§ 4.54 p.m.
§ Lord McIntosh of Haringey
My Lords, I beg to move that this Bill be now read a second time.
This is the second Finance Bill of the new Government that your Lordships' House has considered. It continues the process of modernising the British economy with the objective of raising the sustainable rate of long-term growth and ensuring that everyone has a share in rising prosperity.
It implements the Government's second Budget; a budget which will help turn ambition into achievement and which encourages work, promotes enterprise and supports families. And this Finance Bill, as with the Budget, takes an unashamedly long-term view. There are no quick fixes. Instead, this is a radical reform package designed to bring about long-term gain for the country.
First, we need economic stability, a commitment to low inflation and sound public finances. This is the essential foundation for building long-term growth and rising prosperity.
1540 Last May, the Government inherited an economy showing all the signs that yet another short-term inflationary boom was in prospect, reflecting the previous Government's failure to heed the advice of the Bank of England and take the necessary action. Inflation was way above target and the public finances were in substantial deficit.
Since coming to power, this Government have set out new long-term economic frameworks for both monetary and fiscal policy and taken immediate and tough decisions to prevent a consumer boom and a return to the stop-go cycles which characterised the economy under the previous government. The decisions that we have made since coming to power will achieve the necessary economic stability to ensure that Britain gets back on track for steady and sustainable growth.
Secondly, we are determined to promote enterprise. This Bill introduces a range of tax initiatives to boost investment, help small firms and promote research and development.
Thirdly, I turn to welfare reform. In order to help sustain growth, we need a highly skilled and trained workforce. We are determined to end the waste of resources when people want to work but face barriers to doing so. We will therefore encourage work by making work pay.
Fourthly, in order to create a fairer and therefore more efficient society, we are introducing measures to support families, to protect the environment, and to improve public transport.
These four themes underpin the current Bill, and I will say a little more about specific measures in a moment.
First, I should say a few words about our Comprehensive Spending Review. The public sector will spend over £330 billion this year. That is equivalent to over £5,000 for every man, woman and child in the UK. The CSR has taken a radical root and branch look at how this money is spent to ensure that departments meet the Government's priorities. The Government are investing in reform; investing for the long term.
The new spending plans announced in the Comprehensive Spending Review focus spending on the Government's priorities and root out waste and inefficiency. Over the next three years, there will be £19 billion more for education; over £20 billion more for health; £1.7 billion more to improve public transport; and £4.4 billion more to regenerate our cities and housing.
As I said a few minutes ago, the essential precondition for long-term sustainable growth is economic stability and a commitment to openness and transparency in the management of the economy. That is why over the cycle we are committed to ensuring that the Government meet the golden rule; borrowing to invest, not to fund current spending. And we will make sure that debt is kept at a prudent and stable ratio. Indeed, from now the Government will plan on the basis of reducing debt to below 40 per cent. of GDP.
1541 Clauses 155 to 157 of the Bill implement the Code for Fiscal Stability. The code puts Britain at the forefront of economic policy reform and represents an important step forward in the modernisation of our economic policy framework.
It complements the Government's reforms to the framework for monetary policy by building on that disciplined, transparent and accountable approach, this time in the context of fiscal policy. In the global economy, transparency provides an essential underpinning of a successful economy. And it allows Parliament and the public to scrutinise policy to ensure that it is set in the UK's long-term interests.
As a result of the code, the Government will be required to conduct fiscal policy with regard to a clear set of principles, set down in legislation. Detailed reporting arrangements—such as the requirement to produce an annual economic and fiscal strategy report—and proper accounting standards, including a move towards resource accounting and budgeting, are also integral parts of the code.
The Government will be required to state their fiscal objectives explicitly. And the Bill also establishes a formal role for the National Audit Office in assessing the assumptions and conventions that underpin the projections of the public finances. These changes will ensure that fiscal policy contributes to the economic stability which is necessary for growth and employment to prosper.
I also described how the last Budget was a Budget to encourage work and to make work pay. Measures will be brought before Parliament to implement the working families tax credit which will make work pay. And our reforms to the national insurance system will mean that barriers to work which faced so many people in the past have been removed, encouraging employment. The New Deal will be extended to provide new employment opportunities to the long-term unemployed, partners of the unemployed, the long-term sick and disabled and the disadvantaged communities.
