Pre-Budget Report

HL Deb 25 November 1997 vol 583 cc877-97

3.47 p.m.

Lord McIntosh of Haringey

My Lords, with the leave of the House I shall now repeat a Statement being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is:

"The purpose of this, the first annual pre-Budget Statement, is to report the Government's assessment of the economy; to outline our Budget aims; and to encourage an informal debate on the detailed choices before us. To achieve our national economic objectives—high and stable levels of growth and employment—the next Budget must address three challenges. "The first challenge is to increase our productivity. Britain today is some 20 per cent. less productive than our main competitors and has been for years; secondly, the challenge of employment: 3.5 million working age households—almost 20 per cent—have no one earning a wage; and, thirdly, the challenge of stability. For 40 years our economy has an unenviable history, under governments of both parties, of boom and bust. Stop-go has meant higher interest rates, less investment, few successful companies and lost jobs. It has been the inevitable result of a failure to take the long-term view.

"So the real choice facing Britain in the coming Budget and beyond is between, on the one hand, muddling through as we have done for decades from one stop-go cycle to another, or, on the other hand, breaking with our past, burying short-termism and securing long-term strength through stability, sustained increases in productivity, and employment opportunity for all.

"This is not a challenge for government alone; it is a challenge that must also engage both the understanding and the commitment, and indeed, the energies of all of us, government, managers, investors, and workforce together. So at the heart of this pre-Budget report is the recognition that only by greater openness and informed debate can this country achieve that shared understanding of the tasks ahead and that shared sense of national economy purpose that has eluded us for so long.

"First, stability: the major industrialised countries are expected to grow by 2.75 per cent. this year and 2.5 per cent. next year, despite the recent turbulence we have seen in Asian economies and financial markets. It is imperative that governments and central banks around the world remain vigilant. But it is the task of government, at all times, to ensure a long-term and stable framework, exactly the approach this Government are pursuing.

"When we came to power, the economy was already facing yet again the very pressures that have produced the boom-bust instability of the past. Consumer demand was accelerating, growing three times as fast as industrial production, as over £30 billion was released in building society windfall payments. Inflation was predicted to go far beyond its 2.5 per cent. target and expected at that time to rise towards 4 per cent. next year. All this was happening because the necessary decisions on monetary and fiscal policy had not been taken. It is because this Government have learned the lessons from past instability when interest rates rose into double figures that, starting in May, we put in place a new monetary and fiscal framework. Following our reforms at the Bank of England, long-term interest rates have come down. No one doubts the Bank of England's determination to achieve the Government's inflation target.

"With our five-year deficit reduction plan, public borrowing, which was £23 billion last year, is now forecast, excluding the windfall tax revenue, to be £12 billion this year and £6 billion next year. We said in our manifesto that we would work within existing spending limits. This we are also achieving, as we promised. The deficit has fallen from 4.5 per cent. of national income two years ago to just 1.5 per cent. this year, and 0.75 per cent. in 1998-99, well within the Maastricht criteria.

"There is a risk that the structural deficit—which takes account of the economic cycle—may turn out to be larger. So we will be both cautious and prudent, and I can tell the House we will learn the lessons of 1988 when it was wrongly assumed that the structural deficit had disappeared, and the penalty was the return of boom and bust. And while I recognise the concerns of exporters about the exchange rate, I also understand that what companies fear most is a return to the boom-bust instability of the past. So this summer and autumn, hard decisions have had to be made on both interest rates and deficit reduction and I am now more optimistic that we are on course to put the economy on track for stable and sustainable growth. And it is to reinforce our commitment to the long term that we will publish proposals for a code for fiscal stability.

"We will legislate so that there is a duty on government to report to Parliament on how they are meeting their fiscal rules. In that way everyone can plan for the future on a much clearer and better informed basis. Let me explain why meeting our fiscal rules matters so much, and why they are essential preconditions for long-term social and economic progress. It is because the borrowing levels we inherited are costing the country £25 billion a year in interest payments alone, which is more than our country's total budget for schools, that we had to act.

"Our aim is to reduce the huge sums spent simply servicing debt, in order that more of our money can be spent on meeting the people's priorities. The prize for this country—valued especially by a Government who are committed to good public services—is sustainable public finances that allow consistent and long-term investment in our priorities. By reallocating resources we will be investing an additional £2.3 billion in education. And this year we will invest an extra £300 million in patient care in the NHS—and next year an extra £1.2 billion—over and above that planned by the previous government.

"And I can tell the House that—as our comprehensive spending review re-allocates resources towards higher priority areas—there will be real year on year increases in spending on front-line patient care.

"The key to strong public services is long-term prosperity through higher productivity. Government, industry and people together must now work systematically to remove all barriers to productivity: in product markets through encouraging competition and innovation; in capital markets through measures to enhance growth and investment, not least for innovative small businesses; and in the workplace through encouraging the creativity and flexibility of inventors, managers and workforces.

"After our successful Budget initiative of July to encourage one of the most neglected of our creative industries—film—it is time to do more to encourage other creative industries where from science, computer software and communications to design, fashion and music, our British genius for creativity has made Britain a world leader. This year, entrepreneurs in small and medium-sized companies can draw on our £200 million doubling of capital allowances to invest in new technology. From next year the new National Endowment for Science, Technology and the Arts will make grants to encourage creative talents.

"But I can also say today that in advance of the Budget, the President of the Board of Trade and I are examining how, to improve productivity, we can help leading-edge businesses gain funds to develop new technologies; how we can improve Britain's poor record of investment in research and development; and how we can make it easier for small businesses to draw on venture capital to create jobs and a more entrepreneurial culture. And it is to encourage and reward long-term investment that we are completing a review of capital gains tax, the conclusions of which will be announced in the Budget.

