Lords Sitting of 31 July 1997

Preamble
The House met at eleven of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.
Prayers—Read by the Lord Bishop of Sheffield.

Eagle Owls
Lord Campbell of Croyasked Her Majesty's Government:
Whether they will encourage experiments in the use of eagle owls to control numbers of pigeons, grey squirrels and vermin in appropriate selected areas.
The Parliamentary Under-Secretary of State, Department of the Environment, Transport and the Regions (Baroness Hayman): My Lords, the eagle owl is not native to Great Britain, despite its recent appearance on St. Paul's Cathedral. The last confirmed sighting of a wild eagle owl was in 1883 in Argyll. Encouraging the use of non-native species for vermin control would be inappropriate because of the risk of escape into the wider environment.
Lord Campbell of Croy: My Lords, I am grateful to the noble Baroness for her reply, which was not unexpected. Does she agree that the eagle owl based on St. Paul's Cathedral did a very good job in culling the hordes of pigeons in that area, although he was an alien and an escaped prisoner? Is she aware that the owls would not be expected to discriminate between grey and red squirrels because where there are greys there are no longer any reds. It would not matter if the owl were colour blind.
Baroness Hayman: My Lords, I had not thought of the eagle owl in question as an asylum seeker. Certainly, we should take no lessons from the party opposite on the treatment of asylum seekers. Birds of prey can be and have been used for scaring pigeons in some urban areas. The Wildlife and Countryside Act 1981 does not prohibit such action. But the birds of prey in question sometimes do not limit themselves to scaring. They have been known to consume some of the vermin concerned. Nor are they good at discriminating between either red or grey squirrels and domestic pets. So there are some dangers in taking that course of action.
Lord Gainford: My Lords, the noble Baroness mentioned the eagle owl in Argyll. As someone with Argyllshire interests, may I ask whether it would be possible for the eagle owl to be returned to Argyllshire? Possibly it could keep down one of the biggest pests there; namely, the hooded crow.
Baroness Hayman: My Lords, I know there are concerns about birds of prey keeping down vermin. Birds of prey also prey on other birds, such as racing pigeons. Indeed, we should also bear in mind the
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conservation of grouse. I should also point out that eagle owls are extremely undiscriminating predators. I am told that they are known as the rottweilers of the avian world. We should not wish to get into the position of having to have a dangerous owls Act.
Baroness Nicol: My Lords, is the Minister aware that Members of your Lordships' House visited a landfill site in Sutton Courtenay fairly recently? We were impressed that the birds, which would otherwise have caused nuisance to a nearby aerodrome, were controlled by falcons. But they were in the hands of a trained falconer. There is a serious point behind the noble Lord's Question, which we should pursue instead of always resorting to chemicals.
Baroness Hayman: My Lords, I know that there is concern about the use of chemicals to deal with vermin of various kinds. It would be better if we could have more ecologically acceptable ways of doing it. There are dangers when birds of prey are not properly controlled. The department is examining less environmentally destructive ways of dealing with vermin populations.
Lord Mackie of Benshie: My Lords, is the Minister aware that in the County of Angus there are still red squirrels and we want to keep them? Is the description of the grey squirrel as vermin, given by the noble Lord, Lord Campbell, correct? Would campaigns to eliminate them by more conventional means be acceptable to the Government?
Baroness Hayman: My Lords, indeed, the description of the noble Lord, Lord Campbell, is correct. The grey squirrel is not protected under the Wildlife and Countryside Act and various measures are being taken. The Government are committed to preventing the further spread of grey squirrels, although it is not practical to reduce their number over the whole of Great Britain. The onus rests with landowners and occupiers of land to control grey squirrels in their locality. As I said, research is being sponsored at the moment into methods of controlling grey squirrels, including making them sterile by use of a vaccine in food.
Baroness Gardner of Parkes: My Lords, can the Minister say what answers she offers in terms of central London? I have a beautiful apricot tree which has hundreds of apricots on it. I find it very distressing every day to see a magnificent grey squirrel come down, rip open anything up to 50 apricots, throw the fruit on the ground and eat the nuts—the kernels—from the inside. Various Members of this House have suggested that I could shoot him. But I do not feel that that would be at all appropriate in central London. Does she have any answers about what could be done?
Baroness Hayman: My Lords, deprivation of food is the advice that my department gives but I can see that there would be difficulties in the particular case highlighted by the noble Baroness. On a lighter note, I wonder whether she might care to consult the two gentlemen in Newton Abbot who spent a long time at

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the bottom of their gardens hooting at each other in the belief that they were owls. Perhaps we could go in for some virtual owls to protect apricots.
Lord Campbell of Croy: My Lords, if an experiment were to be undertaken, can it be borne in mind that the owls should be installed in pairs? That would be more congenial for them and make it unnecessary for human beings to hoot at them or at each other by mistake. There are rumours that, with a five foot wingspan, eagle owls attack small dogs. Would they be able to discourage dog ownership in the selected areas and so perform an additional service by helping to keep our pavements clean?
Baroness Hayman: My Lords, the noble Lord is trying to lead me down highways and byways in terms of the dog population where perhaps I should not follow. There would be some danger to the owls concerned were they to feed on the pigeon population in central London. A post-mortem was carried out on the owl from St. Paul's Cathedral because it was believed that it might have been poisoned by eating the contents of the pigeon that it had attacked.
Lord Lucas: My Lords, does the noble Baroness agree that if the recipe of my noble friend Lord Campbell for dealing with these vermin was tried on a wide scale it might be necessary, in turn, to control the owl population? As cats mouse and terriers rat, does she think that 'ounds could be persuaded to owl?

Baltic States: Trade
11.14 a.m.
The Earl of Carlisleasked Her Majesty's Government:
What support they give to firms intending to invest in the Baltic states (Estonia, Latvia and Lithuania).
The Minister of State, Department of Trade and Industry (Lord Clinton-Davis): My Lords, a relief from owls! The main source of support for firms intending to invest in the Baltic states is the Know How Fund's pre-investment feasibility study scheme. At the European level, the joint-venture programme—JOP—part of the EU's PHARE programme assists small and medium enterprises in the EU to set up joint ventures with partners in the region, or expand existing ones. Both the overseas trade services of the DTI in London and the embassies in the Baltic states also provide information and advice.
The Earl of Carlisle: My Lords, I thank the Minister for that reply. I am sure he will know that the volume of imports into the three Baltic states from the United Kingdom compares rather unfavourably with those of our western European neighbours. Is he aware that before the Second World War 30 per cent. of all imports into Estonia—the northern Baltic state—came from the United Kingdom? Is he further aware that the Baltic
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states have an important role to play in the development of trade between the Russian Federation and the West? The Minister is to be congratulated on having already met Mrs. Andrikiele, the Lithuanian trade minister. Will he at the earliest opportunity have meetings with Mr. Leimann and Mr. Krasds, his Estonian and Latvian opposite numbers, so that trade can be increased between the United Kingdom and the Baltic states?
Lord Clinton-Davis: My Lords, if the Ministers concerned wish to see me, of course I shall see them. I am always delighted to meet my opposite numbers in order to engage in discussions about the prospects for enhancing trade. The noble Earl referred to the position of the Baltic states. Of course they are important, and for the reason the noble Earl has given. It is also true that since the war our trade with these countries has deteriorated, which is to be regretted. On the other hand, in the more recent past there has been a sizeable increase in our trade with the three states. That is to be encouraged and we shall use our best endeavours, in the way I have indicated, to ensure that that happens.

Organic Farming
11.17 a.m.
The Earl of Clanwilliamasked Her Majesty's Government:
In the light of their response to the 2nd Report (Session 1996–97) of the House of Commons Agriculture Committee on Environmentally Sensitive Areas and Other Schemes under the Agri-Environment Regulation, what are their proposals for improving support for organic farmers.
Lord Carter: My Lords, the Government wish to encourage an expansion of organic production and are looking at the best ways of achieving that. To this end the Government have this week launched a consultation exercise to seek views from a wide range of interested parties.
The Earl of Clanwilliam: My Lords, I thank the noble Lord for that very encouraging response and I congratulate the Government on their conversion to truly sustainable farming. The evidence that persuaded the Agriculture Select Committee of another place to make the recommendation was given by Mr. Patrick Holden, who recommended that a minimum increase in the organic aid scheme for support should be £200 a hectare. May I impress upon the noble Lord the importance of increasing support to that level?
Lord Carter: My Lords, I am sure the noble Earl would not expect me to commit the Government at the Dispatch Box to that level of aid. However, the Government noted the Agriculture Select Committee's view that they should consider maintenance payments to existing organic farmers, which I know has been argued. The Government need to take account of the funding implications and do not currently view

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payments for the maintenance of organic production as a priority. In the meantime, those already farming organically can receive aid if they convert new land.
Baroness Nicol: My Lords, the reason for not looking favourably on continued support is that organic farmers are expected to get a premium price for their products. However, if the scheme is successful, is it not the case that the premium price is likely to diminish quite sharply? Therefore, will there not be a need to continue with some form of support even after the five to 10-year period that has been proposed? Will the Government undertake to look again at that?
Lord Carter: My Lords, that is part of the review which we are now undertaking. At present, 0.3 per cent. of the UK's food is supplied organically. There would have to be a substantial increase on that, which would take a considerable time before there would be any marked effect on the size of the organic premium received from the consumer, which is the essential help the organic farmer needs in addition to government aid. This is just the kind of point at which the review we are suggesting, which has wide-ranging terms of reference, will be looking.
Lord Bruce of Donington: My Lords, does the noble Lord agree that it should be possible for the Government drastically to revise their priorities in this field? Is he aware that vast sums are paid every year, including £ 1 million to each of five individuals, under the set-aside legislation? Does he further agree that it is quite scandalous that millions of pounds of British taxpayers' money should be distributed by the EU in this way to inhibit the production of food? Is it not the case that much more needs to be done at all levels to support organic farming by all possible means?
Lord Carter: My Lords, I believe that the issue of CAP reform is just a shade wide of the Question on the Order Paper. I can assure my noble friend that, as I am sure he knows, one of the Government's objectives in their dealings with the European Union is a substantial and wide-ranging reform of the common agricultural policy. It is part of the common agricultural policy to encourage organic production and it is also part of our policy. I am not sure that we can shift the whole weight of the CAP onto the support of organic food production.
Lord Marlesford: My Lords, does the noble Lord agree that the real problem in expanding organic farming is the cost to commercial farmers to convert to that method of farming, and that very few farmers can afford to do so? Does he also agree—and this is relevant to the point made by the noble Lord, Lord Bruce of Donington—that the payments for agri-environmental purposes under the CAP are exceedingly small in comparison with other payments for agricultural support? Is the Minister aware that the proposals in Agenda 2000, which sets out the Commission's draft proposals for the reform of the CAP, are rather disappointing in that respect? Will he ensure that the study which is to be made in this country will be brought
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to the attention of the Commission, with the aim of getting greater agri-environmental payments to the countryside in general?
Lord Carter: My Lords, before the election the Labour Party produced documents setting out our suggestions for reform of the common agricultural policy. It is our intention to undertake a wide-ranging reform of the CAP. That certainly includes heavy emphasis on the need for the improvement and encouragement of environmental-friendly farming. Organic production is a part of that.
Lord Mackie of Benshie: My Lords, does the noble Lord agree that, although organic farming will never feed the starving millions of the world, it is a far better use of CAP money than putting it towards set-aside, in that organic farming will reduce the amount produced and provide a reserve in case of a real need for food?
Lord Carter: My Lords, it is certainly true that consideration of organic farming has moved a long way from the days which the noble Lord and I remember when it was regarded as, "muck, mystery and magic". It is now firmly on the agenda. I do not believe that the cost of the comparatively small proportion of production which is now devoted to organic farming, even with a substantial increase in that proportion, will provide the means for a fundamental reform of the CAP.
Baroness O'Cathain: My Lords, is it not true that, whereas we all subscribe to the theory that it is better to have more organic farming, the reality is that the consumer is not prepared to pay the real cost of the product? Does the noble Lord agree that until such time as we can get over that gap between the cost of the product raised through non-organic farming compared with the cost of the product raised through organic farming, we really have a problem? Do the Government have any plans to encourage the British consumer to pay higher prices to meet the increased cost of organic farming? How do the Government propose to convert the consumer?
Lord Carter: My Lords, we regard that as a matter for the consumer. If consumers wish to have more organic products and are prepared to pay more, they will get them: if not, then those products will not be provided. It is the marketplace at work. However, as the noble Baroness said, it is correct that the costs of organic production are higher. There is a problem. Research work shows that, with a high level of technical efficiency, one can produce organic crops and products at an economic cost. The problem is—and this has always been my view as a farmer—that both intellectually and technically it is much more demanding than conventional farming. I am not sure that we yet have the resources for the advice that farmers need.
The Earl of Clanwilliam: My Lords, is the noble Lord aware that there is enormous demand in supermarkets throughout the country for organic products? Is he further aware that they have a great shortage of such products?

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Supermarkets would sell a great deal more if the supplies were available. Is he also aware that at the moment supplies of organic products have to be imported from Germany, Holland and Denmark?
Lord Carter: My Lords, I suppose that if customers were prepared to pay more, that would produce increased supplies.
Lord Lucas: My Lords, does the noble Lord agree that the objective of CAP reform is to reduce subsidies to agriculture and not merely to shift them from one sector to another? Is he aware that MAFF research has shown unequivocally that organic farming can be profitable once the transition costs have been paid? Surely it is those costs with which we should be concerned, and not with increasing subsidies.
Lord Carter: My Lords, it is not a case of increasing subsidies. In the reform of the CAP there will be a shift of support from one area to another. But there are other areas in which reductions in costs can be achieved—for example, tobacco subsidy and fraud.

Mutual Societies and "Carpet-baggers"
11.26 a.m.
Lord Taylor of Blackburnasked Her Majesty's Government:
What steps they intend to take to prevent "carpet-baggers" from attempting to force mutual societies to convert to banks against the wishes of the majority of the members, such as recently occurred with the Nationwide Building Society.
Lord McIntosh of Haringey: My Lords, the Government are well aware of the benefits of mutual societies. We have been looking at a number of proposals for secondary legislation put forward by the Building Societies Association. They all raise difficult issues of principle because they could frustrate the will of the members or significantly reduce the board's accountability to members. In short, they highlight the difficulties that the Government face in acting to protect mutuality without diluting the essence of a mutual organisation; namely, a society owned by and run for its members. But the Government are keeping the situation under careful review.
Lord Taylor of Blackburn: My Lords, I declare an interest as a member of the Nationwide Building Society. I am sorry that other Members of the House who are interested in the agricultural world have not done that this morning. Can the Minister say whether there are other measures that he believes building societies themselves can take to prohibit the action that took place last week with the Nationwide Building Society and the costs that the members had to incur to prevent the carpet-baggers trying to take over the society?
Lord McIntosh of Haringey: My Lords, my noble friend is certainly right that carpet-baggers cause considerable cost and disruption to mutual building societies. They cause additional management costs and put a strain on the service to existing members. I am sure he is also right that there are steps that building societies themselves can take to discourage carpet-bagging. For example, they might consider whether the emphasis on a flat-rate windfall does not actually encourage carpet-bagging.
Lord Dean of Beswick: My Lords, the Minister gave a detailed reply to the initial Question. But is any legislation at present in place, financial or otherwise, that the Government can resort to or place at the disposal of people to stop this practice taking place? If there is not any legislation in place, can the Minister try to get the Government to speed up the inquiry that is taking place with a view to putting a law on the statute book to deal with this situation?
Lord McIntosh of Haringey: My Lords, my noble friend will remember that the Building Societies Act 1997 was enacted just before the election, with all-party agreement. That reduces the temptation, if I may put it that way, to depart from mutual status by giving building societies greater powers to extend the range of businesses that they undertake. I am sure that that is the most important and effective way of reducing carpet-bagging and preserving mutuality.
Lord Skelmersdale: My Lords, is not the answer to the problem in the hands of the members of the mutual society concerned? Is it not a fact that under existing law every member of a mutual society has a vote in such a situation and it is for the members to determine whether the mutual society should convert into a bank?
Lord McIntosh of Haringey: My Lords, the noble Lord is right to say that the answer lies in the hands of the members. Unfortunately, recent experiences do not give us confidence that the members will take full account of the long-term interests of the society and its future members. The result of the Nationwide ballot was, of course, welcome, but, as the noble Lord will know, a number of societies have been invaded by people who are only out for a windfall gain rather than for the long-term benefit of the society.
Lord Burnham: My Lords, is it not the case that the enactment of Section 9 of the Building Societies Act would largely solve the problem? Further than that, undesirable as carpet-bagging is, is it not also the case that every step which is being proposed to stop it equally discourages small investors for whom the building societies are particularly designed?
Lord McIntosh of Haringey: My Lords, I assume that the noble Lord is referring to Section 9 of the 1997 Act which is due to come into force in October. Its effect will be to stop building societies having two-tier memberships, with some voting members and some who

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are simply investing members. Although that is clearly desirable, I am not certain that it will have all of the beneficial effects which the noble Lord is expecting. Indeed, some people in the building societies movement have been urging the Government to defer the implementation of Section 9.
Lord Sefton of Garston: My Lords, in view of the important part which the mutual societies play in democracy in our society, can the Minister give me an assurance that if the building societies come up with proposals which will more firmly place the control of those societies in the hands of long-term, genuine members, the Government will treat such proposals sympathetically in order to stop the parasites who are moving into building societies only for their own benefit?
Lord McIntosh of Haringey: My Lords, I am sympathetic to the thrust of my noble friend's question, as I have been, I think, to all similar questions. The problem is that all the specific proposals which the Building Societies Association has put to the Government for secondary legislation involve provisions such as raising the threshold for approval, delaying the qualifications for membership or increasing the number of nominations required for membership of the board, all of which involve a diminution of the principle of mutuality. Although the Government are, of course, reluctant to legislate for business management reasons, that is not the fundamental issue. We would like proposals from the building societies which will protect mutuality without reducing the rights of members.

Succession to the Crown Bill [H.L.]
11.33 a.m.
Lord Archer of Weston-Super-Mare: My Lords, I beg to introduce a Bill to remove any distinction between the sexes in determining the succession to the Crown. I beg to move that this Bill be now read a first time.
Moved, That the Bill be now read a first time. —(Lord Archer of Weston-Super-Mare.)
On Question, Bill read a first time, and to be printed.

Parliamentary Privilege: Joint Committee
The Lord Privy Seal (Lord Richard): My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the Commons Message of yesterday be now considered and that a Select Committee of six Lords he appointed to join with the committee appointed
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by the Commons as the Joint Committee on Parliamentary Privilege to review parliamentary privilege and make recommendations thereon;
That, as proposed by the Committee of Selection, the Lords following be named of the committee:

L. Archer of Sandwell,

L. Mayhew of Twysden,

L. Merlyn-Rees,

L. Nicholls of Birkenhead,

L. Waddington,

L. Wigoder;

That the committee have power to agree with the Commons in the appointment of a chairman;
That the committee have leave to report from time to time;
That the committee have power to appoint specialist advisers;
That the minutes of evidence taken before the committee from time to time shall, if the committee think fit, be printed and delivered out;
That the Attorney-General, the Lord Advocate, the Solicitor-General and the Solicitor-General for Scotland, being Members of either House, may attend the committee, may take part in deliberations, may receive committee papers and may give such other assistance to the committee as may be appropriate, but shall not vote or make any motion or move any amendment or be counted in the quorum.—(Lord Richard.)
Lord Marlesford: My Lords, I should like to ask the Lord Privy Seal one question. On the assumption that the only purpose of parliamentary privilege is to enable Parliament to do its job better and that that is its only justification, and given that there is, and there should be, considerable public interest in how Parliament performs, and that such interest should be encouraged, will it be possible for the evidence taken by the committee to be taken in public?
Lord Richard: My Lords, I do not know the answer to that question, but I hope that the committee will see fit to conduct at least a large part of its deliberations in as public a manner as it can. It should be done openly and transparently. I am afraid that I am not in a position today to be firm about the precise limitations on where one stops that process.
On Question, Motion agreed to; and it was ordered that a Message be sent to the Commons to acquaint them therewith.

Referendums (Scotland and Wales) Bill
11.35 a.m.
The Parliamentary Under-Secretary of State, Scottish Office (Lord Sewel): My Lords, I beg to move that the Commons reasons and amendments be now considered.
Moved, That the Commons reasons and amendments be now considered.—(Lord Sewel.)
On Question, Motion agreed to.
COMMONS REASONS FOR DISAGREEING TO CERTAIN LORDS AMENDMENTS AND COMMONS AMENDMENTS IN LIEU OF CERTAIN OTHER LORDS AMENDMENTS
[The page and line refer to Bill (8) as first printed for the Lords.]

LORDS AMENDMENT
1 Clause 1, page 1, line 5, leave out ("Her Majesty may by Order in Council") and insert ("the Secretary of State may by order")
The Commons disagreed to this amendment but proposed the following amendment in lieu—
1A Page 1, line 5, leave out ("such day as Her Majesty may by Order in Council appoint") and insert ("11th September 1997").
Lord Sewel: My Lords, I beg to move that the House do not insist on their Amendment No. 1 to which the Commons have disagreed, and do agree with the Commons in their Amendment No. 1A in lieu thereof.
In speaking to this amendment, I am speaking also to Amendments Nos. 5, 6, 7 and 10. The Government have stated their intention to hold the referendum in Scotland on 11th September, with the Welsh referendum a week later on 18th September. The Bill in its original form allowed the dates of the referendums to be appointed by Her Majesty in Orders in Council. We were pleased to accept the principle of the amendments tabled by the noble Lord, Lord Mackay of Ardbrecknish, to incorporate the Orders in Council into the main Bill. The Lords amendments would replace the original mechanism for setting the dates with a power for the Secretary of State to appoint the dates by order. These orders would have been used to set down the dates of 11th and 18th September. It makes sense now to write the dates into the Bill rather than to require an order to be made.
Some noble Lords may ask why we intend that the referendums should be on different dates, contrary to Amendment No. 7—
Noble Lords: Why?
Lord Sewel: Well, my Lords, you are going to get the answer. Amendment No. 7 requires them to be on the same date, but I fail to understand the Opposition's obsession with a single date. There is no reason why the Scottish and Welsh referendums should be held on the same day. They are two separate referendums being held in two separate countries on two separate sets of proposals. They are distinct events and distinct propositions. I am afraid that there would be as much sense in arguing that the referendum on our proposals for London should be held on 11th September. "Why not have a single referendums day?" seems to be the argument from noble Lords opposite. It is a nonsense.
There are many things that we want from the referendum—including a "Yes" result. We want it to demonstrate clearly that the people of Wales endorse our proposals. For that, we need to make sure that the people of Wales are well informed about our proposals and that they make their decision based on a full and thorough understanding of what the assembly will mean, what it will do and what it will bring to Wales. We have already made an excellent start on informing the people.
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I am delighted that the White Papers in Wales and in Scotland are selling well—although one is subsidised. It is hardly a common occurrence for people to clamour to get hold of a government publication.
As well as reading our proposals, people need to debate and scrutinise them and to hear what all the different interests have to say about them. For that reason, it is important that the referendum in Wales is not held on the same day as in Scotland. I am sorry to say, but I think it is a matter of fact, that the national media have a tendency to take less interest in events west of the Border than they do in those north of the Border. If the referendums were held on the same day, there is a real risk that our proposals for Wales would receive less public scrutiny and debate. There would be a degree of overlap and confusion—and that is wrong. People in Wales might arrive at the ballot box having heard a great deal about a Scottish parliament but relatively little about the proposals for a Welsh assembly. We need to ensure that these proposals are discussed as far as possible in a self-contained and focused way. That is achieved by holding the two referendums on two separate dates.
Our proposals for Scotland and Wales are different. There is no reason why the two ballots should take place on the same day, but there is every reason to give the people of Wales the time and the opportunity they deserve to hear and debate our proposals before they go to the polling stations.
Moved, That the House do not insist on their Amendment No. 1 to which the Commons have disagreed, and do agree with the Commons in their Amendment No. 1A in lieu thereof.—(Lord Sewel.)
Lord Mackay of Ardbrecknish: My Lords, we should at least be thankful that the third group of amendments tabled by me and accepted by your Lordships at Committee stage has been accepted by the other place. Therefore, we can leave for our summer holidays today; otherwise, we would have been here for another week. Occasionally, the Government see the good sense of Opposition suggestions.
As far as concerns the amendments before us today, the argument has not improved since the first time we heard it. If I had put forward an argument like that and noted that not a single Member of your Lordships' House believed it the first time round I would at least have tried a different and new argument on the second occasion. Not even his noble friends agree with the Minister's argument. We all know why the referendums must be held on different days. Frankly, it would be far better for the Minister to admit it than to try to create a web of an argument that we all know is absolutely false.
The referendums are to be held on two different days simply because the Government believe—I suspect that they are looking at the bookies' odds—that there is a better chance of achieving a "Yes" vote in Scotland than in Wales and that if they hold the Welsh referendum a week after the Scottish referendum the Welsh people may be gazumped into giving a "Yes" vote there too. I thought that this Government were against gazumping, but here they want to do it on this most important aspect of our constitution.