The working families tax credit is a major reform to the tax system. And it is necessary because the labour market has changed almost beyond recognition from that of 20 or 30 years ago. Up and down the country, firms are reporting skill shortages. At the same time, there is a huge pool of unused talent—people who want to work. That is why we are determined to give them the skills and opportunity they need. So the working families tax credit, the reform of the national insurance system, together with our increased investment in education, training and skills, will all begin to ensure that we have the labour market to meet the needs of the 21st century.
The Budget also demonstrates our commitment to fairness. Clause 25 keeps our election promise to hold the basic and top rates of income tax. The married couple's allowance will be restricted to give relief at 10 per cent. in April 1999, which will enable us to channel more support where it is needed most; that is, to families with children. Pensioners who benefit from enhanced allowances will have the value of those 1542 allowances protected. What matters is need. That is where resources will go. Our primary aim is to support families through supporting children.
We inherited the situation where one child in three grows up in poverty. And the Budget, together with this Bill, increases support for all families with children to begin to tackle child poverty. So, from April 1999, child benefit for the eldest child goes up by £2.50 a week, and there is an equivalent increase for poorer families. Indeed from November this year, child premium, income support and JSA are increased by an additional £2.50 a week for each family under 11 with the result that families on income support with two children under 11 will be better off by £7 a week. That demonstrates the Government's commitment to target help where it is needed most.
And the new childcare tax credit in the working families tax credit will pay up to 70 per cent. of the cost of childcare, up to a limit of eligible costs of £100 a week for one child or £150 for two or more children.
Side by side with labour market reforms goes the need to promote enterprise which is an essential part of an economic policy. The Bill further reforms the corporation tax regime. Clause 29 reduces the main corporation tax rate from 31 per cent. in 1998 to 30 per cent. next year—the lowest rate ever. And the Bill abolishes advanced corporation tax from 1999. This will simplify the corporation tax regime and encourage investment. From 1999, about 20,000 large companies out of 700,000 in total, will start to pay their corporation tax by quarterly instalments, bringing the UK into line with other major industrial countries. We consulted extensively on these reforms, which have been widely welcomed.
As the Chancellor has said, both the main and small corporation tax rates will be held at the new levels or less for the lifetime of this Parliament. When our reforms are in place, companies will pay around £1.5 billion less in corporation tax each year.
This Bill introduces a capital gains tax taper to reward risk taking, promote enterprise and encourage long-term investment by taxing more favourably gains on assets that have been held for longer periods, particularly gains on business assets. When it is fully in place, it will represent a significant simplification to the tax system. The taper, which is introduced by Clause 121 of the Bill, will produce an effective 10 per cent. rate for business assets held over 10 years.
That is on top of other measures to boost research and development. The Budget introduced a new university challenge fund, a private-public partnership, to provide £50 million in venture capital to help turn good research into good business. And we are looking at other ways of improving our record on R&D.
Clause 84 extends the enhanced first year capital allowances which we introduced last year. First year allowances will be set at 40 per cent. rather than 25 per cent. for spending by small and medium sized businesses during the year to 1st July 1999. More than 99 per cent. of small and medium businesses may 1543 qualify for one form of enhanced allowances or the other which will improve their cash flow and help them grow.
Clause 83 contains the legislation for part of the package of measures which the Chancellor announced on 12th May aimed at creating a new framework of prosperity in Northern Ireland. During the four years starting with 12th May this year, expenditure on machinery or plant incurred by a small or medium-sized business for use in Northern Ireland will be eligible for a 100 per cent. first year capital allowance; in other words such expenditure may be written off for tax purposes in full straightaway.
Encouraging saving is also an essential part of our strategy. This Bill introduces the new individual savings accounts making it easier for people to save, extending the savings habit to more people than ever before. We now have a savings regime that is sustainable and where tax relief is fairly distributed.
The Budget also delivers our commitment to close tax loopholes, which taken together with measures from our first Budget will yield £2.8 billion over the next three years.
We are also committed to protecting the environment. Clause 7 increases road fuel duties in line with our commitment to an annual increase of at least 6 per cent. in real terms, having met the targets agreed at Kyoto. For this, credit too must go to the last government who of course were committed to increasing duties by at least 5 per cent. every year. They will no doubt welcome our continuation of their policy. Clause 16 reduces vehicle excise duty for lorries and buses which meet low emission standards.