"Our poor record on investment in Britain also reflects our low level of national saving. Half the adult population has hardly any savings at all. To encourage more people to save we will introduce from April 1999 new individual savings accounts, the details of which will be put out to consultation next Tuesday. But there is one decision on investment that should not be delayed. In July we implemented the first stage of corporate tax reform, cutting the main rate of corporation tax by 2 per cent. to 31 per cent., its lowest level ever. And, following the abolition of payable tax credits, we began to consult, as promised, on the second stage.

"Advanced corporation tax, it has become abundantly clear, is now a hindrance to sensible business planning and investment decisions. Britain needs a reformed system that matches the needs of modern companies and favours the long term. So to allow companies to plan ahead I can confirm today that in April 1999 advanced corporation tax will be abolished. At that point, we will begin the move to paying corporation tax by quarterly instalments. Small companies will be exempt from this change and special arrangements will be made for medium-sized companies. We will phase in the change over four years and we will substantially preserve companies' expectations for using their existing surplus ACT.

"This afternoon the Inland Revenue is publishing full details of the proposed changes. And we will now start consultations on their implementation. To help ease the transition, and to take one stage further our pro-business and pro-investment agenda, I can announce that in the Budget, the main rate of corporation tax will be cut again by 1 per cent. to 30 per cent. from April 1999—the lowest tax rate of any major industrialised country.

"The July Budget started from the understanding that the greatest waste of our economic potential and the most serious cause of poverty is unemployment, denying opportunity to 3.5 million working age households where no one works.

"In July we said that instead of simply compensating people for unemployment, our priority is to tackle the root causes of unemployment and poverty by providing new opportunities for work.

"In the last few months, with the help of Martin Taylor, the Government have been systematically addressing all the obstacles that prevent people taking up and benefiting from work: the absence of marketable skills; the failure of the tax and benefits system to make work worth while; the poverty and unemployment traps that for far too many mean that work does not pay; the lack of employment opportunities; and the scarcity of affordable child care.

"We have concluded that to help people move from benefits to wages, nothing less than a comprehensive tax and benefit reform and the modernisation of the welfare state is required. This strategy involves three basic elements: providing skills for work; making work pay; and creating new job opportunities.

"First, to offer skills for work, the Secretary of State for Education and Employment will shortly publish proposals for individual learning accounts and for the University for Industry. Secondly, I want everyone who can work to be better off in work than on benefit. So the Government now propose an integrated tax and benefit plan involving action at every level.

"To maximise the rewards from work, a 10p starting rate of tax and a reform of benefit tapers will be introduced when it is prudent to do so. To ensure that work pays for families with children, we propose a working families tax credit, backed up by affordable childcare; and to ensure the rewards of these reforms flow directly to the employee we are committed to a statutory national minimum wage.

"We will now consider in detail the working families tax credit—cash paid through the wage packet directly to families on low incomes, side by side with the national minimum wage. The proposal would build on the successful elements of family credit, and involve better help through the tax system for child care costs.

"We will now also consider the future structure of national insurance for the low paid. Under the current system, some low-paid employees face marginal tax rates of over 100 per cent. To improve rewards from work, to simplify administrative burdens on employers, as we want to do, and to encourage them to take on more people, it is now right to consider the scope for bringing the national insurance structure for the low paid more closely into line with income tax.

"And finally, there are men and women who have been excluded for too long and who need extra help to get back into work. In the Budget we made a start by announcing a new deal worth £4 billion that provides jobs for young unemployed, the long-term unemployed, lone parents and the disabled.

"The new deal for the young unemployed will start in pilot form in January and extend nationwide for the young unemployed in April, with the support of some of our best known companies. I can also announce today that some of Britain's leading bus and rail companies have agreed to play their part by introducing a new travel pass for young people on our new deal, cutting by at least 50 per cent. their travel fares.

"Disabled men and women who want to should also have the right to work. As the first step in implementing the £195 million programme for people with disabilities, the Secretaries of State for Social Security and Education and Employment will be now inviting bids for the first wave of new projects to start in spring 1998.

"Helping lone parents into work is the most effective long-term way to tackle their family poverty. The new deal for lone parents began in eight areas in July. Already it is yielding results where it counts—in higher living standards for lone parent families. So from next year our welfare to work programme will be extended to help every lone parent who wants advice and help. And from April every single parent coming on to benefit will be offered help to find work if that is what she or he wants.

"Lone parents need and have a right to expect affordable childcare. Indeed, since May the Secretaries of State for Social Security and Education and Employment have been working with the Treasury on plans to make a reality of a national child care strategy. And, paramount in our family policy, are the interests of the child.

"Tomorrow they will announce a five-year plan to extend out-of-school childcare clubs to every community in Britain. Funds will be available to set up as many as 30,000 new out-of-school clubs, which will provide places for nearly 1 million children.

"The total cost—£300 million over five years—now budgeted for in our plans, the biggest ever investment in childcare, will be shared between the Exchequer and the new opportunities fund. To staff the new clubs 50,000 young people across Britain will be offered training as childcarers through our welfare to work programme.

"Under our plan, every lone parent who needs it will be able to find an out-of-school club in their community. A national child care strategy is no longer the ambition of workless parents. It is now the policy of this country's Government.

"Today while nearly one in five working-age households have no one working, we also have extensive skill shortages throughout our economy. The proportion of manufacturing firms reporting skill shortages is up 70 per cent. on a year ago.

"We will now introduce pilot projects nationwide under which any employer who takes on and trains a young or long-term unemployed person and keeps them on, can now receive up-front three-quarters of their new deal allocation, thus giving immediate help with training costs—in the case of young people about £1,700 and for the long-term unemployed, £1,500.

"These skill shortages are a clear sign of the short-term pressures in the economy today that have to be tackled.