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The argument that the Welsh need another week to debate these issues is the most pathetic of all the pathetic points that have been made. The idea that in that week everybody in the United Kingdom will forget the result of the Scottish referendum and that the whole country will then discuss the Welsh question is imagination on the part of Her Majesty's Government. We all know that the weekend following the Scottish referendum, whatever the result, the United Kingdom press will be full of the results of that referendum. If this argument held any water at all the Government would be holding the Welsh referendum a month after the Scottish referendum to allow clear time between the two. Frankly, I would have had a great deal more respect for the Minister and the Government if that proposition had been put forward. I do not think that I would have been as able as I am now to poke fun at the pathetic arguments that noble Lords have just heard.
If they are two distinct propositions, why did the Government insist that they be debated together yesterday? If they were two distinct propositions they should have been debated on two different days. Even the internal consistency of the Government—
Lord Carter: My Lords, I point out to the noble Lord that it was the Opposition who asked for the two referendums to be debated on the same day.
Lord Mackay of Ardbrecknish: My Lords, I asked for the two to be debated on the same day yesterday. If the noble Lord had been here to listen to my speech, he would have heard me say that I did not believe it was sensible given the list of speakers but fortunately most noble Lords followed my example and kept their speeches short. We did not come to the more important debate on salmon until later, but at least we came to it on the same day as the debate started.
The position is as I have said. The Government's case is a nonsense. They hope that they can gazump the Welsh people into giving a "Yes" vote on the back of the Scots. It is not because the Herald, The Scotsman, Scottish Television, Grampian Television or BBC Scotland have a huge viewing figure in Wales. I suspect that very few people in Wales are able to receive even radio transmissions from Scotland, let alone buy Scottish newspapers. The idea that the Welsh will not be able to consider the proposition before them because the airwaves and the press will be full of the Scottish position is just Cloud-cuckoo-land.
We have been repeatedly told that this is a government of honesty and integrity. Would it not be nice just to have a little honesty on this question? Tell us the truth. The truth is that the Government do not believe that they can get a "Yes" vote from the Welsh unless somehow they can browbeat them into believing that the Scots will get something that they will not get. I say to the Welsh people that whatever my fellow countrymen do they would be best advised to give this a very big "No" on 18th September.
Lord Sewel: My Lords, I take much cheer and comfort from the argument that has been advanced by the noble Lord, Lord Mackay of Ardbrecknish. It is
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based on the proposition that there will be an outstanding victory in Scotland and a decisive "Yes, yes" vote. I welcome that recognition and concession contained in the noble Lord's argument. The fact of the matter is that we are dealing with two very different proposals. That emerged very strongly from the points raised in yesterday's debate. It is proper that there should be a degree of space between the decisions taken on these questions in Scotland and Wales. That will lead to clarity, not confusion. In those circumstances. I commend the Motion to the House.
On Question, Motion agreed to.
11.45 a.m.

LORDS AMENDMENT
2 Clause 1, page 1, line 6, after ("and") insert ("income")
The Commons disagreed to this amendment for the following reason—
2A Because it is desirable to keep the questions to he asked in the referendums as simple as possible.
Lord Sewel: My Lords, I beg to move that the House do not insist on their Amendment No. 2 to which the Commons have disagreed for their reason numbered 2A. In moving this Motion I should like to speak also to Amendments Nos. 15 and 16.
The people of Scotland will be asked whether they agree that there should be a Scottish parliament and that a Scottish parliament should have tax-varying powers. The amendment to which the Commons have disagreed would require a specific reference to "income" tax-varying powers. The key to this is to understand what the people of Scotland are being asked to agree with. It is not some vague notion of an independent Scotland or some never-never promise of better things to come from the party opposite—a never, never, never, never, never promise. The people of Scotland will be asked whether they agree with the Government's proposals. It says so on the ballot paper.
The Government have set out their proposals in the White Paper Scotland's Parliament which was published on Thursday of last week. Chapter 7 of the White paper sets out the financial arrangements for the parliament, including the tax-varying powers. No doubt noble Lords are familiar with it. I quote from Chapter 7:
"Subject to the outcome of the proposed referendum on this issue the Scottish Parliament will be given a power to vary tax … The Government propose that the tax varying power should operate on income tax".
It is crystal clear that the tax-varying power on which the referendum asks the people of Scotland to give their views is the power to vary income tax.
Lord Campbell of Croy: My Lords, I thank the Minister for giving way. The White Paper which was published only a week ago uses the words "operate on income tax". What the White Paper does not say is that the tax-varying power would, for central government

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taxation, be confined to income tax. It just says that it "should operate on". That wording does not reflect what has been said on the Government Benches.
Lord Sewel: My Lords, in all honesty, I do not understand the distinction that the noble Lord is trying to make. It is:
"operate on the income tax system".
It is as simple as that. We have no hidden agenda. We are being straight, honest and clear over this. The chapter goes on to describe in some detail how the system would operate; the amount by which tax could be varied; who would be liable to pay it; what would happen in the event of the UK income tax structure changing in future. We have argued consistently that the questions to be put to the people should be at a level of principle, backed up by the detail contained in the White Paper.
If we add the word "income" why not also include the 3p in the pound limit; or the definition of who should pay the tax? We could keep on adding qualifications until the questions on the ballot paper ended up half a page long. Similarly, we are not asking on the ballot paper whether the Scottish parliament should have powers in Scotland over the health service, social work, housing or any of the other areas set out in the White Paper. The points put to the people of Scotland, through the questions on the ballot paper, are the simple issues of principle that are then backed up and illustrated through the details contained in the White Paper itself.
I accept that a balance has to be struck between keeping the question simple and giving voters enough detail so that they are clear as to what they are voting for. We believe that our original wording is right. The tax-varying power is a sufficiently important aspect of the powers of the parliament to warrant a separate question, but it is not necessary to specify every aspect of the powers in question. That is done by and through the White Paper.
To add the word "income" would create a false sense of precision, because it is limited. There are other factors that go beyond income in terms of the level of the income tax; what is and what is not covered in terms of savings and dividends; and who is liable to pay it. The referendum in Scotland will seek consent for the Government's proposals for a Scottish parliament with tax-varying powers. The people of Scotland will well understand what they are being asked to approve.
Moved, That the House do not insist on their Amendment No. 2 to which the Commons have disagreed for their reason numbered 2A.—(Lord Sewel.)
Lord Mackay of Ardbrecknish: My Lords, that argument was just about as pathetic as the argument on the first amendment, just as the reasons given by the Commons are pretty pathetic:
"Because it is desirable to keep the questions to be asked in the referendum as simple as possible".
Having said that, I agree with the Minister that we should agree with the Commons. I recommend that to the Government. However I shall explain the true
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reason. It is that if we put "income" into the question, we should be asking a deceitful question, because the proposition before the Scottish people, contained in Chapter 7, goes a good deal wider than income tax. That we teased out yesterday.
If it comes about, it gives the Scottish parliament power to vary and to change the form of local authority income. The council tax could be increased of course. It could be replaced or added to by a local income tax, a sales tax, or, according to the Government's partner in these operations, the noble Lord, Lord Steel of Aikwood, by charges. A charge by any other name would sound as sweet, I suppose. We know that the cat has been let out of the bag on this.
Despite the best endeavours of the noble Lord, Lord Williams of Mostyn, to answer my question, I am still just a little bit at a loss to understand the answer as to the consequences of what will happen if the parliament cannot raise £450 million. Let me try once again, but for the last time. If the parliament is to be allowed to raise £450 million as its upper limit (index linked), that is fine. At the moment, that is equivalent to having an additional 3p in the pound on income tax for those of us resident in Scotland.
Let us assume that the Chancellor decides to narrow the tax base of the 23p rate. Then obviously the tax take will reduce. Let us say that it goes down to £400 million. So £50 million will have to be raised from somewhere else. Is it to be raised from breaching the 3p in the pound, or—this is the rub, and why the word "income" must come out, as the Commons have rightly suggested—is it to be raised by some other tax?
Frankly, I did not understand the answer that I received last night from the noble Lord, Lord Williams of Mostyn. I do not think that anyone bar the noble Lord understood his answer. I have tried to simplify it to see whether I can, at last, obtain an answer from the noble Lord, Lord Sewel. If I cannot obtain an answer—I just warn the noble Lord, Lord Sewel—he will be receiving correspondence from me during the Recess in which I shall be keeping at this issue.
It seems absolutely clear to me that that parliament will have a lot more powers over revenue than just income tax. I am pleased to see that the noble Lord, Lord Desai, agrees with me, because he said clearly, and rightly as an economist, that it is foolish to tie a parliament's hands to just one form of raising its revenue. That is why the Government want to overturn your Lordships' amendment. As I said on the previous amendment, a little honesty and integrity would be welcome, and we would know where we were.
When I come to vote on this question, I shall not be voting "No" just to stop the parliament from raising my income tax. I shall be voting "No" to stop it raising a whole raft of taxes on me, my fellow Scots, and the Scottish economy. I commend the amendment to your Lordships. Without meaning to be, the Government are being refreshingly honest.
Lord Steel of Aikwood: My Lords, I think that the noble Lord, Lord Mackay of Ardbrecknish, referred to me as the partner in crime, or something, of the

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Government. Let me assure him that on this issue I have no sympathy whatever with the Government. They have made a rod for their own back with the second question on the referendum. If the referendum itself was thought by many of us to be entirely unnecessary, the second question is thought by most of us to be totally absurd.
Why on earth Her Majesty's Government should pick out one aspect of the proposal and invite the people of Scotland to pass comment, I do not know. Why did they not choose the electoral system and ask, "Do you or do you not approve of that?"? Why did they not choose the relations with Europe, referred to in the White Paper? They have invented the second question for reasons best known to themselves. It is certainly not approved of by me or my colleagues on these Benches. The question of whether the word "income" is or is not included seems to me to be relatively unimportant. However, I have to say that the White Paper is clear, whatever the reasons behind it.
Chapter 7, page 21, of the White Paper states:
"the Scottish Parliament has a defined and limited power to vary central government taxation in Scotland and alter its overall spending accordingly".
That is the point. The proposals which will be brought forward in the legislation will constrain the Scottish parliament on those matters that affect central government taxation only; for example, income tax, VAT and national insurance contributions. Those cannot be varied. However, as I said yesterday, the Scottish parliament can do whatever it likes, apart from those matters which are reserved to the Westminster Parliament.
If the Scottish parliament, in its madness, were to decide to tax caravans, hotel beds or whatever, it can do that. That is within its powers. Where I differ from the noble Lord, Lord Mackay of Ardbrecknish, is that I have a basic confidence in the common sense of the Scottish people and in the politicians whom they will elect, even if they were to elect Conservatives.
At the end of the day, whatever the parliament does, it will have to answer to the Scottish people. The idea that we shall have a parliament in Edinburgh running amok, putting taxes on all over the place, is just Cloud-cuckoo-land. The noble Lord, Lord Mackay of Ardbrecknish, should be a little more trustful of the people of Scotland.
My final point to the Conservative Party is that I well remember the arguments on this very issue in the 1978–79 period. I well remember the Conservative Party in general, and the late Lord Home in particular, arguing against the proposals in 1979 on the ground that the Scottish parliament had no fiscal responsibility. Now that fiscal responsibility is being given to it, it objects again. The truth is that it remains against the whole scheme, and it might as well be honest about it.
12 Midday
Lord Campbell of Croy: My Lords, I rise to thank the noble Lord, Lord Sewel, for courteously giving way in his opening speech. I intervened because I thought
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that it was the right moment to ask about the key words which he was reading. He stated that the varying power would operate on income tax.
My noble friend Lord Mackay of Ardbrecknish pointed out that local authority taxation—that is, council tax and so forth—will be separately within the power of a new parliament. However, as regards central government taxation, again I ask whether the Minister can give an assurance that the varying power will be restricted to income tax?
Lord Rowallan: My Lords, I rise to ask a question. In yesterday's debate the Minister said:
"Let me—I hope for the last time—put the record straight. What we are proposing is that the Scottish parliament will have power to increase or decrease the basic rate of income tax set by the UK Parliament by a maximum of 3p".
He went on to say:
"We decided that the power should be limited to varying income tax because there was no practical alternative".—[Official Report, 30/7/97; col. 187.]
Is the Minister in disagreement with Ministers in the other place? If the Government wish to have the mention of income tax removed from the ballot paper, what other reason can there be, because they have said clearly to this House that that is all they want?
Lord Simon of Glaisdale: My Lords, the noble Lord, Lord Sewel, developed his argument with the skill that has commanded our admiration throughout. However, I am bound to say that it hardly stood up to examination on this issue. What, after all, was the thrust of your Lordships' amendment? It was precisely to state what the Government say they intend to be the ambit of the tax varying power. They intend to limit it to income tax, and they say so in the White Paper. They propose to limit it to a variation of up to 3p. either way. That follows the recommendation of the Scottish Constitutional Conference. I agree with the noble Lord, Lord Steel, that to give a parliament wide powers without financial responsibility is absurd. However, the amendment proposes to write into the ballot paper precisely what the Government propose.
Two arguments have been put forward. Today the noble Lord, Lord Sewel, repeated the argument that he proffered earlier; namely, that it is a question of principle. But he has never explained why one addresses a matter of principle when one asks, "Do you want to vary taxation?", but one does not do so when one asks, "Do you want to vary income tax?". They are equally matters of principle. The other argument was put forward by the other place; namely, that it wants to keep the ballot paper simple. It is not a simplification if what you intend is a variation of income tax to say precisely that.
I intervene as a devolutionist and a Cross-Bencher, but it seems to me that the argument put forward by the noble Lord, Lord Mackay, was overwhelming. If he had divided the House I would have followed him into the Division Lobby, as indeed I would on the earlier amendment. Not only is it futile for the Government to object to a formulation of exactly what they propose, but it is extremely dangerous. Beside the Government

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supporters in the Scottish parliament, there will be supporters of the Scottish National Party, which has a very different agenda. It proposes independence. Its tax varying powers will be utterly different; they will extend to Customs duty because the party will look forward to Customs houses along the Border, which will then be a frontier.
The Government appear to be utterly reckless in framing a question which can be distorted against them by those who are no friends of theirs—the Scottish National Party—who will say, "Yes, the question we put to the electorate was whether they wanted tax varying powers. That is what we want". It is no use the Government saying that in the White Paper they limited that to income tax varying powers, because the Scottish National Party will say, "Who reads a White Paper on holiday, even if it is selling profitably?". It is an utterly unreal argument and the Government are running a grave risk in resisting your Lordships' amendment.
Lord Sewel: My Lords, perhaps I may first reply to the point made by the noble Lord, Lord Steel. The reason for the second question is simply that we are of the opinion that the granting of a tax varying power should not be undertaken lightly. We believe that the people who will be subject to that power should be consulted specifically on the granting of it. We believe that that is the right and proper way forward and that is why we are giving the people of Scotland the opportunity to make a separate and specific decision on that point—
Lord Steel of Aikwood: My Lords, I am grateful to the Minister for giving way. I am listening to him with astonishment. Surely there is a stronger case for consulting on the change in the electoral systems. As the policy of Her Majesty's Government is later to consult the United Kingdom electorate on a change to the electoral system, I would have thought that a stronger case could be made for picking out that one item. As joint chairman of the Scottish Constitutional Convention, my objection is to cherry-picking particular parts of the proposals and sticking them in the referendum.
Lord Sewel: My Lords, I disagree with the noble Lord, Lord Steel. I believe that a tax varying power is a fundamental power that is given to a parliament. It impacts directly on the citizens and as they are subject to that power they ought to be consulted on whether the body that is being established should be able to exercise it. I believe that it is qualitatively different from other aspects of the package and that it is why it is right and proper to have a separate question.
The noble Lord, Lord Campbell of Croy, asked whether I could give an assurance that the tax varying power on central government taxation would be limited to income tax. I give him that assurance.
As regards the points made by the noble Lord, Lord Rowallan, and the noble and learned Lord, Lord Simon of Glaisdale, I can only repeat the argument that I and my noble friend Lord Williams have used. We have
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built this project on the basis of a White Paper which explains the detail and on a ballot paper which asks for approval in principle. That is where we stand. The people will be consulted and invited to make a decision on the two issues of principle. The detail comes through the White Papers.
I turn to the noble Lord, Lord Mackay of Ardbrecknish, and his usual bravura performance. I must refute entirely the argument that somehow he has teased something out of us in terms of the powers in relation to local authority taxation. It is absolutely explicit in the White Paper that the Scottish parliament will have the power to change the system of local government taxation. We have never tried to hide that. It is there; it is in black and white; and to say that it has been teased out is a total distortion.
Let us go along with the point made by the noble Lord, Lord Mackay of Ardbrecknish, about the £450 million. I shall try again to shed some light on that matter for him. The 3p. on the income tax at the moment, because of the tax structure, raises £450 million. The noble Lord says quite rightly that you cannot freeze the tax structure at one particular time and assume that that will continue for ever. Noble Lords who have been Chancellors of the Exchequer have tended to vary the tax structure from time to time and have quite understandably and quite rightly introduced different rates.
There may well come a time in the future when the tax structure changes so that 3p. on the basic rate does not raise £450 million, and I had better say for the sake of completeness, index linked at that stage. What happens then is that the Scottish parliament and Westminster agree the basis upon which the £450 million index linked can be raised—in other words, the shortfall matched—by going back to the income tax structure. That is not to be achieved by opening up the opportunity to raise a whole plethora of other taxes. That is not on. It is focused on and limited to income tax. The only changes which will occur will be a product in changes to the tax structure itself.
Throughout our debates on this issue the noble Lord, Lord Mackay of Ardbrecknish, has from time to time, at every opportunity, tried to run a scare story. The scare story is that, despite our explicit words in the White Paper, we are somehow opening the door to much wider tax-raising powers in relation to the powers conferred upon the Scottish parliament to raise taxes for its own purposes. We are not. That hare will not run; it cannot run; and to persist is irresponsible scaremongering.
Lord Mackay of Ardbrecknish: My Lords, I am grateful to the Minister for getting closer to giving me an answer to the question than either he or his noble friend has managed to do hitherto. But let me be clear. It is going to come from the income tax structure. To me that means that either the standard rate will have to be increased by more than 3p. in the pound or the 3p. will have to be extended into the 20p. rate or the 40p. rate. If it is to come out of the income tax structure of Scotland, it must come in one or other of those directions. I should be grateful to the noble Lord if he would indicate whether I am right about that. I am not asking him to look into the future and predict how it

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will be done. I merely ask him to agree with me that what I suggest is the way in which it will have to be done.
Lord Sewel: My Lords, no, I am afraid that the noble Lord is misconceived on that particular point. On the one hand, he is saying that the tax structure changes and then illustrates that point by saying that we should have to move to the 40p. rate or the 20p. rate. The only reason for any change in the 3p. would be if those rates and structures changed as well. It would not be a movement into 40p. or 20p. but would be as a result of changes in the tax structure, of which we know nothing and have no knowledge at the moment. It may be at some future point.
Baroness Carnegy of Lour: My Lords, will the Minister tell us what information the public is to receive on that subject? I think we were told that a summary of the White Paper will go to every household. Will that summary include all the paragraphs which relate to this matter so that the people know what the ballot paper means? Will there be an explanation and, if there is an explanation, will it explain to people what the Minister has just explained to us? This is quite a complicated matter. If people are to answer a specific question, they must know what it is that the Government are saying.
Lord Sewel: My Lords, the summary will be a summary. It will not contain all the paragraphs in the White Paper by any means. We shall make available to the people of Scotland and Wales a summary in simple, straightforward, plain English of what are the powers of the Scottish parliament and Welsh assembly, including the tax varying powers for Scotland.
On Question, Motion agreed to.

LORDS AMENDMENT
5 Clause 1. page 2, line 3, at end insert—
("() An order under this section shall be made by statutory instrument.")
The Commons disagreed to this amendment for the following reason—
5A Because the amendment is unnecessary, as a consequence of the amendment in lieu of Lords Amendment No. 1 proposed by the Commons.
Lord Sewel: My Lords, I beg to move that the House do not insist on their Amendment No. 5 to which the Commons have disagreed for their reason numbered 5A, to which I have already spoken.
Moved, That the House do not insist on their Amendment No. 5 to which the Commons have disagreed for their reason numbered 5A.—(Lord Sewel.)
On Question, Motion agreed to.

LORDS AMENDMENT
6 Clause 2, page 2, line 4, leave out ("Her Majesty may by Order in Council") and insert ("the Secretary of State may by order")
The Commons disagreed to this amendment but propose the following amendment in lieu—
6A Page 2, line 4, leave out ("such day as Her Majesty may by Order in Council appoint") and insert ("18th September 1997").
Lord Sewel: My Lords, I beg to move that the House do not insist on their Amendment No. 6 to which the Commons have disagreed for their reason numbered 6A.
Moved, That the House do not insist on their Amendment No. 6 to which the Commons have disagreed for their reason numbered 6A.—(Lord Sewel.)
On Question, Motion agreed to.