We recognise that car ownership is necessary in very many parts of the country. That is why we will be consulting on new measures to reduce vehicle excise duty on smaller and more environmentally friendly cars. The use of cleaner fuels like ultra-low sulphur diesels and road fuel gases are also being encouraged. Vehicle excise duty for lorries and buses which meet a low emission standard will also be reduced under Clause 16. This is a Budget that is looking to the future.
This Bill implements many important parts of the Budget, a Budget that was designed to promote long-term sustainable growth, encourage work, encourage entrepreneurship and increase fairness. I commend the Bill to your Lordships.
Moved, That the Bill be now read a second time.—(Lord McIntosh of Haringey.)
§ 5.8 p.m.
§ Lord Boardman
My Lords, Finance Bills tend to pass through this House rather unnoticed because we cannot either amend or vary them. Therefore, I shall avoid dwelling on any of the details of this Bill, some of which are welcome and some less welcome. But it would be more helpful to confine my remarks in the main to the trends which are apparent in the Chancellor's general strategy.
A useful starting point was to look back at the Budget Speech—the Financial Statement—made in March. I read that with some interest last night. I noticed that 1544 the Chancellor gave the due ration of blame to the previous government and to his inheritance. That occupied quite a large part of his speech. But generally speaking, he made the speech with consummate skill. It was the sort of speech that every Chancellor of the Exchequer of whatever party makes to put his goods on display in best form but it was rather short when it came to the delivery of the goods. I regret that that is the case here.
I give just one example of something which was rather misleading and I am sorry that the noble Lord repeated it just now with regard to corporation tax. In his speech, the Chancellor referred to the fact that companies would pay more than £1.5 billion less in corporation tax each year as a result of the changes he had made. Of course, there were reductions in the corporation tax. However, what he did not refer to at all was payment by quarterly instalments. I am told that the effect of that will be to increase the bill for corporation tax in the future very substantially. Indeed, instead of being a reduction of £1.5 billion, there will be a very substantial increase in corporation tax over the lifetime of this Parliament. That is quite apart from the other taxes which are falling upon corporations. Leaving aside the windfall tax which was forecast well in advance, I am told that some £20 billion in additional taxation will fall on corporations during this Parliament.
There are many other matters that I should like to mention; indeed, the Minister referred to savings. The effect of the Budget will be adverse to savings. The noble Lord did not refer to pensions, although the Chancellor the Exchequer did, but the effect of the Budget will be adverse to them.
There is only one small matter that I should like to refer to; namely, retirement relief. That relief has been abolished, but it was of great benefit to small businessmen in enabling them to retire. Throughout the proceedings in the other place, both in Committee and on the Floor of the House, not a single Labour Member—many of whom must have gone searching for the votes of small businessmen in May of last year—made any protest about the possible effects of the decision on retirement relief falling upon their constituents.
I should like to mention one other matter in the Budget speech—the differentiation between capital and current expenditure. It is a great idea and absolutely right. I am sure that every Chancellor of the Exchequer, and certainly every Chief Secretary, has endeavoured to bring this about during his time in office. But every time he will no doubt have received conflicting advice as to what is capital. The one that I remember is a battleship, but many other examples are given. The Treasury has a portfolio, which I am sure is pulled out and shown to every Chancellor of the Exchequer who suggests such a division—at least I hope that that is so. Of course, in principle, that is absolutely right, but capital and current expenditure is different in government from capital and current expenditure in industry.
Perhaps I may refer to the big picture for a moment. The Budget speculates on what growth there could be for the rest of this Parliament and commits all of it, lock, 1545 stock and barrel, for expenditure over the next three years. Indeed, that is all set out in the Economic and Fiscal Strategy report which we debated yesterday. To make that degree of commitment when the world economy—that is, the Asian economy and many others, including our own—is perhaps less strong or optimistic when looking towards the future than was the case back in March, constitutes a high risk. I hope that the Chancellor of the Exchequer is right. But if he is not, in my view there will be an awful lot of blood on the carpet.
