occasions and do so now because of its soundness. The Government's White Papers have correctly positioned defence preparation in terms of their view of the dangers facing us. My noble friend points out dangers further ahead which are similar to the dangers that the Attlee Government faced when they were bounced into large defence expenditure which practically wrecked the Labour Party's economic programme 45 years ago.
So, what are the dangers? My noble friend dealt with the weapons systems dangers, about which he is very knowledgable. I have just one or two other comments to make.
There is currently a desperate search for enemies because once you set up a large defence establishment, if it does not face a threat it must invent something or dissolve itself. Interestingly, that reminds me of the Pentagon papers which came out 25 years ago. That policy was described in great detail in a US Department of Defense document. The US Department of Defense and the CIA always exaggerated the Soviet strength because that was the only way in which they could get larger budgets. That was a perfectly natural thing for them to do.
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I am much more worried about the doctrine that is currently being put forward by Professor Huntingdon of Harvard and others which, in a sense, demonises Islam. I can see why that is an attractive doctrine. If one wants to create a doctrine of "the other", one can, having exhausted China and Russia, turn to Islam. Words like "fundamentalism" are bandied about to make that doctrine look attractive.
I hope, however, that Her Majesty's Government remember that they have friends of long standing in the Middle East. There has not been any long-standing enmity between Islam and ourselves for the past 500 years or so—and there is no need to create it. Although Islamic fundamentalism is being put up as the enemy of the United States and Western civilisation, I believe that the much greater danger is that Islamic fundamentalist forces are undermining states in the Middle East. They are the internal enemy. We should give much more careful consideration not to demonising Islamic fundamentalism but to understanding how the stability of states such as Egypt, Algeria and Iran can be preserved, admitting the strength of the Islamic religion while maintaining the coherence of civil society in this country.
I hope that we will think not only in terms of weapons. I agree with my noble friend that all of these fancy expensive schemes should be avoided, but we must also use a combination of the study of ideas and ideologies and diplomacy to ensure that we have a proactive policy to preserve peace. If we act now we shall avoid expenditure later. The money that will be saved is badly needed round the world for very many development problems. As my noble friend Lord Judd will say, there is a crying need around the world for more teachers and fewer soldiers. We must devise a policy that avoids fancy weapons and "demonising" and ensures that our defence is based on sound doctrines and an active diplomatic policy for peace.
8 p.m.
Lord Judd: My Lords, I start by declaring an interest in view of my professional work as Senior Fellow for Saferworld, an independent non-governmental and charitable think tank on international security matters. Having read Harlan Ullman's article and had the privilege of listening to my noble friend Lord Kennet, it is clear to me that at least in intellectual terms it is he who establishes rapid dominance and, with the force of his intellect and penetrating argument, fills all of us with shock and awe. As for lights going on and off, during his very illuminating interventions on these issues I always find that he does nothing but throw light upon and put into far healthier perspective many of the issues which preoccupy those who now have ministerial responsibility and those who will assume it next year.
Inevitably, there is always a battle for scarce resources available to the armed services. Calls for one capability or another are frequently coded language in the ongoing budgeting battle. It is therefore essential to examine these demands in a broader context. There is much talk about a revolution in military affairs, transforming the nature of warfare as we have known it. Arsenal ships replace aircraft carriers at a fraction of

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the cost and personnel; unmanned aircraft make manned aircraft redundant; and there are mind-boggling developments in communications technology. It is a vision of ever more rapid, ever more automated and ever more apparently clean warfare.
Politicians, no less than senior military officers with a lifetime of experience, can become preoccupied with old ways of doing things, for example believing that the tank will always be central to the Army because it has become so this century, or that manned aircraft will always be central to the Air Force, although in the professional lifetime of young officers entering the services today both may conceivably become as redundant as barrage balloons and horse-drawn artillery. It is essential to listen and to appraise new ideas, and to invest in them.