LORDS AMENDMENTS
7 Clause 2, page 2, line 4, at end insert ("under section 1(1)")
The Commons disagreed to this amendment for the following reason—
7A Because it is not desirable that the referendums in Scotland and Wales should be held on the same day.
10 Page 2, line 26, at end insert—
("() An order under this section shall be made by statutory instrument.").
The Commons disagreed to this amendment for the following reason—
10A Because the amendment is unnecessary, as a consequence of the amendment in lieu of Lords Amendment No 6 proposed by the Contmons.
15 Schedule 1, page 4, line 19, after ("HAVE") insert ("INCOME").
The Commons disagreed to this amendment for the following reason—
15A Because it is desirable to keep the questions to be asked in the referendums as simple as possible.
16 Page 4, line 22, after ("HAVE") insert ("INCOME")
The Commons disagreed to this amendment for the following reason—
16A Because it is desirable to keep the questions to be asked in the referendums as simple as possible.
Lord Sewel: My Lords, I beg to move that the House do not insist on their Amendments Nos. 7, 10, 15 and 16 to which the Commons have disagreed for their reasons numbered 7A, 10A, 15A and 16A. There is nothing more for me to say.
Moved, That the House do not insist on their Amendments Nos. 7, 10, 15 and 16 to which the Commons have disagreed for their reasons numbered 7A, 10A, 15A and 16A.—(Lord Sewel.)
On Question, Motion agreed to.

Finance Bill
12.17 p.m.
Lord McIntosh of Haringey: My Lords, I beg to move that this Bill be now read a second time. This is the first Finance Bill of the new Government that your Lordships' House has considered. It implements the major part of the Budget. That Budget was a Budget for the long term. We are not interested in short-term expediencies that are popular for a day but in the end are damaging to the economy. We will pursue policies whose goal is to ensure stability, long-term growth and sound public finances. And we seem to have made a good start, according to the IMF.

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After its annual mission to review the economy, it said:
"The new Government has made an excellent start. It has set a high standard for its economic policies, aiming to maintain stability and foster long term growth while seeking fairness and developing human potential. And it has taken decisive steps towards these goals by making the Bank of England independent, introducing a Budget that makes rapid progress towards sound public finances, and initiating welfare to work and other programmes to enhance employability".
As I have said, we are not interested in measures that will be popular for a day. We have taken some tough decisions which some people have found uncomfortable. But I am sure they are the right decisions which are in the long-run interests of the whole country.
Perhaps I may now turn to the contents of the Bill. The prerequisite to improved long-term economic performance is ensuring economic stability. Giving the Bank of England operational responsibility for setting interest rates was the earliest earnest of that aim. However, my right honourable friend's Budget and Finance Bill contribute powerfully to stability.
First, Clause 15 provides for the reduction in the rate of mortgage interest relief. The housing market in the past 10 years has experienced an unsustainable boom in the late 1980s and we are only recently emerging from the inevitable slump that followed it. Stability is essential to home owners. Negative equity has been the curse of many home owners. The situation is improving, but no one wants to see another period of hardship and frustration for home-owners like that. But, equally, we do not want to return to the days when house prices were rising out of control. That is why the Budget was the right moment to announce a further reduction in the rate of mortgage interest relief from 15 per cent. to 10 per cent. taking effect from next April.
For the same reason, Clause 49 implements an increase in stamp duty, which took effect earlier this month. Property sales over £250,000 are now subject to stamp duty at 1.5 per cent. and sales over £½ million are charged at 2 per cent.
As I said, the Budget is aimed at the long term. Investment is essential to the long-term health of the economy, and the Finance Bill contains a number of measures designed to encourage it. Clause 18 cuts the main rate of corporation tax to 31 per cent., the lowest it has ever stood at, and lower than in any major industrialised country. It also cuts the small companies' rate to 21 per cent. These cuts will make it more worth while for firms to invest, as more of the profits that they earn will remain with them and not be passed to the Exchequer.
However, the cuts in the corporation tax rates are only part of the story. The tax system at present contains a significant distortion. When a company retains its profit for reinvestment, it is taxed at 33 per cent., but when it pays out to a pension fund that profit is taxed at 16 per cent. As so much of the stock market is in the hands of pension funds, there is a powerful incentive for them to press companies to pay too much out in dividends. That
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cannot be right, and the Finance Bill corrects it. From Budget day, tax credits have no longer been payable to pension funds, removing the distortion that I described.
The latter has not been a popular reform with everyone, as debates in another place confirmed. People naturally have concerns about how pension funds will manage in a different environment. They also have concerns about the withdrawal of the foreign income dividend scheme, where we have promised further consideration. But it was the right reform to encourage the sort of long-term investment that we desperately need in this country. The improvement in economic performance will in the long run be good for everyone, including pension funds. Now was also the right time to change the system. Many pension funds are sitting on substantial surpluses which will give them time to adjust to the new system.
There are other changes to encourage investment. At this stage of the business cycle businesses need to be investing strongly. That is why we have introduced, in Clauses 42 and 43, a temporary doubling of allowances for investment in the next 12 months, targeted on small and medium-size businesses. The change is a timing one only; but businesses will pay £230 million less tax next year which will encourage them to bring forward investment so they do not run into capacity constraints at a crucial stage of the cycle.
On top of this general investment incentive, we are proposing, in Clause 48, a special regime for British films. There is great talent and potential in the British film industry and considerable scope for increased investment and employment. We are proposing a relief which will allow 100 per cent. write-off for production and acquisition expenditure for British qualifying films costing £15 million or less to make. But this is not an open-ended relief. It is set to last for three years, after which we will review the position to see how well film makers have responded to the incentives that we are offering.
The centrepiece of the Budget was the windfall tax. Part I of the Finance Bill, together with the associated schedules, sets out the details of how it will work. The purpose of the windfall tax is of course to fund the Government's welfare-to-work programme, which truly represents a new deal for the young unemployed. But the windfall tax is more than just a way of raising the £5.2 billion that we will be spending over the years of this Parliament. It is right in principle to correct the failures of the past.
The privatised utilities were sold too cheaply and have been subject to early price regulation which gave customers a bad deal. The windfall tax addresses both those failures and recycles the money for the benefit of those in our society—that is, the young and the long-term unemployed—who have been victims of the unbalanced economic recovery that we have experienced over the past five years. We have always made it clear that we are pursuing tax policies which are fair and are seen to be fair. Little that the last government did could have been more unfair than their decision to increase VAT on domestic fuel and power to 8 per cent.; indeed, they wanted to raise it to 17.5 per cent.

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The easiest decision we took in the Budget was, therefore, the one to lower the rate to 5 per cent. which is effected by Clause 6 of the Bill. Of course, we would have liked to have abolished VAT on fuel and power altogether, but we are prevented from doing so by European law. Thanks to Clause 6 all households will be better off from September by an average of £18 a year. But crucially the poorest households, many of them pensioners, will benefit most in proportion to their income because they spend a disproportionate amount of their income on heating their homes, which is what made the imposition of VAT in the first place so unfair.
Cutting VAT will cost about £½ billion a year, which must be made up from somewhere. We have chosen tax increases which further our aim of fairness. Part of the money comes from the removal of the income tax relief for private medical insurance in Clause 17. That relief benefits the few at the expense of the many. There is no evidence to show that that has led to any significant increase in the number of policies taken out by people over the age of 60. In opposition we made no secret of our intention to remove that relief and we have now done so in a way which is fair by allowing existing contracts to run their course with the benefit of tax relief.
The rest of the money that we need to cut VAT on fuel and power—indeed, a good deal more than we need—comes from a powerful package of anti-avoidance measures. I want to make it clear that the Government are serious about attacking tax avoidance schemes wherever we see them. A number of the schemes that were identified relating to VAT and insurance premium tax are being closed down by regulation. Others will have to wait for the next Finance Bill. A scheme whereby employers avoid PAYE and national insurance contributions by paying highly paid employees in the form of money owed by the company's debtors falls into that category.
However, in Clause 26 of this Bill we have been able to tackle a leakage of tax through arrangements to lend preference shares and for share dealers to buy dividends and thus create an artificial tax loss at the expense of everyone else. In Clauses 44 to 47 we have also countered two avoidance devices involving finance leases. In one, finance lessors routinely have a number of subsidiaries with different accounting dates whose sole purpose is to maximise the timing advantage of the capital allowances that they have bought off their lessees. In the other, we are blocking the sale of unused past capital allowances which are transferred to the lessor through the use of sale and leaseback schemes. In addition, as my right honourable friend the Chancellor of the Exchequer announced in his Budget, the Inland Revenue will be carrying out a wide-ranging review of areas of tax avoidance with a view to legislation in future Bills.
Finally, the Chancellor announced a number of measures designed to protect the environment and health. As the new Government's tax objectives that we set out in the Red Book acknowledge, the prime purpose of taxation is to raise sufficient money for the Government to pay for the services which their policies require. However, as the Red Book also makes clear,
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there is a role for the tax system, and the changes that we make to it to encourage the production of "goods" and discourage the production of "bads". For that reason, we have announced that we will be doing work on the environmental costs of extracting aggregates. We will also be consulting on ways of improving water quality. But in this Bill we have shown that we take our environmental responsibilities seriously. Clause 11 increases the rate of tax on hydrocarbon oils. In particular, it implements the first stage of the Government's new commitment for Parliament; namely, to increase fuel duties by 6 per cent. in real terms a year.
The final measure that I should like to pick out from the Bill is the decision to increase the duty on tobacco. From 1st December, Clause 12 increases the duty by 5 per cent. a year on top of inflation. I make no apology for the size of those increases. They will deter young people from starting to smoke and reduce smoking overall to the benefit of everyone. I hope that in these brief remarks I have set the Finance Bill in context by showing how the tax measures we have taken, and are starting to enact today, fit in to the Government's objectives. I commend the Bill to your Lordships.
Moved, That the Bill be now read a second time. —(Lord McIntosh of Haringey.)
12.30 p.m.
Lord Mackay of Ardbrecknish: My Lords, this is our annual debate on the Finance Bill. At least it has been annual up to now, but it will be interesting to see how many Budgets are introduced in one Session by the new Government. If the new Government follow the previous Labour government, I suspect that we shall discuss Finance Bills more than once in a Session. However, I suppose we are grateful that at this last gasp before the long Recess the Finance Bill is before us.
To an extent the Budget was long promised. It has been clear for some time this year that the Government were committed to a Budget to achieve two things: to introduce a windfall tax on the public utilities and to reduce VAT on heating fuel. However, I suspect that some of the other increases have hit fuel in another way. If one has oil-fired central heating, I suspect that on the one hand one has lost something, but gained something on the other hand. I am not sure what the net effect is.
What else were we told about the Budget earlier in the year before the election, apart from the proposed windfall tax and the reduction of VAT on fuel? Earlier in the year the Prime Minister told businessmen in Birmingham,
"We have no plans to tax at all".
He told Daily Express readers,
"Our plans do not involve raising taxes at all".
He seems keen on the words "at all". He continued,
"If we have any such proposals we will make them clear before the election".
As I have said, there was one clear commitment as regards the windfall tax. I shall not discuss that in any great detail because I made my views known during the debate on the Queen's Speech. However, there was no mention of the other 16 taxes, making 17 taxes in all.

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There was certainly no reason to have an emergency Budget. I believe I have mentioned my next quote before. I quote from the Economist of 12th April which states,
"Britain's economy is in its best shape for several decades. It has entered its sixth consecutive year of growth with GDP rising fast, unemployment falling, inflation low, exports growing and the balance of payments healthy. There is now plenty of evidence that Britain's century-long relative economic decline has been arrested and, indeed, that it is well placed to improve its relative performance over the next few years".
That passage appeared in the Economist on 12th April before the events of 1st May. I hope that the Minister and his friends in the Treasury will remember that and not try to pretend to us and to the world that somehow everything that happened to the economy before 1st May was a disaster but that since 1st May there has been a miracle. No doubt if they try to do that I, and even perhaps some economists on their Back Benches, will remind them of the long-term reality of the position. I mention another quotation to underline the point I am making about the strength of the British economy which this Government inherited. On 2nd July it was said,
"As we look at this and future Budgets produced by the Labour Administration, we must remember that rarely, if ever, have a Government had such cause to be grateful to their predecessors when it comes to the economy".
I must emphasise the last sentence,
"rarely, if ever, have a Government had such cause to be grateful to their predecessors when it comes to the economy".
That was not a quote from the noble Lord, Lord Desai. It came from the noble Lord, Lord Healey. I remind the Minister of that in case he tries to pretend that everything they inherited from the previous government was dreadful.
We know that we have had economic success. We have seen it. We have seen the unemployment figures fall month after month over the past four to five years. I used to recount that when I stood at the Dispatch Box opposite. At the same time as our unemployment has fallen, unemployment in most of our Continental neighbours has remorselessly risen. Unemployment among young people in particular has fallen by about 100,000 a year in each of the past four years. When Gordon Brown first proposed his windfall tax to help young people, unemployment for those young people stood at 280,000. It now stands at 180,000 and it is still falling. However, in France, Italy and Spain unemployment rates for young people are double ours or worse. I hope that the Government can continue our success in getting young people off the dole and into work. We introduced a number of schemes. Some of them were pilot schemes to try to identify the schemes that worked best and were most economic. If the Government follow that course, I shall welcome it.
The other thing that the Government inherited was an inflation target which had been hit bang on, as Kenneth Clarke predicted it would in the month of the election. The interesting thing to note is that the Budget adds 0.8 per cent. to the inflation rate. The Government have deliberately set out to increase the rate of inflation over
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the next few months. I shall discuss manufacturing industry later but I suspect that it is having to live with some of the consequences of that.
The Earl of Longford: My Lords, if the previous government were so overwhelmingly successful, why were they treated with such contempt by the electorate?
Lord Mackay of Ardbrecknish: My Lords, that would require a longer answer than your Lordships' patience should endure while I am discussing this Finance Bill. I do not believe for a moment—I do not think that anyone else does—that it was a question of the state of the economy. In some ways the noble Earl might have asked me a more difficult question. The economy was in a good state. I have quoted the noble Earl's noble friend Lord Healey on that point. Perhaps the noble Earl does not agree with the comments of his noble friend Lord Healey. The noble Earl could have asked why, when the economy was in a good state, did the previous government not win the election? Generally if the economy is in a good state the government in office win an election, and if it is in a bad state they lose it. However, the previous two elections have rather stood that theory on its head. However, I shall not be diverted. I have quoted from the Economist and from the noble Lord, Lord Healey. I do not think that anyone disagrees with the proposition that the economy was doing extremely well on 1st May.
I could quote the words of the IMF and the OECD to back my assertion. I noticed that the noble Lord, Lord McIntosh, mentioned some quotations. It is a good job that his noble friend Lord Eatwell, who used to do battle with me on these matters, is not present because he gently reminded me at one stage of the odd time when the IMF and the OECD had made wrong predictions about the economic prospects of government. After that warning I was careful how many times I mentioned the predictions of the IMF and the OECD.
I return to the Budget and the economy. When the Government looked at the books—as it is termed—try as they might, they could find no black hole. Indeed the economy was doing better than the November forecasts in the Red Book produced at that time. In the time between my right honourable friend Kenneth Clarke's Budget to the end of the financial year, borrowing was £3.3 billion less than forecast. Indeed much of the trumpeted speed with which we shall get into balance is due to greater buoyancy of the economy than was forecast by my right honourable friend Kenneth Clarke.
I wonder why we have had these 17 tax rises. Was it because the economy was overheating? If that is the justification—that has been claimed once or twice—why did the tax rises fall so heavily on the corporate sector and not on consumption? If the tax rises were introduced to prevent the economy overheating, they should have fallen on consumption and not on the corporate sector. However, that was not the case. We have heard a great deal, although not today, about rises in spending on health and education. However, none of that is what the Government used to describe—when they criticised us when they were in opposition—as new money. It is money from the reserves and from next year's reserve.

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Every year—but a bit later than this, and in the current year—the Government use the reserves to help those spending programmes that are under pressure. I regret to say they usually had to help the Department of Social Security because we were not good at predicting our spending in the year ahead. We used to be reprimanded quite often, but it was difficult to predict, given the size of the budget and the different factors. However, that was what the reserve was used for. If a programme was under pressure, it went to help.
On this occasion—the Government have trumpeted it loudly—they have allocated half the reserve nine months before the start of the next financial year. They have not changed the control total; it is still within the control total. Therefore, there is no new money. Presumably the Government have a very good crystal ball and can see clearly that in the next financial year there will not be a need for those reserves: that they can live with half the reserve. I do not believe that that is a responsible way forward, but at least we know exactly where the money is coming from. It is not new money. If the Conservative Government had remained in office, nearer the next financial year the chances are that we might have allocated some of those reserves because that has been the pattern of the past few years.
I turn to some specific points in the Budget. I refer, first, to foreign income dividends. The noble Lord, Lord McIntosh of Haringey, did not say much about them; I am not surprised. They are a form of tax relief for British companies with large overseas earnings. The Government said that they were going to abolish them. But when the damage was explained to them—I was going to say that they had cold feet but they did not—they carried on with the legislation. Clause 36 and Schedule 6 to the Bill deal with that. But the clause and the schedule no longer represent government policy. To legislate and then consult is a new concept. I believe that the Government are now persuaded that they cannot undertake what is in the Finance Bill. It is quite remarkable.
I should like to know what they will do. Are we to wait on the next Finance Bill to put matters right? Until that Finance Bill, will they deal with foreign income dividends in the way provided for in Clause 36 and Schedule 6; or will they turn a blind eye to their proposals in the Finance Bill and wait until the next finance legislation to put their mistakes right?
I turn to the other part which I believe important. The Budget claims to help the budget of the Department of Social Security by its welfare-to-work policy. That is fine. As I mentioned earlier, I support anything that can be done to help people back into work, as we were doing. Yet at the same time the Budget endangers the welfare budget by its attack on pensions. The one issue on which I thought we almost had consensus was the importance of our own personal pension provisions, whether through a personal pension or an occupational pension. I know that I am wrong; I have been told that so many times I have to believe it. I am told that the proposals are good for pension funds. It is a doctrine that the noble Lord, Lord McIntosh, has brought before your Lordships' House. I am not sure that too many noble Lords believe him but he keeps on trying.
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The matter has been expounded best by Ms. Dawn Primarolo, the Financial Secretary to the Treasury. On 3rd July at col. 507 of the Official Report she said in another place that it is good for pensions and pensioners, not bad for them. People should understand that the government reforms will benefit pension funds. Will taking £5.4 billion out of pension funds in a year or two's time be good for pensions and pension funds? As I asked the noble Lord, Lord McIntosh, on the last occasion we discussed the issue, if the Government had taken £10.8 billion, would it have been doubly good for them?
Another member of the Government took a different attitude, but before he joined the Government. When the noble Lord, Lord Simon of Highbury, was simply Mr. Simon, chairman of BP, on 1st May he drew the attention of the National Association of Pension Funds to the danger of abolishing tax credits on dividends for pension funds. His remarks were part of a much longer criticism written by John Browne, chief executive of BP. They expressed this simple view: that in the opinion of the board of BP, of which the noble Lord was then chairman, and one of Britain's biggest employers, the plan would be bad for people with occupational pensions and the pensions industry. If I had to choose between Ms. Dawn Primarolo and the noble Lord, Lord Simon of Highbury, I would choose the noble Lord. I suspect that he knows a great deal more about the issue.
Put simply, the position is this. Up to now, when a UK company has paid £100 in dividends, £80 went to the shareholders and £20 to the Treasury. Pension funds were then able to claim that £20 back. They will no longer be able to claim it back. They will therefore not gain £100 but only £80. As in previous debates, a little honesty and integrity is needed, with the Government saying, "Yes, the pensions funds will have a problem, they will have a shortfall, but we need the money and that is the way that we shall go about it". But what is said is that somehow it will be good for pension funds.
The other excuse is that pension funds have big surpluses; that many companies have pension holidays at present. Many do, but not all by any means.
Perhaps I may refer to final salary schemes to which the Government pay such lip service and which are so important for many people. If those schemes do not have surpluses, and when the surpluses are used up, they will then require more contributions from the business, diverting funds from the very investment that the policy was set up to help. The only person who can put money into a money purchase scheme to make up the deficit will be the individual himself or herself. People will have to put more money into their pension funds if they are to achieve the pension they think they need when they retire. Indeed, a 30 year-old who expected at 65 years to have a fund of £270,000 will have his fund reduced to £240,000 by the ACT cuts. He will have to put aside £12 a month for the next 35 years in order to undo that damage. Therefore, I hope that we shall not hear that the policy does not do any damage to pension funds. It does a great deal of damage. For those funds

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which will be brought below the minimum funding requirement, the employers will have to put money in under the 1995 Act in order to make up that difference.
It is a serious matter for pension funds. The Government would do better to be honest about it and say that they believe that pension funds were in a privileged position and they have decided to remove that privilege; and if it means that employers and employees will have either to put more money in or face reduced pensions, they will have to make that decision. That would be more impressive as a reason.
But the policy is supposed to help investments. There is no explanation as to why. I am puzzled why Scottish names have to be changed. Mr. Norman Lamont became "La-mont" and Mrs. Liddell, Chief Financial Secretary is now "Li-ddell". I do not know why Scottish names have to be changed when one enters the Treasury. I am not sure what Brown will be changed to. Mr. Norman Lamont made a reduction from 25 per cent. to 20 per cent. There is no evidence that increased investment arose from that cut. Can the Minister say anything about that in his reply?
I wish to sum up and look at the more general economy briefly. I hope that the noble Lord, Lord Ezra, as he has done with me in the past, will talk a few moments about the impact of sterling on jobs, and the manufacturing industry in this country. This Government have paid much lip service to the manufacturing industry. I do not think that they are doing it any good. They know that themselves. Various remarks are made in what is now to be called either the Red Book or the White Book, depending upon whether one looks at the white cover or the back cover. I could give your Lordships some clear quotes. I am sure noble Lords have read them. The Government say that investment and manufacturing industry will have difficulties over the high value of the pound. Have the Government any intention of doing anything about it; or will they leave the Bank of England to continue putting up interest rates regardless of the consequences for the rest of the economy?
Is it just possible that in the long summer Recess the Government may decide to take Britain back into the exchange rate mechanism? We should be told that, and this is the last opportunity before the Recess to tell us. I hope to receive a clear answer from the Government. I am just a little suspicious that that might be exactly their intention. They will want to make sure that we re-enter at a value of sterling of which they approve. What value do they approve of? And can we have a cast-iron guarantee from the Government that they will certainly not re-enter the ERM between now and the House resuming in October?
12.50 p.m.
Lord Ezra: My Lords, I wish to concentrate on the first two objectives set out by the Government in the Financial Statement and Budget Report issued on 2nd July; namely, promoting economic stability and encouraging long-term investment, to which the noble
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Lord, Lord McIntosh of Haringey, referred in his opening remarks. I reassure the noble Lord, Lord Mackay, that I shall indeed refer to sterling later.
The Government have rightly concluded that the achievement of those two basic objectives is essential if the other objectives set out in the Budget Statement and underlying the Bill under consideration are to be achieved. Those are: modernising the welfare state to encourage work; high-quality public services; protecting the environment; and developing education and health. In view of the importance of the two main objectives, it is worth considering what measures the Government have introduced in the Finance Bill and in other ways in order to achieve them, and what problems lie ahead.
So far as the promotion of economic stability is concerned, the Government have identified the two main issues as keeping inflation and public finances in check. As regards inflation, they have given increased powers of independence to the Bank of England—an approach that we strongly support from these Benches. I have referred to it on many occasions in previous years. We are delighted that the Bank now has that responsibility; it means that decisions in this area will no longer be taken having regard to political consequences.
In the case of fiscal policy, the Government have laid down the golden rule that over the economic cycle they will borrow only to invest and not to fund current expenditure. Again, that is a concept with which we entirely agree. Their stated aim is to keep the public debt, as a proportion of national income, at a stable and prudent level. The Red Book sets out the details by which those desirable objectives are to be achieved. Time will tell whether the measures taken are successful, particularly when changes occur in the economic cycle.
I especially welcome the Government's identification of the need for long-term investment as a priority objective. I have referred to that need many times in previous economic debates; indeed, by my repetition of the subject, I thought I was beginning to bore the noble Lord, Lord Mackay. He has mentioned it to me in the corridors from time to time. I said: "I'll cease to bore you on that, if you cease to bore me on the great and manifold achievements of the Government in running the economy". I do not think that either of us has in fact stopped doing so.
As the Budget Statement makes clear, Britain's ratio of investment to GDP is low by historic and international standards; and in spite of the improvements to the economy to which the noble Lord, Lord Mackay, referred, the gap against other countries has been widening. As recently as 1996 manufacturing investment, which had a particularly bad year then, as a share of GDP fell to its lowest level since records began—a very worrying phenomenon. It is obvious that unless these trends can be corrected there can be no long-term positive prospects for the British economy. I regard the measures introduced in the Budget—which are welcome—to be simply a first step in the process of stimulating investment in the long term; I hope that further Budgets will add to them.