My main concern relates to the overall strategy which the Government and the Chancellor of the Exchequer adopted from the word go. The Chancellor is responsible for the economic management of the country. Until last year, he had two vital controls: he had a lever controlling his fiscal policy and a lever controlling his monetary policy. Those two levers enabled him to endeavour to steer the ship of state in the direction in which he believed it should go. Right or wrong, it was not always a success; indeed, I do not claim that it was. However, the Chancellor of the Exchequer then surrendered one of those levers—his monetary policy lever—to the Monetary Policy Committee. He is now powerless to do what I am sure he must want to do, and what many others want him to do, in order to balance the economy, the exchange rate and to deal with our overseas trade.
Many people may refer to the examples of the National Federal Bank and the USA Government on the one hand, and the Bundesbank and the German Government on the other, where independent banks operate in a happy and usually fairly successful manner. I could make many distinctions in that respect, but I shall not detain your Lordships by going through them now. Indeed, evidence submitted to a Select Committee from the former president of the National Federal Bank and from the Bundesbank shows many of the differences which arise between their systems of monetary and fiscal policy and the one now in operation in this country.
Prior to last May, there had not been a Chancellor of the Exchequer who had ever approached his Budget, or thought through the economic policy of the nation, without considering what his monetary and fiscal policy should be. Sometimes it is necessary to go in for a touch of taxation or a reduction in interest rates, and so on. I believe that the Chancellor of the Exchequer has made a great error in that direction. It is sufficient to ask how he can possibly produce a balanced budget when he has no control over his monetary policy.
In the past, the Chancellor of the Exchequer always had guidance and advice from the Governor of the Bank of England. That guidance and advice was no doubt greatly respected and mainly accepted. Of course, if the Governor of the Bank of England disagreed strongly enough, he always had the power to resign from it. However, now we have the position where it is not a matter for the Governor of the Bank of England but one for the Monetary Policy Committee, which is made up of a group of unelected but extremely able men. They are able to decide the monetary policy which I believe 1546 is central to our economy. I dread the consequences of that sort of control moving over to Frankfurt if this country should ever take a further step down the road to monetary union.
§ 5.16 p.m.
§ Lord Barnett
My Lords, I shall not follow everything that the noble Lord, Lord Boardman, has said. I am happy to say that we served together at one time. Indeed, he was a member of my committee on the European Central Bank on which we produced a report. I know that the noble Lord did not agree with every single dot and comma of that report, but we were unanimous in the end. We all heard some of the evidence to which he referred from major world bankers. Like the noble Lord, I shall not refer to the Finance Bill in detail because, in this House, we normally talk about its economic consequences.
I should like to point out to my noble friend that not only have I heard what he said today, but I also took note of what he said yesterday. Indeed, at col. 1425 of Hansard, I was delighted to see that he said that he believed the single currency "will" work. I emphasise that for the benefit of my noble friend Lord Bruce of Donington. In replying to my committee on the European Central Bank, the Chancellor of the Exchequer did not exactly say the same. Since the reshuffle, I am pleased that my noble friend is able to be so free with his choice of language and that he agrees that the single currency will work. Of course, that is not directly related to the Finance Bill, but he did say that. I hope that he will not withdraw those remarks when he responds to this debate.
Before I comment on the tax and spending plans, perhaps I may say a few words about monetary policy and about giving the powers, to which the noble Lord, Lord Boardman, referred, to the Monetary Policy Committee. I should stress that I completely disagree with the noble Lord in that respect. I support the Government's policy in giving such powers to that committee. If I may say so, I would rather at least have the benefit of one woman who was better than most of the men on that committee; indeed, I would rather they had the power to decide interest rates and monetary policy on entirely non-political grounds than leave it to Chancellors of the Exchequer. With respect, we all know—indeed, it is quite clear—that the previous Chancellor of the Exchequer should have increased interest rates and taken control of what would happen to inflation long before May 1997. Anyone looking objectively at the situation would be bound to agree with that view. Therefore, I agree with the Government's decision to give the power to the Monetary Policy Committee, provided there is full accountability. I think that is crucial. Your Lordships may not have appreciated that today this House approved the appointment of a Select Committee to look at the work of the Bank of England's Monetary Policy Committee. I hope that will provide the kind of accountability to which I have referred.