"At around this point in every recovery, when inflation, and interest rates have risen, a second wave of wage inflation has brought a recurrence of stop-go instability. Past governments have allowed themselves to be diverted from their long-term aims because of their inability to deal with short-term pressures. This time we must do everything we can to make sure that the long term takes priority. It is because the last government held a simplistic and over-rigid view of the relationship between levels of inflation and levels of employment that they told us that high unemployment was a price worth paying.

"There are three reasons to believe that provided reform and responsibility go hand in hand it is possible to lay the foundations to deliver both low inflation and high employment over the long term.

"First, the more our welfare to work reforms allow the long-term unemployed to re-enter the active labour market, the more it will be possible to reduce unemployment without increasing inflationary pressures.

"Secondly, tax and benefit reforms, which remove the barriers to work, and structural reforms which promote the skills for work—in other words, government intervention to create a more responsive labour market—can make possible long-term increases in employment, without fuelling inflationary pressure. The more people return to the world of work, and the more we tackle skill shortages, the less pressure there is on employers to bid up wages in the short term.

"But thirdly, the reality of the more complex and flexible labour markets of Britain today is that pay decisions are made not by the few in smoke filled rooms but by millions of employees and employers across the country. And the more that we all take a long-term view of what the economy can afford, the more we will be able to have job creation and keep inflation and interest rates as low as possible. So we must all be long-termists now.

"The reforms we are introducing will take time. But it is in no one's interest if today's pay rise threatens to become tomorrow's mortgage rise. The worst form of short-termism would be to pay ourselves more today at the cost of fewer jobs tomorrow and lower living standards in the very near future. So wage responsibility is a price worth paying to achieve jobs now and prosperity in the long term. It is moderation for a purpose.

"The choice is between responsibility and reform that would give us higher growth and more jobs; and shortsighted, short-termism, which will inevitably mean less growth and fewer jobs.

"In our forecasts for the coming two years, we demonstrate clearly this choice we all face. If the economy works in the same way as in the past, growth might be 2.25 per cent. next year. But, if we can combine our reforms with responsibility across the economy it is possible to achieve growth of 2.75 per cent. next year. Similarly, growth can be 1.5 per cent. or 2 per cent. in 1999-2000. In either case the Bank of England will ensure that inflation comes down to the Government's target. So the more successful we are in tackling skill shortages and ensuring the success of the new deal and the more effective the exercise of responsibility in pay determination, the more we can achieve our goals of sustained growth and employment. I have today submitted this new evidence to the public sector pay review bodies and met their chairmen to explain the choices before us.

"Just as the Government are offering leadership with responsibility in their monetary policy and the management of the public finances so that we can achieve higher levels of growth and employment, so must business leaders and workforces match this with responsibility throughout the whole economy. This means responsibility, not just on the shopfloor but also from Britain's board rooms outwards—where, in the interests of all, there must be moderation not excess and where an example should be set.

"But we recognise that if we are to achieve our long-term goals and secure a new sense of economic purpose, then fairness and openness must be at the heart of the approach to every Budget. Tax avoidance harms those who pay their fair share of taxes. I give notice today that the Budget will introduce those measures which are needed to root out tax avoidance.

"A fair and open approach to taxation will also be central to our Budget consultations now under way—on North Sea oil, on alcohol and tobacco where the review will conclude early next year, and on charities where the review is working towards a consultation document next spring.

"In securing the long term, nothing is more important than our approach to the environment. On Thursday my right honourable friend the Deputy Prime Minister will publish a consultation paper on ways to help deal with water pollution with a view to making proposals in the Budget. Together we are also looking at how the tax system can reflect our environmental objectives, and will do so in the light of decisions at Kyoto.

"So in this pre-Budget Statement we are consulting in all areas where it is right to consult, taking action in all those areas where action is needed, and putting to the country the choices for debate—choices that can be made only by all of us.

"There is one announcement that I promised to make today. Following a review by Customs and Excise, which will be published tomorrow, I have decided that VAT on the installation of energy-saving material under existing grant schemes, such as the home energy efficiency scheme, will be cut from 17.5 per cent. to 5 per cent. in the spring Budget. This will mean that the funds under those schemes will go further, helping to insulate 40,000 more homes per year. The Government will now explore with our European partners the possibility of a reduced rate of VAT for a wider range of energy-saving materials.

"Our spending review, like our tax policy, is based on allocating resources according to the priorities of investment, employment and fairness. So already, within this Government's tough spending limits, we have redistributed resources to priority areas: from the assisted places scheme to cutting class sizes; from the windfall tax paid by the utilities to creating jobs and repairing our schools; and from defence and the nuclear programme to the National Health Service. After the publication of the National Asset Register yesterday, there will be new scope to re-allocate resources to high priority spending.

"I can announce one further re-allocation today. I now expect our net payments to the European Union to be some £400 million lower than budgeted. Our pensions review is looking at the long-term future of pension provision in Britain, including how we can do more to support Britain's poorest pensioners. We must help the thousands who do not claim benefits and who need them most.

"My right honourable friend the Secretary of State for Social Security is announcing today that she will finance a number of pilot projects so that we can find the best ways of encouraging improved benefits take-up by the poorest pensioners.

"We have already cut VAT on fuel and power to 5 per cent., as we promised. But it would be wrong to wait until we have the results of our pensions review to take action to help the elderly with winter fuel bills. At the moment, although the poorest do get some help through cold weather payments, the payments only go to those on income support and they generally have to wait until after the cold weather until help is available. They are of no help at all to most pensioners, including the million not getting their income support entitlements; no help to those on the margins of poverty; and are of doubtful help even to those who do qualify who often do not know whether they can afford to spend extra money on fuel when it is cold.

"My right honourable friend the Secretary of State for Social Security and I are simply not prepared to allow another winter to go by when pensioners are fearful of turning up their heating even in the coldest winter days because they do not know whether they will have the help they need for their fuel bills.