With the end of the Cold War, civil technology begins increasingly to outpace military technology. Therefore, there is a need to look more closely at exploiting civil advances to make the armed services both more effective and cost effective. I for one have never fully understood why civilian electronics and computers can improve so rapidly and cut costs so dramatically while the costs of military equipment rise inexorably.
If we are not to end up with only one aircraft, with cost escalation extrapolated, there is a need to think through whether or not more can be done to utilise technology that is being developed in the civil sector. At the same time, we should take very seriously the implications for the operational viability of the NATO Alliance if too great a gap develops between the level of technological sophistication of the United States and that of the other alliance members. It is right for the armed services to consider all the possibilities of new technology, but great care has to be taken not to regard this as a panacea. Decisions on military procurement and doctrine cannot be taken in a political vacuum. First, they have to relate to the task. That is why the comprehensive defence review to be undertaken by the new Labour government will be so important. Second, the skills, morale and professionalism of our military personnel will always be of fundamental importance.
I shall deal with each of these in turn. At times it is difficult to escape the conclusion that the technical sophistication of some of those who write and comment on military affairs is matched by an incredible political naivety. This is not true of most leading military people who, in my experience, understand very well the political significance of what they do. To take an important example, there is broad agreement that the spread of weapons of mass destruction—nuclear, chemical and biological—must be one of the central concerns of international security over the next decades. It is understandable that commentators focus on the military aspects of dealing with this challenge, deploying appropriate forces and being able to take necessary counter measures to deter a would-be aggressor from preparing to use weapons of mass destruction; in other words, deploying systems of precision targeting and convincing missile defence systems.
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But in reality military solutions can at best play only a part, however vital, in responding to the situation. What is also essential is to concentrate on strengthening viable, enforceable arms control agreements which make it unacceptable to acquire or maintain these weapons and, at the same time, to deploy firm diplomacy in support of these agreements and in policing them. Priorities must be to draw more nations firmly into the Nuclear Non-Proliferation Treaty, the Chemical Weapons Convention and the Biological and Toxin Weapons Convention and to exercise stricter export controls such as the Missile Technology Control Regime to stop the spread of ballistic missiles. The Chemical Weapons Convention is due to enter into force in April of next year. We should be urging both the US and Russia to ratify the treaty before then and do all that we can to persuade other countries which have not yet done so, especially in the Middle East, to sign it.
The Biological Toxin Weapons Convention is the subject of a review conference even as we debate tonight. Although this treaty has been in place since 1972, it has no teeth because it lacks a verification regime. It is to be hoped that the conference will work towards such a verification regime for the treaty as soon as practicable. As for export controls, the Scott Inquiry has made the urgent need to strengthen them abundantly clear. This is not just in the sphere of weapons of mass destruction. It is conventional weapons which are killing thousands today and doing untold economic, social and political damage. That is why the new Labour government will work to introduce, for example, a European code of conduct on arms sales—something which is clearly appropriate for Britain in the light of the grim revelations about our alleged involvement in what has been happening in Zaire.
On the nuclear front, there have already been encouraging developments. In the past five years several countries have been rolling back their nuclear programmes and voluntarily denuclearising. We have only to think of Brazil, Argentina, South Africa and Ukraine. There has also been some progress in North Korea and Iraq, although this must he recognised as still reversible. What has been achieved so far has been based on international law and building up the standards of international behaviour. It has been founded on a deep sense of the unacceptability of these weapons—a sense which exists in the nuclear no less than the non-nuclear states. Many more states could acquire them but most have not.
The regrettable refusal of India as the world's largest democracy to accede to the Comprehensive Test Ban Treaty has demonstrated, however, that there is still widespread concern in states, which by no stretch of the imagination can be described as "rogue states", lest there is one law for the nuclear states and another for the others. This leads one to question why it is acceptable for Western allies like Israel to have nuclear weapons but not for others.