I think all the men on the Monetary Policy Committee have been wrong to increase interest rates in the way that they have. It would have been better if they had 1547 deferred to the woman member of that Monetary Policy Committee who clearly was rather more sensible about this matter. Having conceded power on monetary policy, I do not think the committee should have acted in the way that it has. However, both Houses of Parliament agreed to that. Section 11 of the Bank of England Act 1998 refers to maintaining price stability. I would add,and subject to that, support the Government's economic policy".In other words, the Government's economic policy comes a bad second to control of inflation. My noble friend Lord Peston and myself moved an amendment to delete the words "and subject to that" to enable the Monetary Policy Committee to consider both inflation and the Government's economic policy. That seems to me the more sensible course, but few people in your Lordships' House or in another place supported that. The fact remains that the legislation is as it is, and I am afraid we are left with the situation that the Government's own economic policy comes a bad second to considering the policy on inflation.
As we have no control over monetary policy, let me turn to fiscal policy where the Government have control, subject, of course, to what is happening in the rest of the world and—I know that many of my noble friends and noble Lords opposite will appreciate this—also to what happens in the European Union, whether we are members or not. I refer to the three-year expenditure plans that we have had recently. If I may say so, the totals are somewhat misleading. That is probably an understatement. I assume that was done quite deliberately by adding the three years together and then adding inflation. At the end of the three years you get quite a big figure. I assume that my right honourable friend the Chancellor did his calculations in that way because the totals look better. They certainly appear to be larger sums of money. Nevertheless in my view the idea of having a three-year policy for expenditure is sensible. However, I am not clear whether cash limits apply. No doubt my noble friend will be able to tell me about that. The words "cash limits" seem to have been lost since I introduced them some 20 years ago. The Barnett formula still exists, but the cash limits seem to have disappeared. If the rate of inflation is higher than has been assumed over the three years, would departmental budgets then be cut in real term figures? I hope that my noble friend can answer that question and that I have made myself clear. If inflation is a little higher, or a lot higher, than the 2.5 per cent. given to the Bank of England—or the 2.25 per cent. that has been assumed—will there be a cut in the real term expenditure of departmental budgets?
The case against the three-year expenditure plans was put succinctly by the noble Lord, Lord Boardman; namely, that we are, as it were, spending before we know what the revenue will be. The logic of that, of course, is that one would never spend anything because one does not know for sure what the revenue will be over the next three years. There has to be an assumption—not guesses—about what the growth of revenue will be over the next three years. My noble friend Lord Desai would have a guess, as would hundreds of other economists. They would not all agree. However, on the whole question of economic growth, 1548 and therefore revenue, the argument is—this is the point the noble Lord made—that the Government have been too optimistic in planning to spend all that money before they had it. I leave aside any party political questions about what one would cut if one did not have that expenditure. That is a matter for another place. We are more serious in your Lordships' House. The consequences of such a policy is that the revenue would be short so we would need either higher tax or higher borrowing. That is the argument that is advanced. If we do not receive the revenue that the Government have assumed over these three years, something would have to give. Either there would be higher taxes, or higher borrowing, or a cut in expenditure. You cannot have it all ways.
Personally, I would not object if expenditure was a little higher. That may seem an odd statement from a former chief secretary but I never enjoyed having to cut expenditure for all those years because I did not enter public life so to do. I wanted to improve public services. But the pessimistic view advanced by the noble Lord and by many others both inside and outside your Lordships' House, and the pessimistic assumptions on growth, are serious and must be taken seriously. I have to accept it is possible that the growth in the economy will be slower if the inflation target that the Monetary Policy Committee has been given is to be met. I should have thought that most people would accept that there has to be a slowing of the economy if inflation is to come down to a reasonable figure.
I wish to show my noble friend that I have read every detail of his speech yesterday. He said yesterday at col. 1426 of the Official Report that 45 independent forecasters and the Government's forecasters are not miles out of line on this matter. There may be one forecaster here and there who may disagree, but they are not wildly out of line. Even the gloom mongers or "doomsters" are still forecasting that the borrowing requirement will be 1 per cent. of GDP at the end of the three years. That may be slightly worse than the Government's forecast, but it is hardly a disaster. Some 1 per cent. of GDP for borrowing is well below the Maastricht criteria in the European Union, which is 3 per cent.
§ Lord Barnett
My Lords, I like to give my noble friend Lord Bruce of Donington something to amuse himself with. The figure I have mentioned would be well below the Maastricht criteria.