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That is all pretty positive. The Government are basically following the right lines. But, I now turn to what I consider to be the major short-term problem faced by the Government in the management of the economy; namely, the rapid rise in consumption. In previous debates I have drawn attention to the fundamental weakness in the British economy in virtually the whole period since the end of the war—namely, the way in which boom periods have been brought about by substantial increases in consumer spending, alongside continuing weakness in investment, inevitably leading to subsequent recessions. That has been our experience over practically the past 50 years. In these circumstances, when referring to this issue, I call for a rebalancing of policies as between investment and consumption. It is satisfactory that the Government have decided to place so much emphasis on stimulating investment and have taken steps to that end.
However, in the meantime consumption continues to roar ahead. In spite of the previous Government's estimate that it would grow at a rate of 4 per cent. this year (the estimate contained in the previous Red Book) the figures for June show that it is already rising at 5½ per cent. Regrettably, that is very reminiscent of what happened in 1988. I drew attention to the fact in a debate on 5th March which was answered for the Government by the noble Lord, Lord Mackay. The Red Book of that year estimated that consumption would grow at the rate of 4 per cent., a rate identical to that assumed for this year. In the event, in 1988 it rose by 7½ per cent. and was the main factor leading to the subsequent recession.
Returning to the present time, while consumption is rapidly rising, so is consumer credit, which reached a new peak in June. M4, which is the broad money supply indicator, is at its highest level since 1990, when the previous recession set in. There are already gloomy forecasts that we may be heading for another recession. I do not share those views but I fear that there are serious risks ahead unless action is taken.
A worrying consequence of the present situation is the rapid rise in the value of sterling (to which I now turn as I was invited to do by the noble Lord, Lord Mackay), even though there has been a slight levelling off in the past two days. That is undoubtedly already having harmful effects on the engineering sector. I attended a meeting the other day of the Engineering Employers' Federation at which there was shown to be a complete change in all the trends in engineering that were very positive last year—orders at home and abroad, re-equipment, investment and so on were moving up. This year, all those trends are moving the other way, and other parts of manufacturing industry are also suffering. Competitiveness abroad has weakened; but so has the position at home, with imports of manufacturing goods now penetrating the home markets more and more owing to relative cheapness. We were told of German manufacturers who for years had abandoned the British market because of the high costs of the mark now returning. So the situation is serious.
The Government, as a result, face an unfortunate dilemma. They have rightly established a long-term policy, which I fully support, based on financial stability and investment growth, and have taken the first steps
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towards its achievement. But they are confronted with the short-term risk of overheating. That has been spectacularly stimulated by handouts from the demutualised building societies to which reference was made in a Question earlier. Happily, the members of Nationwide, at least for the time being, have resisted the temptation to go the way of the other societies.
The main weapons in constraining the consumer boom are fiscal, through tax, or monetary, through interest rates. Within the limits of their manifesto commitments, the Government introduced a number of fiscal increases in the recent Budget. Many feel that those do not go far enough but I do not believe that they could have gone further in view of the Government's commitments. The only weapon left is that of interest rates. That in turn has had, and will continue to have, the harmful effect of pushing up sterling.
The major issue is how to deal with short-term risk while at the same time keeping on course for the long-term objectives. At this point I should like to turn to consideration of what is likely to happen with the euro. Whatever happens, it is bound to affect us: whether we are in or out, whether it goes ahead with us or without us, it is a factor which we now seriously have to take into account. We must contemplate what is most likely to happen and what our attitude towards it should be.
The present expectation—at any rate in financial markets—is that the single currency will be introduced on schedule in 1999. It is also assumed that it will have a large rather than a restricted membership and is therefore likely to be relatively weak. That is the present expectation, as far as I can glean from careful study of the financial press.
If British policy is to stay out at the initial stage, the likely consequence in those circumstances is for sterling to remain strong and perhaps to become even stronger. In my opinion, a strong sterling alongside a weak euro is a recipe for very serious problems for our economy.
Both the CBI and the TUC recently concluded that Britain should commit to the single currency as long as the conditions were right and there was a prospect of sustainability. I believe that also to be the position of the Government. No doubt that can be confirmed by the noble Lord, Lord McIntosh, when he replies.
The CBI, however, does not consider that entry should be effected at the first wave but at some subsequent date. The TUC considers that all options should be kept open, including first-wave entry. If the Government were to follow the TUC view and declare that all options were open, that could help to reduce speculative currency movements. I therefore believe that there is a great deal in the recommendation of the TUC, subject, of course, to the conditions being right and all the other qualifications. This could bring sterling nearer to an acceptable level, in my opinion. What is an acceptable level? I have always felt that if sterling was quoted at DM 2.50, as opposed to the present DM 3, that would be about right.
It is all the more important, in my opinion, that the Government should keep all options open at this stage, including entry at the first wave, in view of the fact that

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the UK will assume the presidency of the European Union next year, when firm decisions will have to be taken as to who will participate in the single currency.
Let me sum up my opinion. I believe that the Government have been right in their strategic approach to the management of the economy. They have been right to emphasise financial stability and long-term investment as the basis on which to build for the future. Unfortunately, they are faced with the all too familiar phenomenon of a consumer boom. It will require great skill to deal with this problem while at the same time safeguarding the long-term objectives. I hope that this time we shall not be thrown off course.
1.5 p.m.
Lord Simon of Glaisdale: My Lords, in the absence of an opportunity to debate the Consolidated Fund Bill and the appropriation Bill, this is the only opportunity at this time of the year for your Lordships to consider the economy generally. Although we had from both the Minister and the noble Lord, Lord Mackay, a valuable concentration on the Finance Bill and its effects, we have greatly benefited, if I may say so with respect, from the widening of the scope of the debate by the noble Lord, Lord Ezra.
I must begin with an apology in that it is many years since I was concerned directly with a Finance Bill. I feel that all the more strongly when I look at the list of speakers which contains so many experts.
Secondly by way of introduction, I should like to express my gratitude to the noble Lord, Lord McIntosh, not only for his introduction but also for the information which he ensured that I received this morning by breakfast-time. I told him yesterday that one of the points I wanted to raise related to the provisional collection of taxes. That matter is inscribed in detail in the mind of the noble Lord, Lord Cockfield, but most of us do not have that advantage. I am most grateful to the noble Lord, Lord McIntosh, for answering in general the points that I put to him and shall be grateful if he will convey my thanks to whoever wrote the letter. There remain two minor points which I should like to raise but, if I may, I will do so by letter rather than detain your Lordships.
My third point is, I am afraid, a familiar one on these occasions. It is a protest against our having to debate this important measure on the day we rise for the Recess. I am afraid that the Government have had a very bad example set them. After repeated protests last year, we finally had an opportunity to debate the Finance Bill, but it was at very short notice on the Friday when we were to rise for the Whitsun Recess. That is a great waste of parliamentary resources. At a time when the Government are considering deployment of parliamentary resources, I venture to suggest that this is a matter which they should consider.
Your Lordships' House has five former Chancellors, four former Chief Secretaries—I see only one present today and no former Chancellor now—two former Governors of the Bank of England, a chairman of one of the joint stock banks and a number of eminent
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economists, though I think only one is present. There is no other parliamentary chamber in the world which commands such expertise and experience. In my catalogue I forgot to mention the noble Lord, Lord Clark. I also omitted the noble Lord, Lord Cockfield, who has so many multifarious experiences that he cannot be classified. But it is a great waste not to debate this important measure at a more convenient time.
I want to mention three specific points. The first was referred to by previous speakers; namely, interest rates. New Labour is nothing if not a political menagerie. No doubt it is highly attractive to shift onto the Governor of the Bank of England unpopular decisions about rate increases, which seems at the moment to be the favourite method of regulating the economy.
With respect, I draw attention to the immense skill of the previous Chancellor of the Exchequer, Kenneth Clarke, in delicately adjusting the rates and fiscal measures to control the economy. It was a model. I confess that I had not seen that since my own Chancellor when I was in the Treasury. Derick Amory had the same gift, helped in his case by the fact that the economic adviser, Sir Robert Hall, had the same gift of seeing how the economy was moving and making the small adjustments that were required to steady it.
I very much fear that shifting the unpopular decision, which will hit house owners and borrowers, onto the Governor of the Bank of England is bound to cause trouble. In all my adult life I have never known a Bank Governor who has not been a hard money man. There have been three increases in the rate since the present Government came into office. It would surprise me very much if we do not have another. Noble Lords who preceded me emphasised the great damage done to exports if there is too severe an interest rate policy.
These days, there is talk of managing by talking down the sterling rate. That is possible. Perhaps the most likely method is to make noises about joining the European Monetary Union. I am in favour of monetary union and the exchange rate mechanism. Unless they are in place, there will be competitive devaluation, which is a protectionist measure. Perhaps if the Government start talking about Europe, it will be at risk of infuriating the noble Lord, Lord Bruce of Donington, but may be useful in reducing the height of sterling.
The other matter that I wanted to mention is again a general one; namely, the borrowing requirement. When we borrow in order to consume the result, we ask our followers—our children and grandchildren—to pay for our own satisfactions. Naturally, I rate access to justice very high. Nevertheless, if we borrow in order to pay for legal aid, we are asking our children to pay for our litigiousness. It is the same with national health. We are in danger of becoming a nation of hypochondriac litigants. So one is bound to ask: for what purpose is borrowing at the present rate justifiable? The answer must surely be: when the benefit accrues to those who have to repay the debt. So if a bridge is built over which they can go, that is justifiable; if education is improved by borrowing, that is justifiable; but what is not justifiable are the transient satisfactions of our generation.

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The previous Chancellor was very good in reducing the borrowing requirement. But it is still very much too high, on the principles that I have endeavoured to lay before your Lordships. I hope that the noble Lord, when he replies, will be able to tell us something about the borrowing prospect. That seems to me, together with the matter of interest rates, to be the most important matter that we have to face on the long-term view of the economy.
1.17 p.m.
Lord Desai: My Lords, it is a pleasure to follow the noble and learned Lord, Lord Simon of Glaisdale. I agree with him that, when we discuss the Budget, we have only one chance to discuss the Finance Bill. In the previous two years we were able to discuss the Budget speech during the week in which the Chancellor presented the Budget. This year it was not possible because of the overload of business. But I hope that my noble friend can assure us that in future years time will be found within the Budget week to have a discussion on the Budget speech. We can then wait for the Finance Bill, when it comes later.
I very much welcome the debate so far. I am sure that my comments will only follow lines which have already been laid down by previous speakers. First, I welcome the perspective which the Chancellor laid down; namely, that we only borrow for investment purposes—the golden rule—and that we try so far as possible not to borrow for consumption. In the debate introduced last March by the noble Lord, Lord Pym, I remember that I said that in a sense there is now all-party consensus on a certain basic macro-economic framework. That is to be welcomed. We all agree about that and there is not very much to distinguish between us on that question.
But I go further and draw an implication from what my right honourable friend said. At the top of a cycle we should not have any borrowing at all. We should not have a consumption deficit at the top of the cycle. We are at the top of the cycle, as many noble Lords have said, and I should have preferred the Chancellor to have taken much more out of the economy than he did. We know that the PSBR projection in the previous Budget for 1997–98 was an overestimate. The economy has done so well that we will not have a £19 billion PSBR. We will have a £15 billion or £16 billion PSBR. The Chancellor has reduced it by about £9 billion. I would have preferred him to wipe out the entire PSBR in one year. At the top of a cycle you can do it. If you cannot have a zero deficit at the top of a cycle, when can you have it? If he had been able to do that, he would have given the Bank of England reason not to increase interest rates; or rather to anticipate the slowing down of the economy due to fiscal measures, which would have lessened the pressure on the pound.
My right honourable friend has taken a decision. It is a matter of judgment. He could be right. But he does not want to fine tune the economy with fiscal measures. He wants to leave it to monetary policy. I believe that he could have done a one-off balancing this time, especially because the short-run monetary policy measures which the Bank of England can take do not solve the problem of the exchange rate appreciation.
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Therefore, we are left with one instrument short. We have to control the booming economy—a consumption boom—but at the same time we have to take care of the exchange rate appreciation. By not taking enough out of the economy through the Budget my right honourable friend left the field open to the Bank of England to take a rather gloomy view and go on raising interest rates. I fear that we have not seen the last of the increases in interest rates. There will no doubt be many more to come.
Some people have argued in the press—Mr. Gavyn Davies is among them—that the Bank should perhaps go for an overkill; that it should increase interest rates not by quarter percentage points but should go for a one percentage point increase immediately. That would mean a quick dip in the growth rate but a quick recovery as well. If you are not going to take the fiscal road to wiping the deficit out, I would prefer the overkill option. If you go slowly—quarter percentage point by quarter percentage point—you will prolong the agony. We may end up with sterling at about three deutschmarks through much of 1997 and a part of 1998 as well.
I agree with the noble Lord, Lord Ezra, that that will mean that manufacturing growth will slow down, if not become negative. The Red Book—or the Red and White Book as the noble Lord, Lord Mackay of Ardbrecknish, called it—actually anticipates that. It predicts a decline in the growth rate of manufacturing output from 1.5 per cent. in 1997, which by itself is not a very high level of output, to 0.75 per cent. for 1998. This has already been factored in. What we are witnessing now is a two-level change in the British economy. First, investment in the services sector is much stronger than investment in manufacturing. The services sector is more profitable than manufacturing and has been for the past few years. That is a long-term change in the economy. At the same time the strength of the exchange rate is probably going to accelerate this process, at least in the next year or two.
The fact that in the first six months of this year manufacturing exports have stayed up tells me that British exporters are learning to squeeze profits when the pound is strong rather than put the prices up as the pound goes up. How long the profits squeeze can last we do not know. We can only hope that we can go on taking a profits squeeze and go on maintaining an exports growth. However, I fear that what we will have is a slowing down of manufacturing production and we could be facing a growth recession and a considerable slowing down of gross domestic product in the second half of 1998 or the first half of 1999. That will happen because the Bank of England will want to put up interest rates. That will feed the exchange rate.
There is speculation as to whether our making good noises about the euro will have an effect on the pound. Much more important than the noises we make on the euro are the noises the French make on the euro. As the noble Lord, Lord Ezra, mentioned, if this turns out to be a euro with a large initial membership, so that France, Italy, Spain and perhaps Portugal are in as well as the countries of the deutschmark zone, it will be a euro which will be under considerable speculative attack and it will be a euro into which we certainly should not go.

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That will mean that the pound will be as strong next year as it is this year. The right thing for us during the presidency would be to say that the euro should not start on time. We should take a firm view that it is not in anyone's interests to have either a weak euro with many members or a strong euro with few members.
We should not have a situation in which one year's deficit number looms so large that we decide on membership on a 3 per cent. deficit and we judge that the French have managed it very well because they are down to 3.2 per cent. or that the Germans have managed very well, by some degree of fudging, to get it down to 3 per cent. That is not the way economies should be run. When we have the presidency we should say that it is in no one's interest in Europe to start the euro at that date. We should say that countries should be allowed to join only if the deficit goes below 3 per cent. for three years. If we do that there will be a much slower and a much stronger evolutionary process for the euro. We are taking the Maastricht deadlines far too seriously. We are taking them seriously. Not only are the mainland European economies damaging their employment and growth prospects, but we are in danger of starting the euro initially weak. That could be damaging.
Lord Ezra: My Lords, does the noble Lord agree that the prospect of the euro coming in 1999 has acted as a strong pressure point on governments to get their finances in order and that, if there were a prolongation for, say, three years, that pressure would be removed and the likelihood of ever getting back there could be much reduced?
Lord Desai: My Lords, we should not postpone it unconditionally. We should say that a performance of 3 per cent. and below should be maintained for a number of years. Only countries which have maintained a good budget deficit record should be allowed to join. Let us merge the stability pact and the Maastricht conditions in one package and let us have a later start date. Let us postpone it so that the markets are convinced that the deficit numbers shown by European countries are not fudged or faked numbers, as they certainly are in the case of Italy and are likely to be in the case of France and perhaps Germany as well. It will do us no good at all just to say that the conditions have been laid down and that therefore, by some narrow interpretation, we fulfil them and start on 1st January 1999. The freedom not to start should be explored. That is the leadership we should give during our presidency. We should say that having these silly conditions dominating us is no way to run economies.
I do not want to say too much about the Finance Bill itself because that is something we cannot amend. But perhaps I may point out one thing about the effects on pension funds. Perhaps one unintended side-effect will be that the pension funds will be able to switch out of equities into gilts. That might make it easier for governments to borrow money. It may be slightly cheaper to finance government debt than before, which may not be a bad thing at all.
Lord Marsh: My Lords, to follow the logic of that, it will also mean that the yield on gilts is likely to go down and that the returns will be less than they are currently because the equity return will be much higher.
Lord Desai: My Lords, yes, indeed. It may be a measure to direct part of the City more towards gilts and away from equities. It is a technical advantage and I do not believe that it is a bad thing.
I cannot resist saying something about VAT on domestic fuel. I do not believe that my noble friend will like me for this. I have said for a long time that income elasticity for domestic fuel is 3.5 per cent. People who gain from cuts in the tax on domestic fuel are the rich. The poor have to pay the taxes, and if the poorest are to be relieved of the burden, they should be given an income transfer, but do not reduce taxation because that only benefits people like ourselves and we are the last who should be favoured.
1.31 p.m.
Lord Clark of Kempston: My Lords, I follow the sentiments expressed by the noble and learned Lord, Lord Simon of Glaisdale. Your Lordships' House has a wealth of expertise in finance. This House has no power over money Bills and consequently finance debates here are sparse and infrequent. That is a mistake. Although money Bills cannot be altered by your Lordships the advice that can be given from this House should not be ignored.
We have to look at the background to the Budget. My noble friend Lord Mackay of Ardbrecknish was right when he said that this Government have been extremely fortunate because they have taken over an economy which was booming. Unemployment was going down and inflation was low, and so forth. There is no question that the economy of this country was one of the best in Europe, if not the best. I remind noble Lords that that is very different from the economy that the Conservative Party inherited in 1979. I believe that all economists would agree that at that time the economy was a shambles.
I first came to the other place in 1959. I believe that I have spoken on every Budget and I have served on many finance standing committees. It worries me that this Bill has been guillotined. One cannot possibly guillotine a Budget debate when running an economy. Consequently, there has not been close scrutiny of the Budget by Back-Benchers in the other place. I deplore the steamroller effect of pushing through legislation without the normal close scrutiny by the other place.
I believe that the health tax on elderly people in the Budget is a spiteful tax. For the life of me I cannot see why, if a person does not want to rely on the National Health Service, they cannot be helped to have private health care. That aspect of the Budget will mean extra pressure on our National Health Service.
I turn now to the pension dividend changes. I believe that the Government have not looked at how pension funds work. The actuarial value of pension funds, particularly for the future, is dependent on the fact that there were fiscal incentives for pensions.