Any attitudes which can lead more nations to acquire nuclear weapons must be resisted. Proliferation is certainly the road to disaster. That is why a genuine, determined commitment to verifiable, multilateral nuclear disarmament must be central to our strategy. It

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will take time and patience. There is no guarantee of success. But in the meantime the nuclear weapon states must make clear beyond doubt that the role of nuclear weapons is a very last resort to be utilised only in the most extreme circumstances.
Careless talk of using American or British nuclear weapons as ultimate coercive power works directly against the restraint which is in our own interests. It can only encourage those who seek to justify proliferation if we allow—directly or by implication—the idea to gain ground that we see nuclear weapons as a legitimate instrument for power projection. We would have only ourselves to blame if others then themselves sought to acquire the means for combating such an instrument. If we want to convince others to give up nuclear weapons, or to forgo acquiring them, we must move beyond Cold War mindset and avoid drifting into an over-dependence on the role of nuclear weapons in our own military doctrine.
Having said all that, we must be realists. We live in an imperfect world and, therefore, before I conclude, perhaps I should say a little more on missile defences. There is, I detect, a tendency to say that if ballistic missile defences are feasible then they must be desirable. But—quite apart from the astronomical cost and consequent penalties in other areas of defence expenditure—the analysis is just not that simple. For instance, such defences might relatively easily be overcome by the use of submunitions and decoys. BMD might simply provide further impetus for others to explore alternative means of delivery—like aircraft, cruise missiles, mini-submarines and special forces or—to use the word paradoxically—unconventional means of delivery. BMD will not be able to prevent a device carried in the back of a lorry or in a suitcase, nor to counter a biological warfare agent being released into the water system or sprayed from a light aircraft. We have to face the prospect that ballistic missiles may not be the optimum means of delivery for a rogue state.
We have also to consider the impact of the deployment of BMD on the policies of Russia, China and others. Is there a danger that the deployment of highly capable theatre missile defences might strengthen the position of any aspiring leaders in Russia who wanted to scrap the START II Treaty, expand Russia's nuclear arsenal once again, and become more reliant on a launch on warning policy? None of those consequences would be in our security interest.
Theatre missile defence—like that provided by the US Patriot missile—will continue to have a role to play when we are confronted with an adversary armed with ballistic missiles. But we must place this type of threat in perspective, appreciate the limits of what can be achieved, and understand that the consequences of widespread BMD deployment may counter-productively provoke reactions that are contrary to our true security. That is why before going too far down that road it will be prudent for NATO to assess all the implications very carefully indeed.
With all the talk of technical fixes we would be unwise to forget that the Gulf War involved far more iron bombs than precision guided munitions and that,
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despite all the technology, and despite unchallenged air supremacy, it proved extremely difficult to locate a few Scud missiles located in the desert. Some of the greatest successes in that regard were by special forces operating in a very old-fashioned way. We had to have armies on the ground to defeat Iraq. We know that the MoD has a review in hand on what should be British policy towards BMD, and that Professor Brown has been its academic consultant. It would be good to hear from the Minister this evening how that review is progressing.
The more we consider the issues raised by BMD, the clearer it becomes that verifiable, comprehensive, multilateral disarmament really must be a relentless, hard-headed and disciplined commitment in our security policy and never, never a woolly wet appendix to our endeavours.
But, above all, we must remember that the tasks in which our armed services have found themselves involved most often since 1990 have not been high-tech wars but a series of missions in which different ranges of skills and capabilities have been at a premium. We are—and must never overlook the fact—one of only five Permanent Members of the Security Council of the United Nations, and the UN has more than 180 members. None of us would advocate giving up our special place. It follows that we are opting for a lead role in world stewardship.
We cannot dip in and out of that role. The crisis in the Great Lakes region of Africa is the latest test. This means that, in a highly interdependent world community in terms of economics, finance, trade, resources, environment, climate, migration, terrorism and the rest, we have all the time to ask ourselves how far our armed services are geared to this responsibility for global stewardship. I have not a shred of doubt that the greatest test of political leadership in the years ahead will be the contribution we make to finding the co-operative global solutions to the immense challenges that face us all, not one of which can be answered within the context of the nation state alone. An effective contribution to collective security is crucial in this respect. Inevitably we shall have to spend considerable amounts on research and development for our defence systems, on securing new weapons, on investing to save. But we must have balance and perspective. Well-trained and highly motivated personnel will always be every bit as important as the latest gizmo.