"The pensions review will report next year. But we must act in the meantime to help pensioner households. For this winter and next every pensioner household will receive £20 extra to help with their bills. Every pensioner household on income support—nearly 2 million—will receive £50 extra. The cost will be met from reallocating the savings on our contributions to the European budget and the money will be paid in time to meet winter fuel bills. So every pensioner household will now see the benefits of this Government's cut in VAT on fuel, our abolition of the gas levy, new competition and tougher regulation of the utilities and, now, the Government's new fuel payment. As a result of those changes, the average pensioner household will be helped by up to £100 a year, and poorer pensioner households on income support will be helped by up to £130 a year.

"This is a Government who, in contrast to the last government who put VAT on fuel, keep their promises and are prepared to take action where action needs to be taken. A government that is meeting the people's priorities, even as we confront the most difficult choices our country must take to build for the long term.

"This year, in 1997, we have made a start and we will do more year on year. Our approach to the coming Budget shows that we are already setting a new course for Britain and building a united country where everyone has opportunity and everyone a contribution to make. I commend the Statement to the House."

My Lords, that concludes the Statement.

4.16 p.m.

Lord Mackay of Ardbrecknish

My Lords, I am sure that the whole House is grateful to the noble Lord, Lord McIntosh, for the fairly mammoth task of repeating the Statement which took 28 minutes. Indeed, I believe that that may be close to a record for the repetition of a Statement because, of course, Budget Statements in the past have not been repeated in this House. Therefore, we can start off by being grateful to the noble Lord, Lord McIntosh. We are discussing a very detailed paper and one which is accompanied by an equally detailed booklet—although, I suspect, I should say a book—which outlines much of the proposals and fills in some of the detail.

I would have asked for a debate on the subject, but I was pleased to see that I have been pre-empted in that respect as the noble Lord, Lord Graham of Edmonton, has tabled a debate on economics. So we shall shortly have an opportunity—on Wednesday next, I believe—to debate the proposals in detail.

When noble Lords were sitting listening to the repetition of the Statement, they could have been forgiven for thinking that many things were missed out and that there really was not a great deal of meat in it. When the Chancellor of the Exchequer started out on this project, I suspect that he intended to share a great many ideas with us about tax rates, and so on. However, as he became more knowledgeable about the workings of the Treasury and how such things happen, he probably realised that it is not entirely safe for Chancellors of the Exchequer to do too much organised leaking of their Budget secrets something like six months before we actually have the Budget.

Here we have a Statement with, frankly, a few important bits but all held together with the cement of a great deal of waffle and much repetition of what we already know. Indeed, that struck me most. Most of the material and the paragraphs are actually repackaging of what we have already been told. Last July, the Government painted a rather blacker picture of the economy than they painted today. There was no sign last July that revenues were buoyant and that the PSBR was narrowing. In fact, if I remember rightly, they accused my right honourable friend Kenneth Clarke of being over-optimistic. Well, it turns out that my right honourable friend was not over-optimistic; indeed, he could have been much more optimistic. But there you are. That begs the question of why we needed 17 extra taxes last July if the economy was doing as well as the Government now tell us that it is.

As usual, the Government tried to paint a bit of a black picture; but, as always, they failed to note that unemployment rates in this country have been coming down for five years. I am delighted to say that they are still doing so. That is in stark contrast to our European friends many of whom are seeing their unemployment rates still rising to heights which I should have thought would be pretty well unacceptable in this country. However, they seem to be quite acceptable in the countries of many of our continental friends.

However, I wish to pick out one or two points in the Statement and ask the Minister one or two questions. Perhaps the Minister will tell me why the Government felt obliged to impose 17 extra taxes including the £5 billion hit on pensions last July when it appears that the PSBR is going into balance rather quicker than the optimistic Kenneth Clarke said it would. The code of fiscal stability is an interesting concept. I suspect that it has much to do with protecting the Chancellor from his more spendthrift Back-Benchers. He makes a rule and then says, "I am sorry this rule cannot be broken and therefore I cannot spend the extra money you want."

That may be a clever device, but there you are. I notice there will be legislation to oblige the Government to report to Parliament on how they are meeting their fiscal rules. Will the Minister go a little further on that? Will there be legislation to oblige the Government not to break their own PSBR limits? I understand that that is what happens in the United States. Those two concepts are poles apart. The one concept consists of reporting and apologising if PSBR targets are not met; the other concept dictates that one jolly well must meet one's PSBR targets. That is an interesting question.

The first part of the Statement mentions money for education and for the NHS. However, we have heard about that money before. How many times shall we hear about that money? Dare I use an expression I have heard for 20 years: is this new money? The short answer is that it is not new money; it is the money we have heard about. I believe we first heard about it last July. I hope that none of the Government Back-Benchers think that this is extra money for health and education over and above the money that they heard about—and no doubt cheered—last July. This is not new money; it is simply the same money re-announced.

As regards productivity, perhaps the Minister would like to tell us what the productivity rates were in 1996; what the Government envisage they will be this year and to predict—given all their high-sounding policies—what they intend the productivity rates will be next year so that we can make a judgment as to whether all these fine phrases become reality. The Government intend to encourage creative industries and others, as they call it. Has that been cleared by the Commission? Is it allowed under the state aid rules? I refer to the taxation rules that we discussed at Question Time. Are the Government sure that none of these inducements will fall foul of the Commission as regards state aids?

I notice that there is to be a capital gains tax review. Shall we see the details of the review so that there can be a public debate? I was not sure about that when the Minister mentioned it. I am certainly looking forward next Tuesday to seeing the detail of the individual savings accounts. I hope that we shall also see some firm proposals about what the Government intend to do about PEPs and TESSAs as there is a huge amount of uncertainty surrounding them and what the tax arrangements for them will be in the future and how they will be linked into the individual savings accounts. I hope that the Government will put some flesh on the bones of that next Tuesday. I had rather hoped that that would be one of the concrete issues we might have heard about today.