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The Government have taken that away. There are no party politics involved in the views of the National Association of Pension Funds. It has worked out that over 10 years it will mean that some £50 billion will be taken out of pension funds. There are long-term consequences. At the moment the pension funds are in surplus, but they could easily go into deficit. There is a surplus at the moment because of the boom on the Stock Exchange, but that may not last.
If that means that an employer has to put an extra tranche of money into the funds in order to counter the cost of £50 billion over 10 years, although the present members of pension funds may remain members, I am worried about the new employees who might come into a business. It may be that there will be resistance by some employers to admitting new employees into their pension funds.
Another point I want to make concerns the base rate. I believe that successive governments have paid far too much attention to the economic effects of the base rate. We all know that there is a consumer boom at the moment in this country. If I have an overdraft of 100 units and I am paying two points over base rate, which is probably what I would have to pay, I shall be paying 8.5 points per 100 units. The Chancellor has put the rate up by a quarter of 1 per cent., but that is not going to stop me spending money. If I know that, from my other resources, I can service an overdraft of that magnitude, another 0.25 per cent. is not going to mean much to me.
As regards the base rate, mortgages have been hit, and also manufacturers, because of the strength of sterling. It means that we shall suck in imports because of the strength of sterling. People will be encouraged to go abroad for their holidays. I do not object to that at all, but it is all a drain on the balance of payments deficit in this country.
We should have concentrated on the other side of the coin to stop or check the consumer boom. I believe that more emphasis should have been given to spending taxes such as VAT. One has to accept that children's clothing, food, and transport would be affected. But the rest of the VAT catchment area could have achieved what is required. The noble Lord, Lord Desai, said that when we are at the top of the cycle we must have no public sector borrowing. That is easily said, but the only way in which one can stop that is either by reducing government expenditure or increasing taxes. There is no other way. It is axiomatic. I remind your Lordships that that happened under both the last government and the one before that. Indeed, some years ago the noble Lord, Lord Jenkins of Hillhead, managed to do that, as did my noble friend Lord Lawson.
We should pay far more attention to matters other than the blunt instrument of raising interest rates by one quarter of 1 per cent. and then by another one quarter of 1 per cent. because there is no question but that that really squeezes our manufacturers and their exports. If they lose exports the consequence is that there are bound to be lay-offs in the workforce. That is the main danger of sterling being too strong. I hope that in the future the Government will look for a more practical way of containing consumer spending by doing something about the spending taxes.
1.40 p.m.
Lord Barnett: My Lords, I begin by supporting my noble friend Lord Desai in his suggestion that we should revert to our previous practice with regard to such debates. I am sure that my noble friend on the Front Bench will be able to assure me that when we have a longer gap between a March Budget and the end of a Session, we shall be able to have a debate on the Budget as well as a later debate on the Finance Bill.
As this is to be our only debate on the subject, I hope that your Lordships will not mind if I do not deal with the details of the Finance Bill but concentrate instead on the general policy behind it. The Chancellor was right to say—he said it again today in an interview in The Times—that he is concerned about getting the economy right and in balance over the long term. He is right about that, but I fear that he is showing an obsession with concern for the short term. He is concerned about the short-term rate of inflation, the short-term public sector borrowing requirement and the short-term level of interest rates. That is in order to achieve a 2.5 per cent. target for inflation, as he said in his instructions to the Governor of the Bank of England.
In the short term, I would not consider it a disaster if inflation was 2.7 per cent. or even 3 per cent. We have known higher rates over the years. I believe that the economy could live with a rate of 3 per cent. over a short period. I could certainly do so. I believe that in the longer term the Chancellor is right to have a target figure of 2.5 per cent. As he told the Governor in that famous letter from which I shall quote in a moment, the Governor will have to explain a rate which is 1 per cent. higher or lower.
However, I believe that the Chancellor has gone too far. Indeed, somewhat unusually for me, I support what was said in a leader in The Times on 26th July, which stated:
"The announcement that the British economy has been growing at a slightly faster than expected pace would normally, one might think be greeted with a little enthusiasm. When that annualised rate of 3.4 per cent. coincides with an underlying rate of inflation clearly beneath 3 per cent., unemployment falling below 6 per cent., and a benign balance of payments …".
The Times is, of course, right and I am not claiming credit for this Government or the previous government. It is a fact. The leader then stated that despite everything that is happening in the economy,
"movements in inflation remain tiny".
That is absolutely true. There is no sign yet of a take-off in the rate of inflation.
However, as a result of the obsession with the short term, growth will inevitably be lower and the tax take will not be high enough to finance reasonable levels of public expenditure. As I have said previously in your Lordships' House, I believe that to sustain for two years the present level of public expenditure bequeathed by the previous government is to attempt to do too much and is to do too much damage to the public sector. The health service, education and local government are in desperate need of money. There can be little doubt about that, yet we are committed to doing nothing more than was done by the previous government.

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What I dislike most of all is that apparently no money can be transferred from one department to another. If one department saves money, that money cannot be used in another department because we are committed to the existing levels of expenditure in each department. Which department will therefore save money? Any department that manages to do so will spend it again pretty quickly, and before 31st March in any given year. We all know that that often happens.
Perhaps I may give an example relating to another public sector body. I have the honour to be the trustee of the Victoria & Albert Museum and chairman of its finance committee. Similar things must happen in other public sector bodies. We have had cuts of £1 million a year for three years. That may seem small to your Lordships, but it is not small to a museum. The museum is now expected to operate at public sector wage levels which are not only very low, but which have been frozen in real terms for a long time. The net result is that many employees—wonderfully decent people—accept those cuts because they fear that the alternative would damage the museum and their own employment prospects. They are not on big salaries now, but they have to live on reducing salary levels in real terms while they see the "fat cats", to use the phrase of my noble and learned friend the Lord Chancellor, doing rather better. Therefore, I am not at all pleased to see levels of public expenditure being maintained and I have to tell the Chancellor and my noble friend on the Front Bench that that is my view.
I turn now to the balance between tax levels, interest rates and the exchange rate which everybody agrees is too high. Even the noble Lord, Lord Mackay of Ardbrecknish, said that it was too high, although he did not tell us how he would reduce it. The Opposition do not have a case because they say that there should not have been a Budget. However, they do not tell us what would have happened to the exchange rate and the economy without the Budget or without the increase in interest rates.
My own view is that having higher taxes and higher borrowing to pay for slightly higher public expenditure in the short term would be right and would not massively increase the rate of inflation or the public sector borrowing requirement. Indeed, it would not be a disaster if the PSBR did not reach zero by the end of the century. All the highly intelligent Ministers and Prime Ministers of the 15 countries which were present for the signing of the Maastricht Treaty, on which incidentally there was no referendum, decided that borrowing 3 per cent. of GDP in any given year would be all right. We will be well within that.
We are told by some—by the CBI, for example—that the Chancellor should talk the rate down. That is a strange request for such an organisation to make. Can anyone imagine the Chancellor getting up and saying, "Ladies and gentlemen, I have to tell you that the pound should be lower". I am sure that that would work immediately. It would have some effect, but I doubt whether it would have the effect that the CBI has in mind, although I am not entirely sure what it does have in mind. Some noble Lords may have been members of
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that distinguished body, but I am not sure whether many of its members would support what the CBI is telling us that we should do.
Those who complain about the high level of interest rates and the exchange rate do not have the faith in the Chancellor which the CBI has. They do not believe that he could talk down the exchange rate. Not even the noble Lord, Lord Mackay of Ardbrecknish, could talk down the exchange rate because he would not do anything. As I have said, he would not have had this Budget. The noble Lord has now returned to the Chamber so perhaps I may say to him that he never does better than when he has a terrible case. That has been true today. I always enjoy listening to the noble Lord. He made a great speech earlier, but what worries me is that he never has a serious case to make. That certainly applied today, although this is a serious matter on which we are having a serious debate about something which is very important; namely, the high exchange rate and the high level of interest rates.
The Chancellor said that he does not want either a boom or a recession. Nor do I. I do not know what will happen in the economy in the next year. Various assumptions have been made about what proportion of building society windfalls will be spent. They are called "assumptions", but in non-jargon, they are guesses. No one knows what will happen. I willingly concede that I do not know. However, I would rather risk a slightly higher rate of inflation than the dangers of recession and a reduction in growth of the kind that we are all too likely to have.
I was not always in favour of the idea of the Chancellor giving the Governor of the Bank of England and the Monetary Committee the right to decide interest rates. It was generally applauded when he first did it. I am not sure that everyone applauds it today. One reads in the Queen's Speech what the Government say about that matter:
"The central economic objectives of my Government are high and stable levels of economic growth and employment … To that end a Bill will be introduced to give the Bank of England operational responsibility for setting interest rates, in order to deliver price stability and"—
this is my emphasis—
"support the Government's overall economic policy, within a framework of enhanced accountability".
We did not read anything or hear anything about such a Bill in the letter to the Governor from the Chancellor. Can my noble friend inform the House when he comes to wind up whether there is to be a Bill confirming the instructions to the Governor and the Monetary Committee on how inflation should be controlled. The letter to the Governor is slightly different from what is said in the Queen's Speech. In that letter the Governor of the Bank of England is informed:
"…I said that the monetary policy objective of the Bank of England will be to deliver price stability (as defined by the inflation target) and"—
this is my emphasis—
"without prejudice to this objective, to support the Government's economic policy, including its objectives for growth and employment".

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It appears from that that the Governor and the Monetary Committee should take account generally of the Government's economic policy but that the overriding matter that they must take into consideration is inflation, regardless of any other consequences to the economy. That is quite clear to me given the words "without prejudice to this objective". The letter makes no mention of a Bill to confirm that. If there were to be a Bill I would not be in favour of that kind of qualification. However, the Chancellor also says in the letter to the Governor of the Bank of England:
"Of course, I have to take into account that any economy at some point can suffer from external events or temporary difficulties, often beyond its control. The framework I propose is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances".
I do not believe that anyone will dispute that that is likely to happen from time to time. However, in his letter he makes it quite clear that the target that he has set of 1 per cent. up or down will be fixed just once a year. It will not be changed in times of volatility. On this occasion it will be slightly shorter because the Budget next year will take place in the Spring, but normally, whatever be the volatility, we are told that the target will be changed only once a year. It appears that the Governor and the Monetary Committee—all of them are very nice people—will have a target and policy imposed upon them by the Chancellor that will place a degree of rigidity on the economy, with which I am not at all happy. The case of my right honourable friend the Chancellor for stability in the long term is well made but not necessarily in the short term at present levels. It will keep growth eventually at too low a level. Growth in the economy is vital if there is to be any hope of improving public services that we all know need to be improved.
The case for a Labour Government, new or old, has been well made and accepted by the country, but eventually it must be a government that is rather better than just the Conservative alternative. There is no point in just being better than the Conservative alternative. We have to do something—which is what we are in politics to do. I hope that we are in politics to give help to those who need it, both through the public services and otherwise. To do the kinds of things that I fear are being done will not provide that kind of help.
1.55 p.m.
Lord Cockfield: My Lords, if I agreed with a word that the noble Lord, Lord Barnett, uttered on the question of inflation I would immediately sell all of my conventional gilts and buy index-linked. I have no intention of doing either. I entirely agree with what has been said by the noble and learned Lord, Lord Simon of Glaisdale, and my noble friend Lord Clark of Kempston about the difficulties of and objections to debating the Finance Bill so late in the day.
There are dangers as well. I remind the Government Front Bench of what happened almost 15 years ago when the Labour Party, then in opposition, decided to take the Finance Bill hostage and ambush it as part of an industrial dispute. The trap was sprung at four o'clock in the afternoon of Friday, 24th July. The Motion for Third
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Reading was opposed. A Division was called and the Lobbies were cleared. At the last moment the leaders of the ambush bottled out—which I believe is the current phrase—and the government of the day got their business. I was the Treasury Minister in charge of the Bill, so I realise the trauma to which such events can give rise. A government who decide to conduct business right up to the wire face certain dangers. I have no reason to suppose that the present Opposition intend to ambush this Bill today. But it is the duty of the Government to keep sufficient of their members on tap in order to defeat any such move, as we did in 1982. I say no more about that.
I should like to raise the question of consultation on major changes in the tax system. I do not do so in any sense of criticism of the noble Lord, Lord McIntosh of Haringey, who has always answered innumerable Questions and supplementaries with great knowledge, patience and courtesy. Just occasionally one gets the feeling that his direct knowledge has run out and, in the immortal words of Edmund Burke, he relies upon his imagination. I propose to deal with the exchanges that occurred on Monday of this week regarding consultation on tax changes.
My noble friend Lord Dixon-Smith asked whether there had been any consultation over the decision in the Budget to abolish the tax credit for pension funds. The noble Lord, Lord McIntosh, did not mince his words. At col. 8 of the Official Report he said:
"My Lords, under existing Budget procedures it is not appropriate to consult".
That point was pursued in the next column by my noble friend Lord Boardman. In reply, the noble Lord, Lord McIntosh, said that the Government had had barely two months. In a moment I shall challenge that. He went on to say (at col. 10):
"Clearly consultation of the wider kind referred to by the noble Lord, Lord Boardman, continues to take place, but not in the specific run-up to a Budget".
Over a very long period of time—certainly as far back as 1920—there have been very detailed consultations on major changes in the tax system. The question therefore is whether what was done in this Budget represents merely a standard sort of budgetary exercise or an important change in the tax system. I rely in evidence on the words of Mr. Gordon Brown in the course of his Budget speech. At col. 306 of the Official Report of the other place he said:
"The objective behind our two-year long corporate tax review"—
notice that he said two years, not two months
"begun in opposition, has been to develop a tax system that encourages personal savings, favours higher levels of investment, rewards long-term investment, and is fair to all".
It would be difficult to imagine a more comprehensive definition of a major restructuring of the whole tax system, but, not content with that, he went on (in col. 311) to refer to:
"A country equipped for the future should have a modern tax system based on principle".
That is how he justified his proposals. One will find that repeated again and again in the briefing that was issued at the time of the Budget.

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There is no question whatever—I have brought along a large selection of documents to prove it—that in circumstances such as this consultation was not only the right procedure but the one almost invariably followed. In 1982, when a massive consultation document was produced by my right honourable and learned friend Sir Geoffrey Howe, as he then was, the result of the consultation was that nothing should be done. That shows that consultation can sometimes put a government right, although not necessarily justify what a government are doing.
I have great sympathy with the Labour Party over this—I say this sincerely—because it came into office with an immense programme—I am not now trying to criticise the programme—and the appalling problem of trying to carry such a programme through two Houses of Parliament in a limited period of time. It had great problems. I in no way contest that, but I want it put on the record that with major changes of this kind the proper course is consultation.
I turn to another aspect of the subject. The Budget changes have been attacked, and in my opinion rightly attacked, on the ground that they impose an additional tax burden of some £5 billion on pension funds and other institutions. But in fact the changes are worse and more dramatic than that. They represent a further and massive step, undisclosed, towards the double taxation of dividends. For more than 150 years—since income tax was introduced in this country in 1789 by Mr. William Pitt the Younger to finance the war against the French dictator, the Corsican Napoleon—the British system has taxed dividends once and once only. Following the system of the deduction of tax at source, of course the tax is collected first on the company and then passed on to the individual shareholder.
But in 1965 Mr. Harold Wilson's Labour Government changed over to what is most misleadingly called the classical system under which dividends are taxed twice. There is nothing classical about that system. In fact it was imported from the USA which imposed it in 1913 when it introduced its federal income tax. That was over 100 years after a system had been introduced in this country. Under that so-called classical system, dividends are taxed twice. That is, one taxes the company first on the totality of its profit—what it retains itself and the dividend—and then one taxes the dividend a second time.
From the Labour Party point of view, particularly from the point of view of old Labour, that was a wonderful idea. It soaked the rich. Potentially it raised a great deal more money. It allowed the Labour Party to indulge in its traditional pantomime of pretending to run the economy.
When the Conservative Party came back into power in 1970, it dismantled that system and returned to the long-established British system of taxing dividends once and once only. Tragically, at that stage a mistake was
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made. We adopted the French imputation system. The French have many very great virtues, but they do not extend to designing a decent tax system.
Lord Marsh: Hear, hear!
Lord Cockfield: I entirely agree, but I shall not go into that. We adopted the imputation system because at that time we were on the verge of joining the European Community, and it was thought, mistakenly as it proved, that the imputation system would become the general tax system in the European Community, and it would therefore be to our advantage to adopt that system. The French imputation system does not tax dividends twice. It taxes them once and once only. Unfortunately the system is opaque and difficult to understand and its results are often misinterpreted.
The story must go on to Mr. Norman Lamont. Mr. Lamont was obsessed by a problem called surplus or unrelieved advance corporation tax. Incidentally, he did a great deal of consultation, so I am not criticising him on that ground. As a first step to meeting the problem of unrelieved advance corporation tax, he reduced the credit given to the shareholder for the tax already paid on the dividend from 25 per cent. to 20 per cent. It is a peculiarly warped piece of logic to say to A, who complains that he is paying too much tax, that it is the intention to increase the tax on B and then to point out to A how much better off he will be because, while the tax is being increased on everyone else, it is not being increased on him.
From the Treasury point of view, that manoeuvre has the great merit of raising an additional £1 billion of revenue. But the truth of the matter is that it was the first step—and a big step—back towards the Harold Wilson system of the double taxation of dividends. It is quite incomprehensible how a Conservative Government could ever have done that or ever have allowed their Chancellor of the Exchequer to do so. I can imagine only that the Government never understood what was going on and most certainly Mr. Lamont never understood what was going on. The argument recently advanced that it was the first step towards a basic rate of income tax of 20 per cent. is complete nonsense. It is not borne out by any of the documentation at the time and nor as a matter of logic does it hold water. It was done solely in the mistaken opinion that it would help the problem of surplus advance corporation tax and that on the side it would produce £1 billion of revenue.
Mr. Gordon Brown has now built on that and effectively he has reverted to the Harold Wilson system of the double taxation of dividends. The move has been disguised by transitional provisions and by measures to soften the blow on individuals. The picture is further obscured by the fact that the first victims are tax exempt bodies. Therefore, it appears merely to be an attack on the pension funds, but it is not. Ultimately, it is an attack on all of us and the day will come when that is apparent.
It is a massive return to the economics of old Labour. The economic arguments are bogus. The Harold Wilson system failed to deliver the alleged benefits. A quarter

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of a century on it will fail again. In the end, even the Exchequer will lose. Professor Northcote Parkinson's fifth law was:
"Expenditure will rise to match the revenue available".
The £5 billion of extra revenue which will be raised by this manoeuvre has been mortgaged in advance in expenditure commitments. Mr. Gordon Brown is already hard at work digging his own grave. I hope only that we do not fall in it with him.
2.11 p.m.
Lord Marsh: My Lords, the noble Lord, Lord Cockfield, rightly drew attention to the failure of the Government to consult on many issues. That was a direct result of a totally unnecessary rush towards a Budget. It was part of the "Gung ho, let's show we are hitting the ground running" attitude. No doubt the Government were clearly inhibited by that failure to take advice and consult on a range of complex issues. I agree with the noble Lord, Lord Cockfield, that in respect of pensions, to which I shall return in a moment, the consequences will go much further than pensioners and pension funds.
Following a distinguished tax expert, I wish to begin with a few words in praise of income tax and those who administer the system. I must admit that I do not like paying it, no doubt like many other Members. Indeed, I spend a considerable amount of money and time seeking to avoid paying it. But it is efficient, flexible and, above all, fair.
However, in the Budget the Government did something which I cannot remember any other government doing. For purely electoral reasons they completely ruled out the use of income tax, despite the high cost and radical nature of some of their policies. I am pleased to see that at least one other noble Lord, hot from the Cabinet Room, has joined the noble Lord, Lord Ezra, on the Liberal Democrat Benches. Before they sold their souls for a seat in the corridors of Downing Street and an occasional trip in a government Mondeo, the Liberal Democrats spoke out consistently against that policy as being purely an election gimmick. They were right. It makes no sense for a government to write out of consideration the possibility of using direct personal taxation as one of the tools available to them.
They were completely committed, despite that, to very expensive policies, some of which are of very doubtful efficacy. Everybody feels the need to do something for the unemployed, in every country. The one fact that has become crystal clear over the years is that not very much is achieved by throwing money at the problem. But the Government were elected on those policies, and I hope very much to be proved wrong. However, even in that regard what they seek to do is marginal.
The Chancellor then took a calculated view that he could get away with the windfall tax and the abolition of tax credits because the public simply would not understand the implications. The windfall tax was presented as part of the crusade against the so-called fat
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cats—vastly over-paid people of little value to society, the sort of people who can be found on a No. 10 guest list.
Of course, the reality is different. That belief that there are things called companies which can be plundered and that that has no impact on people is a mixture of ignorance and a deliberate attempt to mislead. Companies do not have any money of their own. A tax on the utilities is a tax on their owners, otherwise known as shareholders. Those shareholders are not the rich.
There is a lot of mythology in the Labour movement about money, the City and large companies. Overwhelmingly, shareholders take the form of pension funds, insurance policies and particularly in the case of the utilities, the privatised companies, a very large number of small, individual shareholders. The majority of the individual shareholders uniquely in the privatised industries have an average shareholding of something like £2,000. That is because those people invested in the privatised companies precisely because they believed that it was safe because it was government sponsored. They invested at the invitation of the British Government in a public flotation. Some years later, the present British Government decide in retrospect that the issue was under-priced. They then say, "On the basis of that, the profits are too big". They say it is a one-off, but it will not be because those things never are once the door is opened. In deciding in retrospect, that the issue was underpriced they reneged on the original deal and sequestrated some of the shareholders' funds.
It will not be disastrous because of the sheer size of the companies. But it is a very dangerous precedent when people invest in a prospectus, particularly a government-backed prospectus, and then find that the basis upon which they bought is subsequently changed.
Of course, it is perfectly legal. The Government have a very large majority. With that majority, they can do virtually anything they like. But that is the commercial morality of a banana republic and not in the interest of this country.
The issue of tax credits is different. The implications are very wide indeed. As the noble Lord, Lord Cockfield, said, they go a great deal further than pension funds and the impact is as yet unknown. Being charitable, I do not believe that the Government knew what they were doing when they took that action. I am not sure that that is a particularly flattering remark to make about a government. They go down that road and then say, "Well, we did not consult so we do not know what is actually going to happen but we will do the best we can". That is extremely worrying. The implications are wide and still unquantifiable.
The basic facts are clear. That measure will have a major, wholly adverse impact on 7 million personal pension holders. I do not believe that anyone disputes that view. The noble Lord, Lord McIntosh, has said that it will get a lot better in the future. I must say that I have fired sales people for selling policies on that basis. However, it is generally accepted that the figure will he 7 million people or thereabouts.

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With the greatest respect, it is simply absurd to claim that it can be other than highly damaging to that very high number of ordinary people. William Mercer, a well-known firm of independent consultant actuaries, has published its first considered judgment. It estimates that the effect on personal pensions will be about 0.75 per cent. That does not sound very much, but the reality is devastating. For example, for someone with 20 or 30 years to go before retirement, it means that he would have to increase his contribution by between 20 per cent. and 30 per cent. to get there. It is not a question of choice. Most people will not be able to do it. If the Government did not know that that would be the effect, they should not have done it. That is not a piece of political propaganda; it is actuarial arithmetic. You do the arithmetic and that is the result. It is nowhere near as complicated as people outside the industry believe. I feel that I should declare an interest as I have a direct financial interest in the pensions industry and in the investment industry, which I have declared before.
The problem goes even further. The noble Lord, Lord Clark, mentioned the likelihood that employers would switch out of final salary schemes to the disadvantage of the people concerned. Arthur Andersen, another professional independent firm of consultants, decided to take a look at the matter. It surveyed 50 companies in the FTSE 350, employing over 500 people. That is not arithmetic; it is people's replies to a questionnaire. In response, two-thirds of them said that, as a result of the change in the tax credit position, they had already decided to move from final salary schemes to money purchase schemes. Moreover, 6 per cent. said that they were considering getting out of employee pension schemes completely. Again, that is not guesswork: those were the answers obtained from a questionnaire sent out by a reputable, internationally-known firm.
I could go on, but the effect on millions of people who are trying to provide for their retirement is massive. Many who left SERPS—with a lot of prodding from government—now find that they are worse off than if they had remained in it. The implications are interesting. If one looks at pension mis-selling, although it is different, it is clear that the people who mis-sold pensions knew, in most cases, what they were doing and should suffer as a result. But the government of the time, to give them the benefit of the doubt, did not know what they were doing. So some people deliberately chose particular pension schemes because they thought they were better than SERPs. They then contracted out of SERPS and into the other schemes, only to find that they would have been a lot better off if they had stayed with SERPS. I shall return to that point. It is retrospective mis-selling of pensions in a big way by government.
There is also a problem with local authorities and their pension schemes. They now find themselves in a special position. The noble Lord, Lord McIntosh, quite rightly said that, because there has been no consultation and no time to work it out, no one knows what the final position will be. That will come out in the actuarial studies. Therefore, no one knows what the cost will be,
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but obviously local authority finance directors have to make estimates. They may be wrong; but they have made the best estimates they can.
In that respect I give a few examples. These are the estimates drawn up by professional people acting in their professional capacity to the best of their ability. The figure for South Yorkshire is £7 million, for Merseyside it is £9 million and for Greater Manchester it is £10 million. One could go right down the list of unbudgeted expenditure which is now facing local authorities. I believe that they will have just three ways of dealing with it. One is to reduce staff, another to reduce services and the third way is to increase local taxation. These are different policies which are perfectly legitimate in different circumstances but they are not consequences that should arise by accident as a result of major legislation.
The Government's official line on this shambles is extraordinary in its naivety. There is no time to discuss the technicalities. The noble Lord, Lord Desai, said that there will be a switch out of equities into gilts. Some Members of the Government see that as a good thing because they are worried about the risks posed to carefully managed pension funds by equities. Of course that switch helps the gilts market. However, the moment one helps the gilts market, the value of gilts rises and immediately the yields fall. People in pension schemes have to invest their pension funds in gilts because they have to buy an annuity. Therefore, overnight, they will receive lower returns. People believe that the financial services industry is immersed in impenetrable mystery but it is simple. It is not a matter of opinion, it is a matter of arithmetic. When prices go up, yields come down. When yields come down, those people who have invested achieve a more profitable capital position and a less profitable income.
Most pension funds are primarily directed towards income. However, mature funds will have as great a concern with capital. The idea of a government wandering around this minefield, taking a decision and then saying, "Whoops, look what happened here we did not think that was going to happen", is terrifying. There is no doubt at all that what the Government expect to see happen is most unlikely to happen. They believe that that which is crystal clear to them is not even dimly apparent to companies such as Shell, ICI, Glaxo and the major R&D companies. They have not noticed that they should spend a little more on investment. The Government will not only tell them that they should do so—all governments tell industry what it should and should not do—but will try to force the position to make that happen. I do not think that it will happen and there is no evidence that it will.
This Government include people who are highly respected in local government, academia and the law. They are people of real talent who have good reputations. However, it is a fact—this is not intended to detract from their skills and achievements—that few of those people have any experience or interest in business or commerce. This Government do not have a Harold Leaver or a Jack Diamond. I am sure the noble Lord, Lord Barnett, will not mind when I say that they do not have a Joel Barnett.

