Finance Bill

HL Deb 31 July 1997 vol 582 cc326-73

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.

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 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.

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, 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. 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 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. 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.

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 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 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.

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 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 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 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.

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. 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. 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. 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.

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 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". 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 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.

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 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 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 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.

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, 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.

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 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.

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 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 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, 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 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 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 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 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.

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?

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 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 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 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 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 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.