I now turn to the extension or the repackaging of family credit. This is an interesting matter and we shall have to study the details of it. Do I take it that the proposals will go beyond child benefit and will build on the proposals that we put forward and the pilot schemes that we started to give the equivalent of family credit to couples without children and to single people? Perhaps the Minister can tell me that. He talked about bringing national insurance structures into line with income tax but he did not tell us what that comprised. We shall be interested to see how that works and to study the proposals.

As regards the new deal for the unemployed, I was pleased to hear the Government pay tribute to the privatised bus and rail companies. That must have stuck in their throats a little as normally they tell us there is nothing worse on earth than the new privatised bus and rail companies. I am pleased to see that these new companies are showing the kind of imagination that we on this side of the Chamber have been telling the Government for some months now they are showing in every other way. They are showing imagination in helping young people with their travel to work costs. I fully agree that that is important. There are a number of pilot schemes. However—I make this serious point to the Government—there is no point in having a pilot scheme unless you have a clearly defined control group. One of the worries as regards a recent pilot scheme was that there was no clearly defined control group. I ask for an assurance that there will be clearly defined control groups for all the pilot schemes so that we can see whether a pilot scheme is either not working, is not making any difference one way or another, or is making a difference and therefore should be extended. I am pleased to see the Government building on pilot schemes as it is a concept that we introduced. We felt that it was important, especially in the social security field, not merely to believe that an idea would "fly" because it was a bright idea and we had thought about it. We believed we should test it to try to ensure that it "flew". To that extent I am pleased that the Government are continuing to use pilots, but I hope that they will ensure there are control groups.

The Labour Party has had a 20 year learning curve on the need to control wages. I suppose that some noble Lords may have wondered whether it was the Labour Party they were hearing talking this way because for the past 20 years the one thing one could be sure of was that the Labour Party was out there supporting people demanding wage increases. It did not much matter whether that involved people in the public sector or the private sector. The Labour Party used to criticise Conservative governments when Chancellors gave evidence to public sector pay review bodies and said that wages had to be kept under control. It is nice to have some converts on these matters.

Fairness in taxation is important. Next Monday I have a Question on North Sea oil taxation. Will we have a discussion about this taxation or shall we just see the results of an internal review? The noble Lord is sitting beside his noble friend who knows a little about the oil industry. I caution the noble Lord to watch the interaction between tax regimes in the North Sea and in the new oilfields to the west of Shetland and the employment prospects there as they are expensive fields to develop and taxation plays an important part in that process. I hope that the Government do not think they can obtain more tax revenue from the North Sea without considering the consequences for unemployment.

I am not a great supporter of the tobacco industry as I do not really approve of the habit. If the Minister is not aware of the research, his noble friend Lady Hollis of Heigham will certainly remind him; namely, that increased tobacco taxes fall inevitably hardest on the poorest. The previous government and this Government have a distinct problem as regards swingeing increases in tobacco duties because they fall hardest on the poorest.

I am not trying to compete with the noble Lord as regards the length of time I have spoken. I do not wish to speak for too long. However, if we are to have environmental taxes can I be assured that just as we tied the landfill tax into a reduction in national insurance, any increases in taxes for good "green" reasons are offset by decreases in taxes on measures which are good for the environment, such as the reduction in VAT on energy saving measures mentioned by the noble Lord, which I have no doubt will please the noble Lord, Lord Ezra? Will that be backdated as it seems to me that people may be tempted not to continue with energy saving projects between now and the Budget if they know that VAT on those schemes will be reduced from 17.5 per cent. to 5 per cent? Perhaps the Minister can answer that question.

I have probably said as much as I need to. The abolition of advance corporation tax and its replacement by quarterly payments and the reduction by another 1 per cent. of corporation tax intrigues me given the matter that we discussed at Question Time. I hope that that measure will be accepted by the European Commission and will not be seen as harmful tax competition. However, I suspect the reason the Government are introducing that measure is because of all the damage they did to industry by the decision they took last summer on ACT. However, that does not negate the fact that the pensions industry remains damaged, and will continue to be damaged, as will pensioners, by the £5 billion hike. I am sure that we are all looking forward to the debate that the noble Lord, Lord Graham, indicated. We can then perhaps get down to some of the detail. In the meantime, I thank the Minister for repeating the Statement.

Lord Ezra

My Lords, I, too, thank the noble Lord for repeating the Statement and express great pleasure that the Government have embarked on what is a fairly courageous route: to anticipate a Budget so far in advance; and to initiate a public debate on many of the issues. Unlike the noble Lord, Lord Mackay of Ardbrecknish, I was impressed by the number of practical and positive measures which the Government saw fit to announce with this preliminary Statement. I had not expected them to do more than raise issues, bearing in mind the tax implications and other implications of announcing measures in advance.

The Government are absolutely right to say that the nation faces the three challenges of productivity, employment and stability. The document logically follows on from that opening gambit. I should like to pay particular attention to the issue of investment—an area where we have fallen behind other countries over the years, and the Government are committed to putting that right. As regards investment in public services, if there was one part of this Statement which slightly disappointed me it was what it said about the reallocation of resources in public services. What we have been told is what the Government have already decided on. We are further told that, as comprehensive spending reviews are carried out, there will be more resources allocated towards higher priority areas. That is fine, excellent wording. But I would have hoped that we could have had more indication of what the Government have in mind for the essential public services of health, education, and let us not forget public transport, and, for those who live and work in London, the London Underground, which has been starved for so long of resources. I should like to have seen some reference to that issue among other things.