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The culture of the Labour Party has always been suspicious of the Stock Exchange and its activities. Words such as "gambling" and "casino" are regularly used. Yet within days of entering office the Government concluded that they should go ahead with their policies in this area. As a result they have dealt a blow to the pension plans of 7 million people, far greater than Maxwell and mis-selling combined. The side effects are massive. The Government have become involved in trying to directly affect the share market and Stock Exchange. Yet I have heard it said—I am sure that it is not true—that some of them believe that P/Es are little green things served with fried cod. If the Government are working in this way, it is a terrifying prospect. They will live to regret it. The tragedy is that many people who were not responsible will pay the price.
2.30 p.m.
The Earl of Longford: My Lords, it was said, I believe of the late President Kennedy, that he may or may not have been a good president but he was a hell of a speaker. Rising above party controversy, I believe that we can say that about the noble Lord, Lord Marsh. My mind goes back to the time when he was an infinitely promising youngster. He sat beside me in the Wilson Cabinet. To adapt a phrase used of Gladstone, he was rising over the stern unbending socialists. I do not know whether the noble Lord feels that he still says the same thing, or has changed totally. I visit prisons a lot, and murderers and people say to me that they feel remorse. Does the noble Lord feel remorse at having been such an ardent socialist? I do not know. Perhaps at some time he will tell us. However, he speaks with enormous feeling and, frankly, it makes a strange impression on me, his old colleague and admirer on that Cabinet Bench all those years ago.
I shall detain the House for a very few moments. I have a question to put to the noble Lord, Lord McIntosh. I am glad that he is not totally inhibited these days. I should have much liked to have seen him playing a large part on the penal front, but he seems to have a mixed sphere of influence. I have given him notice of my question, and told him that I do not expect an answer or a comment. I hope that he will lay my fundamental and unavoidable question before his colleagues today. It is not a question which would have puzzled the noble Lord, Lord Marsh, in the old days. He would have given a very positive answer.
In recent times I have said that this is the most critical moment in the penal history of this country. I adapt the language a little to talk about our social history. This is the most critical period in our social history.
At the last election, I put to an excellent candidate this question. Does the Labour Party still believe in the redistribution of wealth in favour of poorer classes? No one can fail to understand the question. In the old days no Labour Government would have had any difficulty in answering the question. Certainly the noble Lord, Lord Marsh, would have had no difficulty in the days when he sat beside me.
That is my question. I realise that there are arguments the other way. I have changed; we have all changed over the years. The Catholic Church has changed. Some time
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ago we had Vatican II. I am not against all change. I do not suggest that. Nevertheless, when I was a young Conservative, working in the Conservative Research Department, an article in The Times said that unfortunately wealth is like heat. It is only when it is unequally distributed that it can perform what the physicists call work. I quoted that with alacrity. I probably supplied it to Mr. Neville Chamberlain, my chief, as a useful piece of spokesmanship. That was and remains an argument. It convinces many good people, better people morally, I dare say, than me. It convinces Christians, including, I am sure, the noble Baroness, Lady Thatcher, a good, Christian woman. The argument is plain enough. If one allows people to receive the rewards of their commercial activities, that will benefit the poor in the long run. Some people call it the "trickle down" theory. Whatever it is, the theory is extremely prominent throughout the world. People are allowed to achieve something and are rewarded, and in the end the poor benefit more than under any attempt at redistribution.
Whatever answer is supplied, we cannot get away from the question: do we favour redistribution towards the poorer classes and an increase in social justice? Looking back at the history of this country, roughly speaking, half of the 34 years preceding 1979 were under Conservative rule and half under Labour rule. During that period the income and wealth of this country were redistributed in the direction of the poorer classes. Then Thatcherism came in and there was an abrupt change. That change continues to the present day. It represents a redistribution of wealth in favour of the rich.
I saw some figures the other day, although I do not lay too much stress upon them, indicating that over the past 10 years the income of the poor has remained roughly the same; whereas the very rich have become far richer. Now, that trend is established as a fact. Do we in the Labour Party support that trend? Or do we return to the traditions of the Labour Party? It is a simple question. I do not ask it of the noble Lord, whose heart is in the right place, if my saying so does not embarrass him.
I am always nervous of paying compliments to Ministers since it might damage them. I may have fatally damaged the career of the noble Lord, Lord Marsh, by suggesting that one day he would be Prime Minister. I said the same of the noble Lord, Lord Mayhew, and it did not do him any good either. I am not sure that that was not what ruined the prospects of the noble Lord, Lord Marsh, as a future Labour Prime Minister. So I shall be careful. Subject to the reservations mentioned, the noble Lord, Lord McIntosh, has his heart in the right place. Today he is a government spokesman and bears that responsibility. Having been a spokesman of one sort or another in this House for over 20 years, I know how careful one has to be. One cannot speak as one would perhaps wish to do if one were on the Back Benches. So I do not expect an answer today. But there is the question. It cannot be escaped.

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As I understand it over the next two years we are more or less committed as a result of election pledges not to spend more money on welfare. So be it. We have gained a tremendous majority with a manifesto of that kind. I hope that we shall be in power for five years. After those five years are up and the next election comes, I hope we shall be able to produce a policy of which the late Clem Attlee would have been proud.
2.37 p.m.
Lord Butterworth: My Lords, I wish to spend a very short time drawing attention to a problem that is not dealt with by the Finance Bill. It was in a debate on 27th March 1996 that the noble and learned Lord, Lord Brightman, drew your Lordships' attention to the urgent need to simplify the rules governing capital gains tax. The introduction of self-assessment of income tax has increased the need to amend those complex procedures. I wish therefore to speak briefly about that problem.
Capital gains tax is an established and well-accepted tax whereby a capital gain is taxable above a certain level. The rules are complicated, largely because the gain is taxable, however many years it takes for the gain to emerge, provided only that it has emerged since March 1982 or from the date of purchase if the item was bought after March 1982.
Money has fallen in value since March 1982. Because it would be unfair to tax a gain that has emerged only as the result of a fall in the value of money, a device termed the "indexation allowance" was introduced into capital gains tax legislation. It is a device of Byzantine quality, about which I must go into some detail in order that your Lordships can appreciate the nature of the problem.
I think I can do no better than quote the pithy description of the indexation allowance given in that debate in March 1996 by the noble and learned Lord, Lord Brightman. He explained that, in order to calculate a capital gain, five steps have to be taken:
"Step one: you deduct the retail prices index at March 1982, or at the later date of purchase, from the RPI at the date of sale in order to obtain an adjusted RPI. Step two: divide the adjusted RPI by the RPI at the date of purchase in order to obtain a readjusted RPI. Step three: you multiply the cost price of the investment by the readjusted RPI in order to obtain the indexation allowance. Step four: you add the indexation allowance to the actual cost price in order to obtain the adjusted cost price. Step five: you deduct the adjusted cost price from the sale price and there is your taxable gain".—[Official Report, 27/3/96; col. 1724.]
That is a Byzantine procedure which is clearly too complex for most who assess themselves and attempt to complete their tax return without professional advice.
The introduction of self-assessment of income tax carries the necessary corollary that the processes should be capable of being easily understood by all. In fact, the calculations can become much more complicated. Let me give an example. Every time there is a rights issue during the period when a share is held, the calculation must be repeated, as the RPI will be different at the date of a rights issue from that which prevailed when the share was purchased. Again, any investor who decides
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to take advantage of an offer of shares instead of a dividend needs to undertake the calculation at the time he receives the additional shares.
It has been suggested that much of this could be avoided if taxable capital gains were limited to gains made over the period of the past two years because the need for indexation might then be avoided altogether. If that is not acceptable, some other system must be devised which is capable of being widely understood and operated, not only by the man in the street but also by the peer on the Clapham omnibus.
2.45 p.m.
Viscount Trenchard: My Lords, first, let me say how much I have enjoyed today's debate. I am indeed grateful to the noble Lord, Lord McIntosh, for introducing it today. I have learned a great deal from noble Lords far more experienced and knowledgeable than I am. I am indeed grateful to your Lordships for your kind attention.
Not all noble Lords will agree with everything that Her Majesty's Government have done since taking office and some may share the concerns which are increasingly often heard nowadays; namely, that the Government are rushing through too much legislation without providing sufficient time for parliamentary debate. In that sense I worry that, intentionally or unintentionally, the role of Parliament, including that of your Lordships' House, seems to be being diminished.
Nevertheless, I appreciate the opportunity that we have today to debate the important matters contained in the Finance Bill. I also want to say how very delighted I was to learn today of the appointment of Mr. David Clementi as Deputy Governor of the Bank of England. I have worked as a colleague of Mr. Clementi for 20 years and have the very highest regard for him.
I must admit to a degree of disappointment in the Chancellor's Budget speech. It does nothing to alleviate the real economic problems that we face. At a time when there is a growing need for measures to encourage savings rather than consumption, it is to be greatly regretted that, instead, the Government have adopted measures that will discourage savings.
I do not want to talk today about the windfall tax, on which much has already been said in your Lordships' House and elsewhere. But in that connection also I believe that the Government hit the wrong target, as was so eloquently and clearly explained by the noble Lord, Lord Marsh. The windfall tax will do nothing to encourage investment by overseas as well as domestic investors in United Kingdom equities.
My noble friend Lord Mackay of Ardbrecknish told your Lordships that pension funds will no longer be able to reclaim the 20 per cent. advance corporation tax credits. The abolition of those tax credits means that tax exempt institutions effectively will be subjected to a 20 per cent. tax charge on their dividend income from United Kingdom companies, which would have to increase their net dividends by 25 per cent. in order to provide the same return as they do now to pension funds

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and to charities. The latter will benefit from a 2-year grace period and then some compensation on a declining scale for the next five years.
I understand that 19th April this year was designated Pensions Day by the Labour Party's campaign team. Mr. Tony Blair, at the time Leader of the Opposition, said in a pensioners' rally in London that day:
"My message is be warned, your pension is not safe with the Tories".
Look what happened! The Secretary of State for Social Services is quoted as having said that the pensioner deserves a better deal. The Chancellor, to the contrary, has dealt him a severe blow.
The Chancellor's measure will encourage consumers to spend rather than save for their retirement. It is the opposite of what the economy now needs. Furthermore, it makes investment in United Kingdom equities relatively less attractive than before compared with investment in other kinds of assets, such as fixed income securities and foreign equities. That may well lead professional fund managers to reduce the proportion of pension funds which is invested in UK equities. That proportion is currently around 55 per cent. in a typical case.
Your Lordships will understand that the effect on share prices will be to reduce the prospects for capital gains at the same time as increasing the cost of capital to British companies. Pensioners may, therefore, find that not only is the dividend income of their funds reduced but that the capital value of their funds is also adversely affected, a so-called double whammy. That is from a government which have pledged to advance the long-term interests of the many and meet the people's priorities.
The Institute for Fiscal Studies has said that one would have to be very optimistic to believe the Chancellor's claim that the abolition of dividend tax credits will actually boost investment. I think that the Chancellor does not pay enough attention to the relationship between yield and value. Neither, apparently, does he recognise the relationship between share price level and ability to invest. The effect of his proposal will be to divert £5 billion a year from investment into government expenditure.
I should declare my interest as a trustee of the Royal Air Force Benevolent Fund. In the year ended December 1996 we were able to disburse £12.5 billion as direct charitable expenditure. This is money that is provided to former and current members of the Royal Air Force and other countries' air forces that fought with us in the Second World War, such as the Polish Air Force, in relief of sickness, disability, accident, infirmity, poverty or adversity. Our calculations show that for the year 2004 our main fund, together with its principal subsidiary funds, will suffer a loss of income of nearly £1 million as a result of the Chancellor's measures. This calculation assumes no increase in dividend payments during the period, so I believe the real loss will be much greater. The situation is the worse because investment income is our only increasing source of income. Our other principal sources of income—public support,
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Royal Air Force support and legacies—are all declining and are expected to continue to decline. I believe the other service charities face a similar situation.
It is also relevant that demands on the fund are increasing and will be nearing their peak at the time these changes take full effect in 2004. Nevertheless, I was happy to learn that the Government plan to review the taxation of charities and hope that this review may provide an opportunity to reimburse the losses that the charities sector will face as a result of the changes.
I am also a trustee of the Royal Air Force Benevolent Fund Staff Pension Fund, which will suffer an immediate annual loss of income of some £100,000. I believe therefore that the parent charity will have to suffer an additional burden in that it will need to increase its contributions to the staff pension fund by around 2 per cent. per annum in order to maintain the minimum funding requirements. Mr. Peter Murray, the chairman of the National Association of Pension Funds, was reported as saying that public and private sector employers will have to provide over £50 billion of extra pension contributions over the next 10 years, money which could otherwise have been used for investment. This works out at roughly £5 billion a year. However, this amount of additional contributions is what is needed to cover the shortfall in annual income. It is not the amount which would need to be added to the total principal amount of our pension funds now in order to maintain their dividend income stream.
The total pension fund pool in this country amounts to around £600 billion. Of this a little over half is invested in UK equities. Assuming no change in dividend payments, this amount would have to be increased by more than £75 billion in order for the current level of dividend income to be maintained. Alternatively, some companies may be able to increase their dividend payments. However, the Chancellor said in his Budget speech that the present system of tax credits encourages companies to pay out dividends rather than reinvest profits. I assume, therefore, that it is not through increased dividend payments that he intends that the income shortfall should be made up.
The Chancellor also reminded us that many pension funds are in substantial surplus and at present many companies are enjoying pension fund holidays. What he did not tell us is that around 40 per cent. of pension funds of quoted companies will not be able to meet their minimum funding requirements as a result of these measures.
The attack on pensions was an easy move for the Government to make because most people do not fully understand the advance corporation tax system. The Chancellor's move is perhaps easier to understand if one considers its effect on the heralded stakeholder pensions and citizens' pensions. Clearly, the abolition of advance corporation tax credits has substantially reduced the potential cost of a compulsorily-funded pension scheme as far as the Exchequer is concerned.
Unfortunately, the Budget introduces anomalies between different ways of saving, which is likely to lead to pension funds attempting to disguise themselves as

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personal equity plans or the soon-to-be-introduced individual savings accounts, in order to continue to receive advance corporation tax credits.
The reduction to 31 per cent. in the rate of corporation tax is, of course, welcome, but within two years it is likely that additional pension fund contributions will more than offset this benefit. The Budget has done nothing to address the structural imbalances within the economy. It has increased the incentive to spend rather than to save. It has made it more likely that there will be further interest rate rises leading to an even stronger pound. Against that background the prospects for our manufacturing sector maintaining its creditable export performance look increasingly bleak.
I must apologise for having detained your Lordships for too long. Other noble Lords have covered other aspects of the Finance Bill. I entirely agree with my noble friend Lord Mackay in what he said, especially on the subject of foreign income dividends, which is now causing so much confusion and uncertainty. I earnestly hope that the Minister will look again at the bitter blow that has been dealt to the country's pension funds and encourage his right honourable friend to reconsider his proposals in respect of advance corporation tax credits. I thank noble Lords for listening to me.
2.57 p.m.
Lord Lucas: My Lords, I would like to begin by answering a question which was asked by my noble friend Lord Mackay of Ardbrecknish in terms of Scotsmen changing their names. "Don't say Brown, say Hovis". That would be an insult to that great loaf in the context of this half-baked Bill which we have before us today, which has been improperly drafted and improperly considered—a strong argument for the Bill being considered in detail by this House. That is an argument which I believe will become unanswerable should the party opposite ever get around to reforming this House, as it has said it intends.
It is a Budget and a Bill which have brutal effects on industry. The noble Lord, Lord McIntosh of Haringey, quoted parts of the IMF report which approved of what the Chancellor had done. He left out the bits where it pointed out the damage to industry and suggested that consumers should have been more heavily taxed. I am very glad that the noble Lord, Lord Desai, was able to fill in those missing parts in his peroration.
I must do my best to adopt the non-adversarial and inclusive approach which is being hymned by the party opposite, and perhaps confine myself to the side-effects of this Budget, and to some words on the RPI, which has featured in many speeches.
"It's good to talk", as they say, and perhaps it would be a good idea if the Chancellor was to do some more of it, as my noble friend Lord Cockfield so admirably said. He should at least talk to his colleagues who have great plans for the economy and for the future of this country, such as the introduction of a new pension and social security system and a long-term approach to the way in which we look at investments. As the noble Lords, Lord Marsh and Lord Barnett, pointed out, it is
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no good talking about long-termism and then looking at the short term in all the measures that one takes. The Wood Mackensies of this world, when they look at pension funds, say that they are looking at long-term performance, but they measure it quarter by quarter and so long-term performance just becomes a succession of short-term performances and any real sense of long-termism goes out of the window. If the Chancellor does the same and measures all his activities by the short term, then long-termism will not have a look-in.
The Gladstonian settlement for the Chancellor has set him apart and made him an institution which is both adversarial and non-inclusive within government. It is something at which this Government, if they are true to what they profess, ought to take a look.
The Chancellor should have talked in particular to his colleague the noble Lord, Lord Simon of Highbury, who could have told him in a moment what a mess he was making with FIDS. Indeed, on the day after the Budget, BP wrote to the Chancellor telling him that if he persisted in that, it would list in Luxembourg and would no longer be part of the FTSE in London. Within the next few days, about a quarter of that index had similarly written to the Chancellor. That is the motivation behind his change of mind. If the Chancellor had had the sense to talk to anybody who understood anything about major companies, he would not have made that mistake.
The Chancellor could also have talked to Martin Taylor of Barclays, who could have told him something about the effects of the proposed tax changes to leasing. Leasing has, indeed, been used by banks as a tax avoidance scheme, but it is a tax avoidance scheme with excellent side-effects for industry. It has made cheaper, and has encouraged, investment in capital goods by British companies and at least half the cost of that so-called "tax avoidance" has gone into benefits for British industry. Barclays may look around for a month or two for other ways of sheltering from tax and it will find them because it has some excellent people on board. As far as I can understand what is being said at the moment, it will find such a shelter in schemes that will benefit overseas companies and individuals, not British companies. The net cost to Barclays will last for a month or two, but the net cost to British industry will be of the order of £0.5 billion per annum.
Martin Taylor might also have had something to say about the moves to stop market makers benefiting from dividends and providing liquidity to markets over dividend dates. If dividends are made so unattractive to people, tax avoidance schemes will be built around them. You cannot avoid that. Now that that incentive has been increased, more such schemes will spring up. Why choose to attack one of the main mechanisms of liquidity in the London market and allow the abuse to appear elsewhere?
There has to be an understanding of the fact that the tax avoidance industry will always be one step ahead of the Treasury. What the Treasury has to do is impose a morality and to make sure that people do not take it too far and that those abuses that occur are controlled and have beneficial side-effects. The windfall tax is a direct

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attack on any reasonable concept of morality between the Treasury and the taxpayer, particularly the corporate taxpayer. Its effect will be to push people into what perhaps I may describe as an "Italian attitude" of institutionalised tax avoidance and deceit. I should be very sad to find our tax system going down that road.
If the Chancellor had chosen to talk to almost anybody about his proposed changes to pensions tax credit, he would have been put right. So many noble Lords have referred to this today that I do not want to speak at the length that I had planned, but I am sad that my noble friend Lord Buckinghamshire is not here today because, as a professional, he would have been able to enlighten the Government on the way in which actuaries go about the business of valuing pension funds. They do it on the basis of income—and what other basis is there for valuing a share? It is all that the long-term shareholder ever gets from a share. When he sells, he does so to somebody who wants the income that is yet to be generated by that share. To do so on any other basis would be a form of pyramid selling. It is right to talk about market value, but market value is related to future income and the Government have cut both that and the actual income at a stroke.
The Government have also taken the unusual step of reducing the accepted value for the underlying growth rate of the British economy. It will be interesting to see how actuaries take that into account when they look at the prospective dividend growth rate in their pension funds.
Actuaries are being asked to swap the immediate certainty of dividend flows for an extremely sketchy uncertainty of the possibility of greater dividend growth in the future. That dividend growth is not due to come from anything that the Chancellor has done; it is due to come from companies further cutting the dividends that they pay in order to create money for reinvestment. That will merely compound the problem of pension funds and pension fund shortfalls. They are extremely unlikely to do it and I cannot see any benefit to companies from that move.
The Budget misunderstands the basic role of dividends, particularly if one is looking at tax-exempt funds and pension funds. Dividends are a mechanism for moving cash from cash-rich and cash-generating companies—from the cash cows to the young calves of Britain who require some food. Pension funds take their dividends and reinvest them in companies that need the cash. Now the cash will be stuck in companies that do not need it. One will have breweries with bulging coffers, but young high tech companies that we need for the future must turn elsewhere for it, because it will not be in the hands of the institutions that used to have it.
The Government have great plans for pensions. In making this move on taxation they have cut off many of their options and alternatives far too early. It would have been much more beneficial had they saved this change, should it have been made, until their entire plans for the pensions and savings industry had been in place. As many noble Lords have said, there will be a good number of side-effects, some unknown but some already obvious. There will be a gearing up of British
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industry. The pension funds will want to have back their income. Future issues will not be in the form of shares but in the form of convertibles. There will be leveraged buy-outs.
One of the extraordinary side-effects of this Budget is the possibility of windfalls for individuals. The Budget is supposed to be a response to the problems in the economy created by windfalls, but it has been done in such a way as to ensure that companies indulge in share buy-backs on a scale that has never been seen before. That will create yet further windfalls in the hands of those lucky enough to hold those shares. It will make the whole business of venture capital much more difficult because the higher risk end of equities will be the area from which pension funds will flee in their search for income. It will make pension funds more short term and industry more short term in its attitude. A company that is highly geared must have a more short-term attitude.
It will poison any movement there may be towards final salary schemes. It is perhaps more correct to say that it will hasten the rush away from final salary schemes. It will have an immediate effect on individuals who are to retire. An individual who retired a day before the Budget would receive 13 per cent. more in pension than an individual who retired a day after the Budget. If one looks at the effect of the measures, it is an immediate tax on those who are retiring. As the noble Lord, Lord Marsh, has said, this can be made up only by those of us who have 20 or 30 years to go by a 30 per cent. increase in contributions.
Further, it will make property companies a relatively unattractive investment. It will be 31 per cent. more expensive for an institution to hold properties through a property company than through direct investment. By and large, this means that the property market as a whole will become much less fluid, active and efficient. It will result in the movement of assets overseas where there is not the same disadvantage on the income front as there used to be. As the noble Lord, Lord Marsh, has said, it will lead to a move back into SERPS. To be in SERPS is now more profitable than to be out of it. That will cost the Government dear. It has been estimated that over time it may account for half the benefit that the Government hope to receive from this tax change. It will also impose on industry an enormous upfront cost in making up its pension schemes. Industry will gain no benefit from it unless it does what the Government supposedly urge it to do and cuts its dividends so that it has more money to invest. If it does so it will merely compound the problem.
But enough of what everyone else has said. I should like to deal now with the retail prices index. This has become an important part of our economic management. It is the target that the Bank of England sets, and it has been given only interest rates as a mechanism to meet that target. When inflation was running at 10 per cent. a year, errors in the RPI did not matter all that much. It did not matter if it was 1 per cent. or 2 per cent. wrong. The difference between 9 per cent. and 11 per cent. was not part of the public consciousness. However, when one speaks of an RPI target of 2.5 per cent. errors in the RPI matter a great deal.