8.16 p.m.
Earl Howe: My Lords, the House will be grateful to the noble Lord, Lord Kennet, for raising the subject for this debate, and to noble Lords opposite for their erudite and informed contributions. I shall, in the next few minutes, endeavour to answer as many as possible of the points which have been made. I shall be happy to write to noble Lords with answers to any questions that I do not manage to address.
The Question tabled by the noble Lord, Lord Kennet, seeks Her Majesty's Government's views on the new political and military doctrines and weapons systems being developed in the United States. In a world where unpredictability is rife and technology advances at an

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ever-more rapid pace, it is hardly surprising, as I am sure the noble Lord himself will appreciate, that such speculation is commonplace.
With a US defence budget in excess of 275 billion dollars per year, decisions on the future direction of defence can create or destroy whole industries. In such circumstances it is only natural that many bodies, both within government and outside, are engaged in developing potential concepts for dealing with an uncertain future, and identifying potential technologies to carry them out. It is equally natural that the visions they create vary from the fantastical to the prosaic. What matters, however, is that they contribute to a debate which will help inform decision making. In that context Her Majesty's Government follow that debate with a keen interest, although we do not believe that it is necessary or helpful to comment upon each and every unofficial idea put forward.
Nevertheless, one such "think-piece" currently clamouring for the attention of decision makers in Washington, to which the noble Lord referred, is the article by Dr. Harlan Ullman on the subject of rapid dominance. Dr. Ullman is not, of course, a spokesman for the US government. Indeed, I understand that, in conjunction with a number of retired senior officers and officials he has produced this work with a view to publication under the auspices of the National Defense University, in Washington DC. As I have indicated, I do not believe it would be appropriate for Her Majesty's Government to take a formal position on every such academic article.
I have read this particular piece and, if it is of use to the noble Lord, I would offer the observation that much of Dr. Ullman's underlying analysis appears uncontentious: the future will see shrinking defence budgets; research and development cycles for new equipment will still be long; the security environment in which we will find ourselves will be different from that to which we are accustomed.
He categorises some of the factors which make up military effectiveness: speed, deterrance, communications, training, intelligence, and force superiority. Those factors would be recognised by most operators in this field worldwide.
What Dr. Ullman deduces from that is that a force with overwhelming capabilities, capable of rapid deployment anywhere in the world, might so intimidate a potential opponent as to make its actual deployment unnecessary, but Dr. Ullman himself recognises that turning "rapid dominance" into a doctrine would be to attempt to
"reach what may prove to be beyond the limits of our grasp",
as he puts it.
We should beware of giving these ideas more substance than they merit.
When it comes to matters being urged within NATO, the situation is somewhat different. We welcome constructive contributions to the question of how NATO should adapt its structures, doctrines or capabilities to allow it to face the challenges of the next century. Adaptation of the alliance to the post Cold War security
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environment has been an important issue for the UK and our NATO allies since the Alliance Strategic Concept was agreed in 1991. It was a key feature of the summit in 1994 and it has been a focus of attention at subsequent ministerial meetings.
We welcome the contributions to that debate, whatever their origins, but we approach them on a case-by-case basis in the context of our own views on the issues addressed. NATO is an alliance of 16 sovereign nations. While the views of the United States are extremely important as a vital transatlantic ally, it is quite wrong to suggest, as I thought the noble Lord, Lord Kennet, tended to do, that the alliance is merely an adjunct of US foreign policy.
Lord Kennet: My Lords, I did not mean to imply that the alliance was just an adjunct to US foreign policy, only that we wanted to keep an eye on US foreign policy to see whether it is something which NATO can continue to live by. We should be very careful that it never does become merely an adjunct.