The other aspect of investment is investment in productive enterprise. The Government have already moved positively in that direction by increasing the capital allowances for smaller firms and by reducing corporation tax. There is the welcome announcement of a further reduction in corporation tax. There is no doubt that with the measures which the Government will take to encourage savings—as the noble Lord, Lord Mackay pointed out, we have to find out what will happen to existing saving schemes; no doubt that will emerge in due course—there must be measures to encourage investment in the right ways. I am glad that a start has been made. It is very necessary to have the right fiscal framework to encourage enterprise to invest.

The noble Lord, Lord Mackay, said that I would undoubtedly be pleased at the Government's announcement about reducing VAT on energy-saving materials. Indeed, I am, I have been campaigning for that for years. I never in my wildest dreams expected that we would hear today that the Government have taken this step. I must say that I welcome that very much indeed. Furthermore, I welcome what the Government are doing as regards pensioners and their heating allowances. I have spent many years seeking to improve the conditions and insulation of the homes of elderly people on low incomes. This announcement undoubtedly will be a big step forward in that direction.

I conclude by welcoming the step which the Government have taken in initiating this pre-Budget discussion. I hope that they will persevere in what they have started. I hope in due course that we shall hear more about encouraging investment in essential public services. I hope that the Government will persevere with stimulating investment in the productive sector.

Lord McIntosh of Haringey

My Lords, I am grateful to both noble Lords for their response to this Statement, as usual in differing degrees.

The noble Lord, Lord Mackay, said that this was one of the longest Statements before this House. I have to tell him that at 28 minutes it was stakhanovite. At the Budget speed of 125 words a minute, the Statement was timed at 32 minutes and 50 seconds. I reckon that the House owes me almost five minutes of time and I propose to take that up in due course!

The noble Lord was right to welcome the debate that we shall hold next Wednesday. I can confirm that all the questions he raised can and no doubt will be raised next Wednesday. That does not mean that I shall not try to answer his points today. The noble Lord warned against what he called organised leaking by the Chancellor. I assume that he was talking about the danger that there could be some forestalling of Budget measures if they are announced too far in advance. If the noble Lord reads the Statement, I think that he will recognise that, although there is, as the noble Lord, Lord Ezra, kindly confirmed, a great deal that is positive and practical in the Statement, I cannot identify a single occasion where any of the announcements will result in forestalling or in damage to the Chancellor's flexibility and freedom of action when he comes to the Budget itself.

The noble Lord, Lord Mackay, asked me why we put forward a blacker picture in July when we accused Mr. Kenneth Clarke of being over-optimistic. In July, when we increased some taxes, it was a fact that inflation was overshooting its targets and that we had to plan for the long term and avoid boom and bust. But since that time we can confirm, as we could not have done then, that our deficit reduction plan is on target and it is therefore possible to be—I do not use the word relaxed; one would never accuse the Chancellor of being relaxed—able to make some of the positive points to which noble Lords have referred.

The noble Lord asked me about the code of fiscal stability and whether it was going to be binding on government. I assume he meant in the sense that the Gramm-Rudman Act in the United States is binding on governments. I have to tell the noble Lord—I am sure that he and the House know—that the Gramm-Rudman Act has not worked. Over many years deficit reduction programmes have bedevilled politics but have not helped economics very much. Our model is rather different. It is that of Australia and New Zealand, where the model is one of openness and debate rather than compulsion. That model appears to work. It is that transparency in economic and fiscal debate that we seek to achieve.

The noble Lord asked me—these are different parts of his speech; I shall try to bring them together—about whether what we are doing will fall foul of harmful tax competition rules in the European Union and state aids. I can say to him without concern that they do not fall foul of the code of conduct which we discussed earlier. Indeed, I remind the House that the code of conduct which is to be debated and decided on at ECOFIN next Monday will not in any way damage the ability of this country and any member state to determine its own tax and spending policies. The removal of harmful tax competition, which is not an unworthy objective, is one which will be achieved to gain certain specific advantages in reducing tax avoidance and evasion and is not intended to lead to harmonisation of all tax policy.

The noble Lord asked me whether the capital gains tax review referred to in the Statement will be made public. The answer is yes. He asked whether the future of PEPs and TESSAs will be made clear when the Statement is made next Tuesday on individual savings accounts. The answer is yes. Therefore there will be an opportunity to debate them next Wednesday.

The noble Lord also asked whether family credit will go beyond child benefit. The answer is slightly more complicated. It could go beyond the child benefit, but it does not have to go beyond it. This point relates to the noble Lord's remarks about pilot schemes. We need the research from the pilots to see whether these in-work benefits affect, for example, local wage levels. We also need them to provide us with judgment not so much on levels of credit but on administration. As a social researcher myself, I entirely agree that pilot schemes are necessary before we go national with major changes in social policy. I pay credit to the previous government for having done the same on a number of occasions.

I was interested in the noble Lord's point about the need to offset increases in green taxes by decreases. I am not sure that I know the answer. If I am told anything, I will write to the noble Lord. Again, the matter can be raised in debate.

The noble Lord, Lord Ezra, was extremely complimentary about large parts of the Statement. I am tempted to say: "What else can I say, except that I love him?" The noble Lord drew attention to the importance of investment and of reallocation of resources in the public service. He is quite right. It has always been difficult for me to understand the rationale of some public investment decisions in a situation where we have cash accounting by the Treasury rather than resource accounting. The noble Lord will be pleased to be reminded—although I am sure he already knows—that within the next two years we shall be accompanying cash accounting with resource accounting in the public sector; and by the year 2001 we shall have gone over to resource accounting, with traditional cash accounting acting as a cashflow statement rather than as a substitute for an income and expenditure account.

On energy saving materials, there is nobody by whom I would rather be congratulated than the noble Lord.

4.42 p.m.