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In March 1996 the Bank of England published a paper entitled Measurement Bias in Price Indices. That looked in particular at three sources of error in the RPI. It referred to outlet bias, because the RPI does not take account of the fact that people would look at various shops and choose to buy at the cheapest one. The movement from the more expensive to the cheaper shops is cut out of the RPI and so the RPI overestimates inflation. It is late in bringing in new goods. It waits until new goods have reached the plateau of their price progression. It misses out on the bit when they are dropping steeply in price, and, again, overestimates inflation as a result. It misses out changes in quality, as is occurring continuously with goods such as computers, and overestimates inflation as a result.
The Bank of England's conclusion was that the RPI, as a result of those three factors, might be an up to 1 per cent. overestimate of inflation. Things do not stop there. The RPI includes interest, as a proxy of housing costs. So if the Bank of England puts up the interest rate, it puts up the RPI. The Chancellor has fitted himself with a set of self-twisting knickers. He cannot do anything about it. The more the Bank of England sticks up interest rates, the more the inflation rate goes up, and, presumably, the more it has to stick up interest rates to try to bring it down again.
The RPI includes house prices as a proxy of house maintenance costs. That is ridiculous. In a period of high house price inflation as we have at the moment, maintenance prices have not increased by, 25 per cent. in the past year. The RPI does not include the effect of loyalty cards, BT's friends and family scheme, and all the other schemes that organisations have to keep customer loyalty, which have greatly reduced the cost of shopping in places such as Tescos, and the cost of telephone calls. But those reductions are not in the RPI.
The family expenditure survey upon which the RPI is based is acknowledged to be unreliable. It has to be fudged for drinks, sweets and tobacco. If you look at the way in which the weights have changed over the past five years, it is supposed, under the family expenditure survey, that we have not spent a penny more on telephones. It is still only 1.5 per cent. of our expenditure. It is the same over each of those five years. But the amount we have spent on rail travel has apparently fallen from 0.6 per cent. to 0.4 per cent.
There are a number of other aspects of the survey which raise some eyebrows as to whether anyone has tried to connect what it is saying with the real world; whether they have compared the minutiae upon which it is based of innumerable surveys of shops and people with what is happening in the economy as a whole.
It includes indirect taxation. That is an extraordinary thing for it to do. The Chancellor taxes us indirectly through raising the price of cigarettes, and it is in the RPI. If he raises income tax, it is not. What is the argument for indirect taxes being in there? Why should we look at inflation in that way? It is not, it is taxation. There is an index published (the RPIY) which excludes that. Is that not the direction in which we should be going?
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There is nothing in the RPI for major elements of our expenditure on the NHS, education, or roads. Just because they are done through the Government, does not mean that they are not part of inflation as experienced by ordinary people. Certainly their effects are, because if we are getting inflation in those areas it comes back at us in tax.
We have to get the RPI right. It seems possible to me, on the basis of my quick look at it, that we might have an RPI inflation which is zero at the moment. We might be basing our entire economic policy in terms of interest rates on trying to get down an inflation which is already not there. We have to use a measure which is accurate. It is enormously important that the Bank of England should be running its interest rate policy on a measure based on reality.
In conclusion, I ask whether the Government will follow their own premises: to open up the process of setting a Budget; to apply the principles of inclusiveness and non-adversarialness to the way in which, internally, they generate their Budget decisions; to make a new settlement for the Treasury so that individual Ministers can take on more responsibility. They are asking the Scots to take on the responsibility for their own budget, but individual Ministers still do not have to live with the consequences of their decisions. They are treated by the Treasury as if they were babes in arms. There needs to be a more equal split between the responsibility for money taken by the Treasury and that taken by Ministers, hard though that might be for the Treasury to accept. It might also result in it coming a few centuries up to date in its accounting policies.
I hope that the next Budget, which is not long away, will support the long-term projects for the success of this country which the Government profess, and that it will rescue us from "Brown's bust", which seems to be the fatal result of this Budget.
3.15 p.m.
Lord McIntosh of Haringey: My Lords, the length of the debate and the expertise of those who have taken part give lie to the claim that your Lordships have had an inadequate opportunity to consider the Finance Bill. At the beginning, I was inclined to divide the debate into one about process—in other words, the consultation and other processes leading to the production of the Budget and subsequently the Finance Bill before us—and product, which I thought would be the content of the Finance Bill and its implications. I now see that my taxonomy was inadequate. There is indeed a process and I shall try to spend as little time as possible on it. There is also product—and I refer to the contributions which are related to the Finance Bill.
However, there is a third section which appears to me to have nothing to do with the Finance Bill or the subject we are debating today. I would love to follow my noble friends Lord Barnett and Lord Desai in their speculation about the way in which the economy is going. They know far more about that than I do and I am not qualified to do so. However, I am in no way capable of following the noble Lord, Lord Lucas, for example, who spent a long time discussing the retail

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prices index, or the noble Lord, Lord Butterworth, who spoke about the indexation of capital gains tax. Neither of those subjects had any connection with the Finance Bill which is before us.
I shall deal as quickly as I can with the issue of consultation and the nature of the process
Lord Mackay of Ardbrecknish: My Lords, I am grateful to the noble Lord for giving way. I know that he has not taken part in previous debates on Finance Bills. The tradition has been that they range a good deal wider than the Bill; they have the double function of being a general economic debate and the debate on the Bill. I believe that if the noble Lord checks he will discover that his noble friends took that view when they sat on the Opposition Benches.
Lord McIntosh of Haringey: My Lords, I hope that I have recognised that it is entirely proper that the debate should be about the wider economic issues. I believed that in referring to my noble friends I was acknowledging that. But some contributions have gone somewhat beyond even that proper wider definition.
We have been told that there was inadequate consultation on the Budget. On 1st May we had the largest consultation on the economic policies of this country that has taken place for five years. The result was overwhelmingly clear that the previous government did not sustain the confidence of the people of this country in their economic, social or other policies. During that consultation period—that long election campaign—all the issues of taxation, redistribution, equity, economic growth, employment and investment were aired at great length. Such consultation will continue as far as the Government can encourage it. We believe that there should be public debate on these issues and that the Government should take a lead in—I will not say "guidance"—ensuring that the debate is well-informed and constructive.
What we did not do during the two months between the election and the Budget was to consult on specific issues such as advance corporation tax and pension funds. I refer to the noble Lord, Lord Cockfield. Two aspects are involved. First, as the noble Lord well knows, once one starts consulting on an issue of that kind the pension funds will take forestalling action and will see to it that the large companies in which they invest anticipate any change in taxation by increasing their dividend payments.
The noble Lord referred to the experience of Mr. Norman Lamont in 1993. I think he will find that Mr. Lamont did not consult on the reduction of advance corporation tax for pension funds and that, even if he did, the effect of his reduction in advance corporation tax was quite different from ours because it was not accompanied by a reduction in corporation tax. That makes the whole package that we are now presenting rather different from his package.
We have been told that the process of the passage of the Bill was inadequate because of the use of the Guillotine in another place. The noble Lord, Lord Clark, referred to that. This Bill, with only half the number of
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clauses of the previous Finance Bill, had far more time on the Floor of the House of Commons than that Bill did. If one takes clauses per hour, it can be shown that debate in another place was entirely appropriate, as indeed it has been in this House, bearing in mind our responsibilities. Therefore, I reject utterly any claim that there has been inadequate parliamentary consideration or consultation in relation to the Finance Bill 1997.
I turn now to the product rather than the process—the more interesting aspect of what the Bill contains. First, I address the issue of whether we needed a Budget which was raised by the noble Lord, Lord Mackay, in his opening speech. I find it remarkable that it should be suggested, on the one hand, that we did not need a Budget at all and it was perfectly all right to carry on without any adjustment to fiscal policy; and, on the other hand, we should be criticised, as we have been from all sides of the House, for an inadequate constraint of consumer spending. That was the perfectly legitimate point made by the noble Lord, Lord Ezra. I do not agree with it. The IMF does not agree with it. But a number of noble Lords have said that we have failed adequately to constrain consumer spending, which has damaging effects on exchange rates and inflation.
The fact is that the PSBR is planned to reduce by £7 billion in this year and there will be a further reduction next year. That requires that there should be a readjustment of fiscal policy of the kind which is being put forward in this Budget. I cannot accept that it would have been possible, even if it had not been required by our election manifesto and victory, not to proceed with a Budget this summer rather than waiting for a whole year.
We turn then to the issue which has concerned most noble Lords; that is, pensions. On that we have had what can only be described as hustings speeches. Noble Lords have drawn much larger conclusions from the relatively modest changes in advance corporation tax for pension funds than is justified by the extent of what is actually taking place in this Finance Bill.
For example, the noble Lord, Lord Cockfield, from his great expertise, gave us a considerable discourse on the history of the corporation tax system. But without in any way being qualified to disagree with what he said about the history of double taxation, the changes proposed in the Budget do not result in the reimposition of double taxation. The changes are related specifically to pension funds and they amount to the removal of double relief. Those who are not liable for taxation—pension funds and charities—will no longer be able to claim that from the dividends which they receive from companies. Therefore, they are being put in the same position as everyone else. There is no attack in this Budget on the single taxation of dividends for the noble Lord, Lord Cockfield, himself or for any other individual. We are not abolishing tax credits. Indeed, they will still remain and the companies tax will still be imputed to the shareholders.
The noble Lord, Lord Marsh, in particular, made considerable oratorical reference to the latter as if it were some great immorality as well as a lack of wisdom. It is not simply a question of whether we need the

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money, although of course we do: it is a question of whether it is right to have an anomaly in the corporation tax system which encourages companies, at the behest of their pension fund shareholders, to pay dividends instead of putting the money into investment. If noble Lords doubt that, they should look at the difference between the general level of dividends in this country and those paid by companies in other European countries or, indeed, in the United States. It is an anomaly of our tax system which has caused these excessive dividends, and those dividends—this double relief against taxation—are abolished by the changes in advance corporation tax set out in the Budget.
As someone who ran a small business for 30 years, I find it rather amusing that the Labour Party should be told that it has no business people. I believe that the phrase used was "business men". Indeed, when I look at my noble friend Lord Simon of Highbury and at the role played by Mr. Martin Taylor, and at the many distinguished business people who are gladly involving themselves in the project of this Government, it seems to me that some noble Lords on the Opposition Benches are a little less representative of business thinking than they believe themselves to be. I give way to the noble Lord.
Lord Mackay of Ardbrecknish: My Lords, I am much obliged. I am sorry to interrupt the Minister again, but he did mention his noble friend Lord Simon of Highbury as being a serious businessman; indeed, he is. Has the Minister any comment on the remarks that I quoted from a letter written by the noble Lord, Lord Simon, when he was the chairman of BP as regards ACT? It seems to me that he did not much approve of it.
Lord McIntosh of Haringey: My Lords, as the chairman of that company, my noble friend Lord Simon was producing a covering letter on the participation by his chief executive in a deposition from a large number of companies. It was in the form of a covering letter that my noble friend Lord Simon made his observations.
Following on from the pension issue, there is a valid point to be made about foreign income dividends. Indeed, it is a valid point to say that in certain circumstances it would be possible for surplus advance corporation tax to build up and for there to be no way to deal with it. However, I should emphasise that no changes will take place on foreign income dividends before April 1999. Even then, we have agreed that there will be special rules for international headquarter companies and that during that period there will be extensive consultation on the issue of what will happen about foreign income dividends.
I shall move on now from pensions and foreign income dividends to the question of the windfall tax, which again has aroused a great deal of antagonism. I rather think that today's debate has been held a month too late for those noble Lords who feel so strongly about it. It would have been legitimate to speculate at the time of the Budget that this might be enormously damaging to prices and to investment by the privatised utilities and
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that it might have all sorts of damaging side effects. However, the month that has passed since the Budget has shown that that is not the case. There has not even been a significant effect on share prices, let alone any justification for claims that the windfall tax will be paid by means of a reduction in employment on the part of those companies, by increases in consumer prices or by a reduction in investment.
Four weeks after the Budget it is clear that we calculated the windfall tax correctly and that it is a proper reaction to the under-pricing of the privatised utilities at the time of sale and inadequate regulation in the immediate succeeding period. I make no apology for the basis on which the windfall tax has been calculated. I certainly do not acknowledge that the windfall tax will lead to any significant economic disadvantage.
As I said, I would love to follow my noble friends into some of the wider speculation on the economy. I, of course, acknowledge the damage that could occur from a high pound. I agree with the noble Lord, Lord Ezra, that what he described as a short-term problem could, if it were badly managed, become a longer-term problem and that would have a greatly damaging effect on our manufacturing industry because of a poor balance of payments position. The Government recognise that as well as anyone else. We recognise the limitations on options that are available to us. I notice that no one who said that we should not have a high pound has put forward any concrete suggestions as to what should be done about that.
I notice that no one who criticised the interest rate policy did anything other than observe that interest rates continue to rise, as they did in the final nine months or so of the Conservative Government. I do not question whether interest rates should rise by a large percentage or slowly by a quarter of a per cent. but whether interest rate changes should be made early rather than late. I suspect that some of the difficulty that we are now experiencing results from the fact that the previous government refrained, on I believe six occasions, from agreeing with the Bank of England on interest rates. The result is that interest rates may have moved further than would otherwise have been necessary if remedial action had been taken in time.
I wish to reply to the point made by my noble friend about the rich and the poor and the trickle-down effect. If he looks at the Budget he will find that rather than seeking redistribution through the taxation system we are seeking through the taxation system to increase the spending power and the self-respect of poorer people in our society by providing them with opportunities for work and for getting off welfare. In terms of the decent society that he and I care about, that is the most practical way to proceed at the present time. That is direct action on poverty of a sort which is simply not possible in fiscal terms.
The Earl of Longford: My Lords, I was rather hoping that the noble Lord would not attempt to reply. I am rather sorry that he has tried to do so.
Lord McIntosh of Haringey: My Lords, we shall have other opportunities to debate these matters. I am

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sure that they will be valuable opportunities. The noble Lord, Lord Mackay, in his opening remarks mentioned what he described as the tendency of the Labour Party to claim that the previous government's economic policies were disastrous and that the present policies represent an economic miracle. I have felt that temptation myself. In the past few months I have observed among those on the Opposition Front Bench a temptation to react to any question, however specific, with a generalised claim that the economic policies of the previous government were miraculous and that the economic policies of this Government are bidding fair to be disastrous. So I think that the boot is on both feet, if I may so put it.
Bandying claims about the differences between economic policies of past and present governments will not get us far when considering what we should do next, which I consider to be the most important issue. The noble Lord, Lord Clark, for example, boasts about the inheritance of this Government compared with the Conservative Government of 1979. He should consider the employment statistics as well as some of the other figures before he is quite confident of the change that he describes.
Though I seek to make as small a party point as possible, it is true that over the past period—I do not even describe it as 18 years—the economy has lacked the capacity to grow adequately without setting off inflation. It is true that the gross domestic product per person is still lower than that of any other major industrial country. It is still true that unemployment is above 2 million; and one in five households have no work. It is true that we have inadequate investment in education, infrastructure and new technology. We have a history of large budget deficits, resulting in a burden of public debt which is to be paid off by current and future generations. I do not claim that the Budget overcomes those inherited difficulties. But I claim that it is making a start and moving in the right direction. I commend the Bill to the House.
On Question, Bill read a second time; Committee negatived. Then, Standing Order No. 44 having been dispensed with (pursuant to Resolution of 30th July), Bill read a third time, and passed.

Aerodromes
3.27 p.m.
Lord Rotherwick Lord Rotherwick rose to ask Her Majesty's Government whether they are satisfied with the range of provisions and facilities at aerodromes.
The noble Lord said: My Lords, I am delighted to be able to speak on this Unstarred Question and raise certain problems that are occurring within the range of provisions and facilities at UK aerodromes, and I hope that the Government will wish to address those concerns in a positive way. I should like to thank the noble Baroness, Lady Hayman, for being present to answer my questions. I am also grateful to noble Lords who are taking part.
I declare an interest insomuch that I am a member of the Popular Flying Association (PFA) and like many thousands of other members of the PFA I am a pilot
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who flies his own home-built aircraft. My plane is a two-seat Glasair aircraft and, everything working, I shall be flying to Pakistan in late September via Corsica, Greece, Cyprus, Jordan, Kuwait, Dubai and the Oman. I am also an elected member of the PFA Executive Committee as well as a member of a number of other flying clubs and squadrons.
A number of aerodromes and facilities at aerodromes are being lost to general aviation. Existing aerodromes are being closed or put under pressure to reduce their operations. For example, Hatfield was closed after Welwyn Hatfield District Council used lack of positive government advice as an excuse for failing to support the proposals for Hatfield aerodrome. Another example is that of West Mailing aerodrome which was closed and turned into a business park. The local residents of this area would probably prefer the odd plane coming and going to a large grassy aerodrome than the tarmac and concrete business park they now have, with all the associated noisy traffic. West Mailing's air traffic has been accommodated at other aerodromes such as Biggin Hill, which has become overcrowded with air traffic. There is often a 25-minute wait for take-off clearance.
The most recent concern is Little Gransden's battle with the South Cambridgeshire District Council, whose Airfields: Supplementary Planning Guidance, published in April 1997, will severely limit the airfield. I shall refer to this as the South Cambs. policy. The policy will have far-reaching consequences for general aviation (GA) where it is implemented. Indeed, the South Cambs. policy has succeeded where Hitler failed. It has grounded all the Spitfires in the Cambridge area except for those at two airfields. Are the Government happy with the South Cambs. policy, which will limit selected aerodromes to certain categories of aircraft and limit aerodromes to shortened flying times? Most importantly, are the Government happy with the South Cambs. policy authorising flightpaths and routes to and from aerodromes? Will the Minister agree that any aircraft, once it has left contact with the ground at an aerodrome, must comply with the Air Navigation Order (Civil Aviation Act 1982) and that the CAA administers that legislation?
Local government is making planning policies that are closing down or restricting aerodromes. These restrictions are dangerous and are in conflict with the remit of the CAA. The South Cambs. policy was produced by the council without proper consultation with the CAA, which not only wished to be consulted but also has a statutory right to be consulted. The guidance was seemingly produced without expertise and has direct safety implications. It also propounds unilateral changes to the Rules of the Air. The end result of the South Cambs. policy could produce a very hazardous situation. Are the Government concerned about that?
Also worrying is how the South Cambridgeshire District Council produced this policy. The council received 1,077 representations, of which five offered no comment; 13 supported the council; and 1,059 opposed the council. The PFA, with its 9,100 members, would have been just one of those 1,059 objectors. Surprisingly, Cambridgeshire County Council offered

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no comment; and Luton airport was supportive. Luton airport, which receives mainly commercial air transport (CAT) traffic and discourages general aviation from using its own area, is now seeking to discourage general aviation outside its own county. It is interesting to note that in 1990, 43 per cent. of all pilots entering CAT did so via GA's flying clubs and private flying movements.
Planning Policy Guidance 13 does not seem to be strong enough. The previous Government declared their support for GA and the importance it placed on flying training. PPG 13 states:
"small airports can serve local business needs, especially in outlying areas, as well as recreational flying. In formulating their plan policies and proposals, authorities should take account of the contribution of this General Aviation (GA) to local and regional economies and the benefits of having suitable facilities within a reasonable distance of each sizeable centre of population. As demand for commercial air transport grows, GA may find access to larger airports inconveniently restricted. GA operators will therefore have to look to smaller airfields to provide facilities".
Further to that, Dr. Mawhinney, a member of the previous government, said that,
"The Government consider that strategic and local planning guidance will need to recognise the role that smaller airfields and landing strips play and the difficulty of reopening or providing substitute facilities for airfields that have been closed".
Will the Minister confirm that the Government not only agree with PPG 13 and Dr. Mawhinney's statement but would also act positively where this policy is insufficient? The planning policy guidance has not been strong enough to save Ipswich airport, which has been closed in order to facilitate the building of more houses by the local district council. I am sure that the wide open space of this old aerodrome and its wildlife will be much missed by future urban dwellers.
Today, the planning system in the UK is a "plan-led" system (Section 54A of the Town and Country Planning Act 1990). This means that increased emphasis has been placed upon development plan policy by local government officers, elected members and the Planning Inspectorate. It is therefore essential to have clear policy guidance regarding GA issues from central government. A lack of policy inevitably leads to confusion. With no national policy on aerodromes in the UK, it is not surprising that we are losing aerodromes. Do the Government believe that a national planning policy on aerodromes is important, and do they agree that it is disconcerting that the UK is losing aerodromes?
The noise and subsequent awareness of aircraft in the sky creates public hostility. New planes can be produced to be quieter and more efficient. Some older planes can be engineered to be quieter and more efficient, although this can be difficult and expensive. Both these aims can be achieved with motivation and resources. In the interests of aviation and good relations with the general public, we should strive to achieve these goals as soon as possible.
Considerably lower noise levels and better efficiency of planes can be achieved by fitting engine silencers, electric magnetos and multi-bladed propellers. To achieve these goals, modifications and new components would need to be cleared for safety by the existing regulators. Many engineering developments and
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modifications have been tested and approved abroad by well respected aviation bodies but require extensive and expensive duplication of tests before they are allowed in this country.
A number of district councils, such as Huntingdonshire and Suffolk Coastal District Council, seem to be interested in implementing the South Cambs. policy. If this were done, the rules of the air would change depending on the county a plane was flying in and the CAA would lose some of its regulatory powers to district planning officers. Would the Government be happy to accept that situation? Perhaps now is the time for a government national policy on aerodromes, a strengthening of PPG 13, in return for a professional body to come forward with proposals for an improved behavioural code for flyers dealing with such difficult subjects as reducing noise on individual planes and improving flying movements—in other words, a complete code of behaviour for pilots. What are the Government's thoughts on this matter?
3.48 p.m.
Lord Strathcarron: My Lords, I rise to support the Unstarred Question asked by my noble friend Lord Rotherwick on the provisions and facilities of aerodromes. I should like to declare an interest as I am chairman of Kent International Airport, which is still referred to by many by its old name of Manston, a famous fighter base during the Battle of Britain which was subsequently adapted to become an emergency landing field for aircraft in trouble. Having a very long and wide runway and an unobstructed approach from the sea, it was very suitable for that purpose. It was one of the few airfields to have a fog dispersal system, known as Fido, which consisted of 75,000 gallons of petrol spread either side of the runway in the form of a ditch. In foggy weather the petrol was ignited and the intense heat dispersed the fog sufficiently for an aircraft to land. Needless to say, it was abandoned after the war as being too expensive to continue.
I have always taken a keen interest in general aviation, having flown during the war and only having to stop flying 10 years ago for medical reasons.
There has always been a need for airfields near major cities to cater for business aircraft and private flying in general. They have now become more important than ever, as major airports are being extended, with new terminal buildings—for example, possibly a fifth terminal at Heathrow and a second runway at Manchester. With ever-increasing numbers of scheduled and chartered flights, the business aircraft will be squeezed out more and more. It seems strange that only 25 years ago a private pilot could land at Gatwick to clear customs and there was no landing fee at all to pay. It concentrated the mind when air traffic control would ask one to expedite one's landing—which means, in flying jargon, "For God's sake, hurry up"—because there was a Boeing 707 on final approach. Soon, unfortunately, those days were to end and very high landing fees virtually eliminated the possibility of light aircraft, private aircraft certainly, using Gatwick.