Earl Howe: My Lords, I take the noble Lord's point and apologise if I read into what he said more than he meant. One important aspect of adaptation of the alliance to the new security environment is the work that has been undertaken to address the response to the risks posed by the proliferation of weapons of mass destruction and their means of delivery. That theme was picked up by noble Lords opposite. I say to the noble Lord, Lord Judd, that the work is a good example of how political leaders of the alliance have been keen to inject new thinking to address new problems. As the noble Lord, Lord Kennet, reminded us, he has in the past questioned how the alliance would respond to the risks posed by the proliferation of nuclear, biological and chemical weapons. Indeed, there was a debate in your Lordships' House last year when my predecessor responded for the Government on that very subject.
At that time, the noble Lord was concerned that the alliance would be forced by the United States to adopt what had been termed in Washington "the counter proliferation initiative". In responding to the debate, my noble friend Lord Henley drew attention to the important work in this field that had been initiated following the NATO summit. He made clear that, far from accepting any single nation's views of the appropriate military response to the problem posed by proliferation, the alliance was undertaking a fundamental analysis of the response to the problem of proliferation with no pre-determined outcome.
I am pleased to inform your Lordships that the important work set in hand by the summit was concluded and the conclusions were endorsed by NATO foreign and defence ministers in June this year. Some of those conclusions will come as no surprise. While the primary aim will continue to be the prevention of proliferation through diplomatic means, we need to take account of the risk which such weapons pose to any operational missions which the alliance may be required to undertake.
We believe that some 10 countries of concern to the alliance now possess either biological or chemical weapons and that a number are also pursuing a nuclear

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weapons programme. Some already have ballistic missiles capable of reaching the southern periphery of the alliance. As the NATO summit in 1994 recognised, such proliferation constitutes a threat to international security and is a matter of concern to NATO.
Based on the military capabilities and common defence developed over the course of five decades of allied co-operation, NATO's forces remain robust. At the same time, those proliferant countries which are seeking nuclear, biological or chemical weapons and their means of delivery may in many cases be less predictable than the patterns established by the old Warsaw Pact. And they are less likely to have effective command and control and operational doctrines. These considerations and others have led the alliance to identify a number of actions which need to be taken by the alliance to respond to the risks posed by proliferation. In particular, greater emphasis should be placed on the need for the protection of alliance forces which may be deployed out of the NATO area where the military risks posed by proliferation are greatest.
Some, but not all of the actions identified involve some improvement in existing alliance military capabilities. The important outcome of the work, however, was the overall programme of follow-on work and the mix of capabilities put forward. It would be quite wrong to believe that the work undertaken was preoccupied with a single equipment or capability. In addition—I hope that this will answer in part some of the concerns raised by the noble Lord, Lord Kennet—the notable feature of the work was that it was not based on individual national equipment plans. It derived its conclusions on the basis of the functional military capabilities required. It was therefore a policy framework for subsequent detailed decisions as necessary.
As I shall endeavour to explain in a moment, the alliance is now in a process of relating those capabilities to individual nations' equipment plans. The alliance has developed a well established defence planning process which operates on a two-year cycle. This involves individual force goals being placed on nations which balance the military requirements and what it is realistic to expect nations to provide, taking into account resources and any political factors. Not only does this process seek to ensure that individual nations meet their NATO obligations, it also allows for a relative importance of particular military requirements to be tested. In order to allay what may be a concern of the noble Lord, Lord Kennet, I should stress that the alliance force planning process is a means of establishing whether individual capability enhancements are included in a nation's plans. It does not represent a financial commitment either by the alliance or by the nations concerned.
Once the alliance had reached conclusions about the actions required to respond to the risks posed by proliferation it was important to ensure that the work was taken forward through the existing machinery of the alliance. It would have been a waste of the effort involved if the practical implications were not felt by the troops on the ground. In those cases where additional capabilities were identified, that meant making use of
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the established alliance force planning machinery. Given the importance of the work for the adaptation of the alliance to the new security environment, it would have been inappropriate to wait until 1988 for the next cycle of the force planning cycle to address the capabilities identified. The alliance therefore agreed in June to initiate an accelerated process which will report to Ministers next month. In future years, the capabilities identified in this process will be handled alongside all other military requirements placed on nations through the force planning process in the normal way.