Lord Ashley of Stoke

My Lords, is my noble friend aware that I understand the financial problems of the Government and support the broad thrust of the Chancellor's policies? However, if any move is made to cut the benefits of disabled people, it will be totally unacceptable. Those benefits are to pay for the extra costs of disability. To cut them would be to place disabled people at a double disadvantage. Such a move would incur the implacable hostility of 6½ million disabled people and their supporters in Parliament. To penalise those people is the very thing that I could never countenance. They would find it impossible to believe that that is the policy of the Labour Party against many people who are unable to work as a result of severe disability. Let the Government get people to work if they can, but severely disabled people cannot work. Therefore, cutting benefits would be counter-productive.

Lord McIntosh of Haringey

My Lords, as the House knows, I respect no one more than my noble friend, particularly when he speaks on this subject. I respect not only the strength and sincerity of his argument but the degree to which it is founded on personal experience.

I hope that he will agree that the content of the Statement concentrates more on the encouragement that is given to those disabled people and those lone mothers who wish to take advantage of it to find work for themselves.

Clearly there are wide ranges of severity of disability. My noble friend is right in saying that there are very many disabled people for whom no earning work is possible. I can only say that a very thorough review of the matter is in progress. It will be completed in the late spring. All options will be considered at that time, and no decisions have been taken.

Lord Desai

My Lords, while I welcome the Statement, perhaps my noble friend will say rather more about the fiscal framework that the Chancellor hopes to adopt. I see from the useful background document that government projections for 1998-99 are for investment of £8.7 billion in net capital spending, and the PSBR is only £4.5 billion. That would mean that we are doing better than the golden rule. Is the Government's intention to produce a surplus even by the golden rule, rather than merely a surplus by the old Treasury rules?

Lord McIntosh of Haringey

My Lords, I believe it was David Heathcoat-Amory, who, during his service at the Treasury for the Conservative Party, said that the thing about the golden rule was that it was neither golden nor a rule. I agree.

We do not deliberately seek to improve on the golden rule. The difficulty with the golden rule is that, when we say we are to be constrained by the economic cycle, none of us knows at what stage in any economic cycle we find ourselves. It is not deliberate, but there may be occasions when it may be possible to have higher investment.

Lord Clark of Kempston

My Lords, does the noble Lord agree that the present Government are extremely fortunate in inheriting a very strong economy, in fact the strongest in Europe? Will he explain why, given the buoyancy of our economy—with falling unemployment, increased production and so on—it was necessary to increase taxation by 17 taxation matters, and particularly so far as the long-term economy is concerned? There are long-term savers in pension funds—which are the long-term investors. Why was it essential to penalise them by £5 billion per year so far as income is concerned? Finally, will the noble Lord give the House an assurance that, if there is any harmonisation in taxation between this country and our European partners, there will not be an extension of VAT on food?

Lord McIntosh of Haringey

My Lords, on reflection, I am glad that both I and my right honourable friend the Chancellor refrain from the sort of "yah-boo" cross-party, cross-Chamber comment that has given rise to the noble Lord's contribution. We did not abuse the previous government. We recognised, as I have always recognised, where there was virtue in what they did. At the same time, we have to recognise that the boom-and-bust instability that was characteristic of the previous government resulted in the loss of thousands of businesses and millions of jobs; that we inherited productivity at a level more than 20 per cent. lower than that of our major competitors; that we inherited an economy in which 3.5 million families have no one in work; and that we inherited a tax system that is blatantly and apparently unfair and is seen to be unfair by everybody who pays tax. Under those circumstances, and for the reasons that I have already given, we believe that our judgment on tax policy in the July Budget was correct.

Lord Monson

My Lords, perhaps I may take up one small point in the Statement. One can well understand why the Government propose giving £50 a year towards the fuel costs of pensioner households on income support. Nobody would quarrel with that. But will the noble Lord, Lord McIntosh, say why the Government propose to give £20 a year, which is presumably not taxable, to all other pensioner households, including those pensioners, of whom there are a great number, who can afford to take round-the-world trips on the "QE2" or 20-minute lunch-time flights on Concorde for £350? Is not the idea that all men become poverty stricken at the age of 65 and all women at the age of 60 a relic of the days of Andy Capp?

Lord McIntosh of Haringey

My Lords, as one who is five months off the age of 65, I would say that perhaps there is some sense in which people become more poverty stricken at the age of 65. The balance between means-tested and universal benefits contained in the fuel policy announcements which I have just repeated seem to me to be about right. The biggest challenge is that so many pensioners who, because of their economic circumstances, are entitled to benefits do not take advantage of them. One of the measures which my right honourable friend proposed was increased efforts to secure better take-up of benefits. I hope that the noble Lord would agree that that is right and that the balance is right.

Baroness Thomas of Walliswood

My Lords, perhaps I may ask the Minister a question on a slightly different subject allied to the previous question. He repeated the Government's commitment to their priorities of education and health, with which I do not disagree. When will improving personal social services for the elderly become a government priority? How do the Government expect to assist that arm of social care when authorities are criticised if they do not concentrate all their care on those most desperately in need, thereby leaving large numbers of people who could be helped to a healthier lifestyle completely unattended?

Lord McIntosh of Haringey

My Lords, it is not a question of when; it has already happened. Announcements already made about further funding for the National Health Service made it clear that a considerable part of that funding is to be allocated by health authorities to the social services departments of local authorities for the needs of those who are in a better position and prefer to be at home rather than in hospital when they do not need medical treatment. The issue of long-term care for the elderly—to which I think the noble Baroness is referring—is not one to be solved in six months. It is one of the major problems of developed societies; we take it with a great deal of seriousness. But we are not in a position to give answers to these major questions at this time.