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On the Continent and in France, in particular, there are well equipped airfields near most of the larger industrial areas. But it is better not to land between 12 noon and 2 p.m., as one would be lucky to find anyone in air traffic control or customs or anyone to refuel the aircraft. There is an excellent general aviation airfield at Cannes-Mandelieu on the French Riviera, which eases pressure on the nearby Nice airport.
The London area would benefit from a suitable airfield for business and private flying, with easy access to London. Farnborough comes to mind as suitable and as an airfield which could easily be developed for that purpose. Unfortunately, Hatfield, which would have been another suitable airfield, has already been closed. A few years ago, the north lost Sunderland Airport to make way for the Nissan car manufacturing plant, and northern regions certainly should not be neglected.
I hope that Her Majesty's Government will give their support to encourage general aviation airfields to the benefit of business and to ease the congestion at major airports.
3.52 p.m.
Lord Norton: My Lords, I thank the House for allowing me to speak in the gap. I only appreciated this morning that the subject was being debated. I speak from the standpoint of the private pilot. I declare an interest as a private pilot with some 1,200 hours flying time, although I must admit that most of those hours were flown on the Continent.
The very large airports have the facilities but no enthusiasm for the private pilot. That is quite understandable, given the enormous pressure of commercial activities. But it is at the other smaller commercial airports that I consider improvements can be made for the private pilot wishing to travel from one commercial centre to another.
The medium-sized airports—those with spare capacity—so far as I have experienced, have very little enthusiasm for the private pilot. The private pilot is a nuisance. Private pilots do not bring in jumbo-sized fees by way of landing charges, handling, maintenance, catering etc. I suspect that they are also considered more of a security risk. I shall make a specific recommendation about that later.
So, the private pilot represents low income. But, so far as the airport is concerned, exactly the same radio calls are made to land a large jumbo or a small light aircraft. Price is used to dissuade the private pilot from using the facilities at the commercial airports. To give just a small example, recently I had to divert from Coventry to Birmingham, having just missed the closedown of Coventry for the day. The price of landing and overnight stay at Coventry was £21, but at Birmingham it was £47. That included a £17 handling charge, for which no handling services were required. It is cheaper for me to land at Geneva, Paris, Marseille or Berlin than Birmingham, and in every case the facilities are as good or superior.
What are the special facilities or provisions that the private pilot requires? The most important is a realistic price for the facilities; the second is an enthusiasm for
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the private pilot. Otherwise, the demands of the private pilot are few. Strangely enough, one of the most important requirements is to have signs for easy access to the facilities available. That prevents private pilots being a nuisance because they do not know how to reach the facilities which are available. Airports are complex places to find one's way around. Signs are important. They also improve security.
Every airport has facilities such as weather forecasting, fuel and flight planning that will already be required for the commercial operators. There is no reason why the same facilities should not be used by the private as well as the commercial pilot, as happens all over the Continent. On the subject of security, perhaps I may suggest to the Government that they look at the possibility of having photographs on pilot licences. At present, there are airports such as Southampton which use the licence as a security document. That is ridiculous as it has no photograph and no ready means of identifying the person who is holding the licence.
What are the benefits? They are, first, increased revenue to the airports from increased use; secondly, a corresponding reduction on the pressures that exist on the smaller flying strips; and, thirdly, a greater ease of travel for the private pilot through the use of airport communication infrastructures. The small airfield communication facilities either by road or rail are frequently poor. What is required is an enthusiasm for private flying by the commercial airports from which the pilots and airports could benefit.
3.56 p.m.
Earl Attlee: My Lords, I, too, am grateful to my noble friend Lord Rotherwick for asking this Unstarred Question. It is a little unfortunate that the timing of it has reduced the number of noble Lords available to contribute when compared to the similar debate that he initiated earlier this year. It makes it difficult for me to respond to or amplify his observations and those of other noble Lords. My noble friend Lord Strathcarron and the noble Lord, Lord Norton, made valuable comments. But it must be harder still for the Minister to respond.
There is much to be said for revisiting this issue as we have a new government and an integrated transport review in progress. We also now have one department, the Department of the Environment, Transport and the Regions, responsible for transport as well as for the environment. Many of the points raised concern the balance to be struck between the requirements of general aviation and the implications for the environment. We shall have to see whether the DETR is in fact manageable and what advantage the Government are able to take of it.
My noble friend Lord Rotherwick mentioned the problems of Ipswich, Hatfield and West Mailing. My noble friend also raised the problem of local authorities' planning decisions impinging upon matters which are properly and indeed legally the preserve of the CAA. He particularly drew your Lordships' attention to the situation in South Cambridgeshire County Council. The

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council did not even consult the CAA before introducing changes. My noble friend has explained the situation in detail. I do not propose to repeat what he said.
The CAA is an internationally highly regarded regulatory authority and, quite properly, is legally responsible for regulating all safety matters, in particular take-off, circuit and landing routes for aerodromes. I recall a similar incursion by local authorities outside of their remit during the implementation of the night and weekend lorry ban in London. The desirability of that ban is a separate issue, but the local authorities were inviting—a polite way of putting it—operators to interfere with their vehicles' EU-type approved braking systems by fitting airbrake silencers in order to reduce the noise. We now seem to have a similar problem of adventurous local authorities interfering in matters properly in the domain of the CAA. I have to confess to being technically a little weak when it comes to aviation matters but it seems to me that anything to do with civil aircraft design, maintenance or operation should be the strict preserve of the experts at the CAA. I am sure the Minister will not dispute that.
My noble friend Lord Rotherwick also suggested that some local authorities are attempting to cut back, or at least to hold to a standstill, general aviation facilities for environmental reasons. I hope that the Minister, while understanding the concerns of local authorities, will want to allow the continued development of general aviation.
My noble friend Lord Strathcarron and the noble Lord, Lord Norton, also raised the problem of business aviation at major airports and the availability of landing slots and their cost. There is a difficult balance to be struck here. On the one hand, I am sure that the new Government's instincts will not suit the convenience of an international playboy. I do not know whether the noble Lord, Lord Norton, qualifies as an international playboy. On the other hand, if they are indeed the party of business, they will recognise the real economic value to be attached to the time of a chief executive of a major international—
Lord Norton: My Lords, I would like to put the record straight. I am not an international playboy.
Earl Attlee: My Lords, I am extremely grateful to hear that my previous friend, the noble Lord, Lord Norton, is not an international playboy. I would have been extremely disappointed if he thought that he was. As I said, if the Labour Party is the party of business, it will realise the real economic value to be attached to the time of a chief executive of a major international company based in the United Kingdom.
These are important matters for the integrated transport review, which I am sure the Minister will tell us will be much more than a re-statement of the desirability of public and, in particular, rail transport. It is surprising to me that light aircraft are really quite economic in terms of cost per mile. Can the Minister assure the House that when the review is finally published these particular matters will be covered in
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detail? Will the review include a comprehensive plan for small airfields, as asked by my noble friend Lord Rotherwick?
Part of the problem that local authorities are attempting to address is noise pollution. Of course, there are noise regulations for new aircraft. In another debate I have recently stated that I am wary of retrospective legislation. Furthermore, most light aircraft in use can meet international noise standards without modification, but that does not mean that there is no room for improvement. There are ways in which noise emissions of light aircraft can be reduced. My noble friend Lord Rotherwick mentioned silencers, multi-bladed propellers and, interestingly, magnetos, which are of course 1950s technology.
Some noise-reducing modifications would have other benefits to the operator and so would not necessarily be objectionable in cost terms. I am sure that so soon after the noble Lord spoke and so near to the Recess, the Minister and other noble Lords will not be disappointed if I do not repeat all the noble Lord's detailed arguments.
The Minister will be aware that there are many ways of measuring noise and I believe that PPG24 is relevant, although I have to confess that I am not familiar with the document. Is there more than one way of measuring aircraft noise? How is ambient noise accounted for and where is the noise from an airfield measured? Is the noise measured only on the airfield or is it at inhabited buildings near to the airfield or at all points of the compass?
I do not believe that the technical decisions that the CAA would need to take in order to secure improvements in noise emissions are too revolutionary. Some of the modifications that have been proposed this afternoon are already approved by the FAA. My noble friend Lord Rotherwick referred to the duplication of tests. The Minister will even be aware that aircraft registered with, and approved by, the FAA can fly in the United Kingdom without CAA approval of the modifications that have already been implemented. However, I do accept that the FAA is configured slightly differently from our own CAA.
My understanding is that the CAA is principally concerned with safety, but must have regard to environmental considerations. If we are to allow general aviation to continue to develop without unduly interfering with the right of others to their peace and quiet, the Minister might have to consider altering the CAA's terms of reference to give greater weight to environmental matters. That is another matter for the review to cover.
My final question is fairly general, but this is a good opportunity to ask it. The integrated transport review will be completed some time next year and no doubt there will be frustrating delays, such as those we experienced with the accelerated road review—and probably for the same sort of reasons. Does the Minister envisage a need for primary legislation as a result of some aspects of the review, particularly within her own areas of responsibility? Will there be a comprehensive and integrated transport Bill, such as the 1968 Act, or

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will there be only minor tinkering, using secondary legislation? Short though this debate has been, I am sure that it has been worthwhile. It will be interesting to hear how much the noble Baroness saves for her review.
4.6 p.m.
Baroness Hayman: My Lords—
Lord Graham of Edmonton: Wind-sock it to 'em!
Baroness Hayman:—I begin by thanking the noble Lord, Lord Rotherwick, for initiating this debate, and those noble Lords who have participated. Although we have heard only a few speeches, their content has made clear the importance and the value that noble Lords attach to general aviation. That is well understood by the Government. Unlike others, I have no direct interest to declare, not holding a pilot's licence myself, and I certainly cannot emulate my predecessor in this post who I understand took to paragliding at one stage of his career. I do not want to follow him down that route. However, perhaps I should declare an interest in the sense that for five years I had the honour of representing Welwyn and Hatfield as constituency Member of Parliament in another place and I am aware of the history of that aerodrome and have flown from there.
Perhaps I should first set out the regulatory framework within which aerodromes operate, which requires a brief explanation of the CAA's responsibilities with regard to aviation safety. Flights involving the public transport of passengers or pilot instruction must generally use aerodromes licensed by the CAA, which requires that specific safety arrangements and facilities be available. Other flights can use unlicensed facilities, but the CAA publishes guidelines as to the minimum safety facilities that these should consider. Pilots using unlicensed facilities will in any case have demonstrated their competence to the CAA via the pilot licensing process. I can certainly assure the noble Lord, Lord Rotherwick, that airborne aircraft must comply at all times with the 1995 Air Navigation Order. Separately, developments at all aerodromes with flight operations on more than 28 days a year may be subject to scrutiny under the planning system.
It was in relation to the planning system that the noble Lord, Lord Rotherwick, highlighted the loss of aerodrome facilities in this country. It must however be remembered that the Government are not responsible for the development or operation of civil aerodromes. This is a matter for the owners or operators of those sites working within the bounds of the established planning system. The noble Lord rightly pointed to the pre-eminence of the plan-led system. I am pleased that aerodrome operators, users and their trade associations are paying more heed than in the past to the need to make their views known early in the planning process. This system allows for public participation and it is right that all those with an interest should participate in it. Where my department can, and does, help is by examining draft development plans to ensure that, where appropriate, they accord with published planning advice.
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Planning Policy Guidance Note 13 on transport, with a section highlighting to planning authorities the economic benefits of general aviation and smaller airports, has already been mentioned. In response to queries from the noble Lord, Lord Rotherwick, I confirm that we support the guidance set out in PPG13. As for a national planning policy, this guidance, including the approach to air transport, will be part of a wide-ranging review of policy leading to a White Paper on an integrated transport strategy to be published next year, to which the noble Earl, Lord Attlee, referred.
I confirm that civil aviation in all its guises has a role to play. I assure noble Lords that the environmental impact of aviation and airports and their contribution in terms of an integrated transport policy in this country will be integral to the review and the White Paper. We therefore encourage all interested parties, including the general aviation community, to respond to the consultation which will be launched shortly on the White Paper. In the meantime, I assure the noble Lord, Lord Strathcarron, and other noble Lords that the Government recognise the importance of general aviation, especially its contribution to business and flying training.
The noble Earl, Lord Attlee, asked whether the Government anticipated major legislation at the end of the White Paper. I believe that it would be wrong to prejudge the results of the consultation and what will go into the White Paper. What, if any, legislative framework follows must respond to what is set out in the White Paper.
I return to the issue of planning guidance. PPG24 also warns local authorities about inappropriate or noise-sensitive development such as new housing in the vicinity of aerodromes. But in the field of planning circumstances always vary from site to site and from one planning authority to another. It is therefore not appropriate to be more prescriptive. But the department is not aware of any concerted efforts by planning authorities to undermine general aviation.
The noble Lord, Lord Rotherwick, referred to particular cases where he believed that local authorities had ignored those interests. Our understanding is that Welling and Hatfield Borough Council engaged experienced consultants to study whether a general aviation use of Hatfield would be economically viable. I also understand that the option of a grass runway as part of an aviation heritage centre is among those currently being considered by the council.
As far as concerns South Cambridgeshire, I note the noble Lord's concern about the precedent that may be set for the CAA's regulatory role. I am pleased to report that South Cambridgeshire has formally sought CAA views on its supplementary planning guidance on aerodromes, and the two parties have since been actively discussing safety issues. The CAA has now given South Cambridgeshire specific guidance on safety requirements as well as more general advice on matters of policy. I can assure the House that the Civil Aviation Authority is very much aware of the issues involved. I can also reassure those noble Lords who have raised

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the point that planning authorities' policies on general aviation will be considered as part of the review of PPG 13.
The noble Earl, Lord Attlee, referred to the powers and competencies of the CAA. He is correct in his assertion that the CAA's primary responsibility is for the safety of aircraft. The authority has not at present indicated any problems arising from lack of powers in respect of environmental matters, but if it chose to do so in future we would give careful consideration to those concerns.
To return to individual cases, if a planning authority refuses planning permission for aerodrome development or takes enforcement action or one of the other options in the planning system, there is a right of appeal. In considering an appeal an inspector appointed by the Secretary of State will take account of all relevant circumstances and give them the appropriate weight according to published guidance. I am sure that noble Lords realise that I am unable to comment on the merits or otherwise of individual planning cases, especially where appeals are outstanding or decisions may be pending. That applies in the case of Little Gransden. But at the end of the day it is unrealistic to ask the Government to force an aerodrome to stay open if the owner or operator is determined to close it, be it publicly or privately owned. I emphasise again that it is perhaps at the early drafting stages of development plans that the department can have most influence.
I know that there is concern about some well-publicised cases of aerodromes closing or under threat. In fact the number of licensed aerodromes has remained close to its present total—just over 140—over the past few years. In addition, there are thought to be over 400 unlicensed aerodromes, as well as many more hang-gliding, paragliding and balloon launch sites. So while I can understand the concern of individuals about threats to their local aerodromes, that is not the national trend.
The noble Lord, Lord Strathcarron, asked about Farnborough in relation to business aviation. The MoD is currently in the process of tendering Farnborough Airfield for business aviation. The successful new operator, to be selected later this year, will be expected to continue its business aviation capacity. The Department of the Environment, Transport and the Regions is following that process carefully.
Perhaps I might write to the noble Lord, Lord Norton, about photographic pilot licences. That strikes a chord, because I am wrestling with photographic driving licences at the moment. On the issue of charges for private pilots, the European Commission has just issued a proposed directive setting a framework for airport charges to all users across the Community. The UK is taking an active role in negotiations in the Transport Council to ensure that the interests of the UK industry, including general aviation users, are taken into account.
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I turn to environmental considerations which have been highlighted in the debate. The environment is at the heart of the Government's policy concerns and throughout their transport considerations. I welcome and support the goal of the noble Lord, Lord Rotherwick, of reducing noise impacts of light aircraft. We must all recognise that noise from aircraft is a significant environmental nuisance at smaller aerodromes as well as at large international airports, although different in character and scale. But the prime responsibility is on aerodromes and pilots themselves to fly responsibly, and to be good neighbours. That has been acknowledged in the debate.
We know that leisure and private flying are found by many people to be generally more annoying than other forms of aviation. There are other patterns, which also emerge in the correspondence my department receives.
Localised or prolonged activities such as parachuting or aerobatics can also attract complaint, so here again it is important that those activities be conducted so as to minimise nuisance. The noble Lord, Lord Rotherwick, pointed to the need for a better behavioural code for flyers. In that context, we welcome the production of material such as the General Aviation Awareness Council's guide to considerate flying. That is an excellent document which, if followed, will ensure that flying will cause the least possible nuisance to people on the ground. In that area local public perception as to the nature and conduct of flying activities is central. That means that effective consultation with the community is in the interests of aerodrome, pilots and public alike. Some aerodromes are required, by designation under Section 35 of the Civil Aviation Act, to provide consultation facilities; but the non-designated aerodromes are not absolved of the need to communicate with their neighbours. As my noble friend Lord Clinton-Davis commented in this House earlier this year, we are keen to see good practice at all aerodromes. I am happy to commend again the very constructive advice on that subject produced by the General Aviation Awareness Council.
On the issue of aircraft noise reduction, the noble Lord, Lord Rotherwick, mentioned the various noise reduction devices that are available for individual aircraft, and where those are officially sanctioned I would hope that operators would choose to fit them. But it must be right that the CAA, as the body responsible for aircraft safety, must be convinced that their use does not diminish safety standards. In several instances, noise reducing measures developed in research institutes have fallen short of those standards in practice. There have been cases where such equipment has had an effect on airworthiness through vibration, reduction in engine cooling, airframe fatigue, power loss or weight increase. The CAA is considering this matter in collaboration with colleagues in the European Joint Airworthiness Authority from the safety viewpoint and, with the International Civil Aviation Organisation, from the noise angle. I should add that, while we welcome technological advances to individual

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aircraft, they are wasted if the aircraft are operated in an inconsiderate manner. I am sure that noble Lords who are pilots will understand that even better than I do.
The noble Earl, Lord Attlee, asked some specific questions about noise and its measurement. He is right in saying that there is more than one way to measure aircraft noise, but the system used within the United Kingdom is well respected and internationally accepted. He asked how ambient noise was accounted for. Ideally, it is accounted for by siting monitors away from where the ambient noise is generated. However, if unavoidable, allowance will be made for the ambient noise if it is, for instance, background traffic noise. As regards the place from where noise at an airfield is measured, two options are available. It can be done by siting the noise monitors at the most sensitive areas or by putting monitors where the aircraft are noisiest, which is UK policy. Therefore, we have a level playing field between the measurements taken at different aerodromes.
In conclusion, I wish to reassure noble Lords that the Government recognise the concerns of general aviation users and the role which small aerodromes can play in facilitating business aircraft and the training of pilots. Furthermore, we recognise that that is a legitimate interest which should be taken into account when we consult on the integrated transport White Paper.
Equally, we are committed to striking the right balance between aviation and the environment. The integrated transport White Paper will give us all the opportunity to consider these issues in the round. It is a theme that in the balance between transport, mobility
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and the environment, it is vital that we tackle across the transport field if we are to achieve an integrated transport policy that is the Government's aim.
Earl Attlee: My Lords, I am grateful to the Minister for her reply. I am a little disappointed in her response to the possible means of reducing noise, the role of the CAA and the duplication of approval of the FAA and the CAA. I do not expect the Minister to reply today, but perhaps she will reflect on the issue and come back to us later.
Baroness Hayman: My Lords, I shall be pleased to write to the noble Lord on that matter. However, it is only right that I should reiterate the advice that the CAA is giving at present. It is that safety considerations must be its paramount considerations. I shall certainly write to the noble Lord on that issue.

Royal Assent
4.23 p.m.
The Deputy Speaker (The Viscount of Oxfuird): My Lords, I have to notify the House, in accordance with the Royal Assent Act 1967, that the Queen has signified her Royal Assent to the following Acts:

Appropriation (No. 2) Act,

Finance (No. 2) Act,

Education (Schools) Act,

Law Officers Act,

Referendums (Scotland and Wales) Act,

King's College London Act.

House adjourned for the Summer Recess at twenty-four minutes past four o'clock until Tuesday 14th October next.