I have explained the work that the alliance has undertaken to respond to the risks posed by the proliferation of nuclear, biological and chemical weapons. The UK played an important role in the development of the conclusions and it warmly welcomes this work. It represents one of the initiatives arising from the NATO summit in 1994 and is an important element in the adaptation of the alliance to the new security environment.
The noble Lord, Lord Kennet, referred to a techno-military bandwagon. The United States defence budget is substantial, as I have already said. However, I cannot share the conclusions that he drew from that. Our defence and industrial links with the United States remain first-class and we are intimately involved in a number of cutting-edge industrial projects. Prominent among those is the joint strike fighter, a joint UK-US project to develop a new generation of fighter aircraft designed to meet the needs of the US air force, US navy and US marine corps as well as those of the Royal Navy. However, it is fair to say that the United States does possess and is developing further unique military capabilities which are not available to other allies or which they are simply not prepared to fund.
The strategic airlift comes to mind. But the United States lead in command control communications and information systems is substantial. It is not surprising therefore that much of NATO's capability in that field is based on US assets; for example, most, by far, of the satellite communications channels used by IFOR are on US satellites. I believe that that is all the more reason why the European defence identity must be built within NATO if that is to amount to anything. The Europeans, having not made the same investment as the United States, should not now be contemplating creating vastly expensive and now unnecessary alternatives.
The noble Lord referred to our approach to the ballistic missile defence system. A pre-feasibility study carried out by a BAe-led consortium, together with associated studies within the pre-feasibility programme as a whole, is being used to inform the continuing work on the potential risks to UK interests from ballistic missiles and response options.
The conclusions of that work will be announced to Parliament in due course. The noble Lord, Lord Judd, mentioned Professor Brown's fundamental issues study. That study is another part of the wider pre-feasibility programme. I understand that Professor Brown has expressed a personal wish to publish his study report. We are discussing with him the work which would be necessary to allow the creation of an unclassified version.

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I have made clear that no single capability was singled out as more important than anything else in the conclusions which have been reached. The important conclusion was that a mix was required with particular emphasis on the need for protection of alliance forces which may be deployed out of the NATO area, as I have mentioned.
Lord Kennet: My Lords, before the noble Earl leaves Professor Brown's study report, perhaps I may clarify whether what he is saying now is a departure from what he said in a recent Written Answer. In that Answer he said that neither Professor Brown's work nor the work of BAe would be published. If it is possible that there may be a sanitised version of it published, we may take great hope from that, since Professor Brown has published an ordinary article under his own name which approaches the problem with extraordinary good sense and realism.
Earl Howe: My Lords, I am grateful to the noble Lord for that question. I did indeed indicate in a Written Answer that we should not be publishing either report;
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but we are now discussing with Professor Brown whether there is a way in which to allow an abbreviated or amended version of his report to be published to inform the general debate. I cannot yet give an undertaking to that effect but we are working towards that end.
I believe that this has been a useful short debate. I welcome the opportunity to stress the importance of the NATO alliance as the centre of our defence policy. The views and engagement of the United States are vital to the success of NATO; but, as the noble Lord knows, NATO operates through the consensus of 16 sovereign nations. I am sure that over the months and years ahead, there will be no shortage of ideas propounded by a host of individuals and bodies as to how NATO should adapt. But NATO's established doctrines will change only after exhaustive discussions among the 16 allies. In the meantime, I believe that we can all reflect on the fact that NATO, as an increasingly flexible military force, stands ready to respond, and respond effectively, to any challenge to our vital interests, military or humanitarian, which may present itself in an increasingly uncertain world.
House adjourned at twenty six minutes before nine o'clock.