Baroness O'Cathain

My Lords, I welcome the openness of the Statement and the fact that there will be continuing debate on the suggestions raised in it. I look forward to reading it. I believe that the Statement included the words "pro-business" and "pro-investment". Does that mean that the Government are prepared to reconsider some of the taxation measures taken in the last Budget which are neither pro-business nor pro-investment?

Lord McIntosh of Haringey

My Lords, I challenge the premise of the noble Baroness's question. I believe that the measures that we took in the last Budget were pro-business and that there is wide acceptance among the business community that that is so.

Baroness O'Cathain

My Lords, the real point is the effect of the measures upon pension funds. Many people say they are neither pro-business nor pro-investment.

Lord McIntosh of Haringey

My Lords, I rather thought that the noble Baroness was going to return to the removal of double tax credits. I do not in any way apologise for the removal of those. They were an anomaly that had to be dealt with quickly. I believe that the announcement which I have just repeated of the abolition of advance corporation tax will be welcomed by the business community and I think that it puts our decision in July into the proper context.

Lord Davies of Oldham

My Lords, my noble friend is to be congratulated on his riposte to the Opposition. He might have added that a sense of unfairness and gross inequality has been felt by the nation over the past 18 years about the general distribution of income and wealth.

One point raised by the Opposition today deserves further consideration. The problem with an early consultation exercise is that people may make dispositions against their judgments of what the Chancellor intends to do. For example, will not the proposal with regard to reducing VAT on the insulation of houses lead people to delay such work until that proposal is implemented? Or is there an indication that the measure will be backdated?

Lord McIntosh of Haringey

No, my Lords, there is no indication that it would be backdated. But we are talking about a period of only a few months. My understanding is that most energy-saving improvements take place in the second half of the year rather than in the first half when people are expecting the weather to get better rather than worse.

My noble friend is right in saying that there has been a sense of unfairness and injustice about economic policies over a considerable period of years. The Government believe that the most direct way to relieve poverty and therefore to remove injustice is by getting more people back to work.

Lord Davies of Coity

My Lords, I should like to take this opportunity of welcoming the Statement, particularly with regard to the measures to increase productivity. Those measures are concerned with high technology, high skills and high levels of employment. They contrast with the productivity increases that have sometimes been gained in the past with low wages and high levels of unemployment, placing a considerable burden on the country as a whole.

The introduction of a statutory minimum wage, if not implemented correctly, could create a poverty trap in that people may obtain an increase in wages but lose whatever income support they currently receive. Can the Minister assure us that, with the introduction of a national minimum wage, any reduction in supplementary benefits would take place over a period of time in proportion to an increase in the level of the national minimum wage?

Lord McIntosh of Haringey

My Lords, my noble friend will not expect me to anticipate the results of the investigation being carried out under the chairmanship of Professor George Bain. However, he can be assured that the problem of the interrelationship between wages and benefits is at the heart of Professor Bain's inquiries. He will have noticed that there is a reference in the Statement to reforms to benefits and, for example, to the tapers on benefits which will undoubtedly be necessary when a minimum wage is introduced.

Baroness Hogg

My Lords, I wonder if the Minister can help me with a point relating to public expenditure. Normally, in the autumn Statement we receive details, programme by programme, of what is happening to the profile of public expenditure. I am disappointed that this time the supporting material contains no such detail by department. However, there is one clue in the supporting material: we are told that there has been a classification change which should have had the effect of reducing total public expenditure on the control total by some £700 million. However, in the control total this year it is reported as unchanged. The implication is clear. There must have been a discretionary increase of £700 million in public expenditure since the Budget Statement. Can the Minister explain where this net discretionary increase has taken place?

Lord McIntosh of Haringey

My Lords, with regard to the noble Baroness's first question, the nation will not be deprived of statements of public expenditure; but no final decision has been taken about whether we shall continue with the unified Budget and Public Expenditure Statement or about the timing.

Baroness Hogg

My Lords, I was referring to the autumn Statement and with it regular publication, programme by programme, of out-turns.

Lord McIntosh of Haringey

My Lords, I appreciate that. But this is not an autumn Statement in the classic sense and was not intended to be so. I hope that the House will have found it a good deal more wide-ranging than an autumn Statement and a good deal more conducive to constructive debate.

As to the second point regarding the gap which the noble Baroness calculated, the Statement contains a number of examples of resource re-allocation. I have not added them up. The noble Baroness is entitled to have them added up and I shall write to her in that regard.

Lord Mackie of Benshie

My Lords, I am grateful to the noble Lord for his efforts to keep me warm this winter. But can he say, if there are figures, how many pensioner families are actually in need of support in the winter and how many are not?

Lord McIntosh of Haringey

My Lords, not off-the-cuff, I am afraid. I am sure that I ought to have known, but I do not. I shall write to the noble Lord.

Lord Dixon-Smith

My Lords, the Minister has had to take us through a complex Statement and a number of phases. He began by expressing concern over the rate of GDP at present being relatively unsustainable. We will not go into the reasons why the Government are of that opinion. He then went through a series of investment suggestions which should increase productivity and therefore, one would have thought, in due course impact on GDP and give it an inclination to increase. The noble Lord then went through a further set of steps which should increase the volume of employment by taking people off the unemployment register. Those factors are extremely welcome.

However, at the end of the Statement, unless I misheard, the noble Lord came up with figures for the range of growth in GDP next year of 2.25 per cent. to 2.75 per cent., which is less than the current rate of GDP growth. Did I miss something?

Lord McIntosh of Haringey

No, my Lords. The contrast which the Statement makes is between GDP growth without the measures which we are proposing and GDP growth with the measures we are proposing. The Statement makes clear that we inherited a pattern of GDP growth which was unsustainable without further action to avoid the kind of "boom and bust" situation which we inherited and which had been the pattern for a number of years. Without subscribing in every detail to the summary the noble Lord kindly gave of what he agrees is a complex Statement, he is right in his understanding of the figures for GDP growth.