I have always envied the so-called experts—especially those in the Monetary Policy Committee—who argue that you need to increase interest rates by a quarter of 1 per cent. to be able to say with any certainty that in two years' time inflation will be 2.5 per cent. I find it odd that anyone can know with such certainty what will happen. I confess to being what might be called a "don't know" because I do not know what will happen tomorrow, let alone in three years' time. Nevertheless we have to manage an economy. That is the Chancellor's job. If he is to meet the golden rule to which my noble friend referred again today—I agree 1549 with that—that current income should meet current expenditure; namely, at 2.25 per cent. over the three years, that is fine. However, it is not altogether clear what will happen if the current income that I have mentioned turns out to be slightly lower than has been assumed in the golden rule. Will the Government then cut public expenditure? Is that what they would have to do?
I know my noble friend will say that that is a hypothetical question. He will say that that will not happen and we shall not really have that problem. I hope he is right. However, as he has shown since yesterday's "shuffle", he is prepared to be rather more open and not just read his brief, and tell us the truth. Will he tell us—I hope he can—that the Government have not ruled out the possibility of increasing tax or borrowing if the revenue growth is not as high as forecast in the Government's plans? I know that my noble friend will be able to answer those two small questions.
To sum up, I believe that the Chancellor has over-stated the modest annual growth in expenditure. I note that even that is subject to performance targets, which are to be overseen by the new Cabinet committee chaired by the Chancellor, not the Chief Secretary to the Treasury. I am beginning to wonder, and to worry somewhat, about what job the new Chief Secretary will do. So far as I can see, there is not much left for him to do. I thought that the reshuffle might remove the post of Chief Secretary to the Treasury. I put that question to my noble friend the other day. He replied effectively that the Chief Secretary will have plenty to do. So the post of Chief Secretary has been retained. I gather that the new occupant of the post is very bright—even if he cannot do his multiplications.
Inevitably, the figures are uncertain when we are talking about a period of three years. But they are clearly set out. This is not a matter of creative accounting. Indeed, it is to do a disservice to creating accounting to call it such. The plain fact is, all the figures are there. They may be wrong, but they are there, as are the assumptions behind them.
If my right honourable friend the Chancellor has over-stated the position, as is clearly possible, the critics over-state the consequences even more. If the Chancellor has been too optimistic, he will still achieve a modest growth in expenditure with a borrowing requirement well below any crisis levels on any kind of historic comparison. So, on balance, it is more likely than not that the growth targets will be met. Indeed, I should have preferred even higher growth targets; and I should have been prepared to accept a 1 per cent. higher borrowing requirement. If my noble friend takes the inflation figures for the European Union, this country is already well below 2.5 per cent., because a different method is used to calculate inflation, and quite a nice one. The figure for this country is about 1.7 per cent.
The Bank of England Act as it stands requires a change in the way the so-called independent Bank of England and the Monetary Policy Committee are able to work. I should have preferred to amend the Act itself, but it is now too late. I ask my noble friend to pass on 1550 to the Chancellor a request from me, which I am sure he will accept; namely, to give the Monetary Policy Committee greater flexibility in regard to the inflation target—let us say, to use the European Union target—or give the committee a better chance of achieving the perfectly reasonable objective on growth and income and expenditure by making the inflation target in the Bank of England Act rather more flexible.
§ 5.32 p.m.
§ Lord Marlesford
My Lords, in the early months of this Government being in power, one was quite often asked whether or not it really was a "New Labour" Government. My answer used to be: I do not think, frankly, we can judge them on the first Budget, but we should judge them on the second Budget. I believe that the Government have passed the test so far on that second Budget. The Government are doing pretty well on most of the major economic policies for which they have been responsible.
I have a worry, not unlike that expressed by the noble Lord, Lord Barnett. I shall turn to it presently. First, I issue a reminder to the noble Lord, Lord McIntosh of Haringey. During debate on the Statement on the Comprehensive Spending Review I mentioned the inheritance of this Government, and the noble Lord began attacking the Conservatives for wasting North Sea oil revenues. I would remind the noble Lord, and colleagues on both sides of the Chamber, of the astonishing legacy inherited by this Government. The exciting thing was that for the first time in my life, and perhaps in the lives of all of us, socialism was off the political agenda in this country. We had actually elected a Government who believed in capitalism and sought to make it work. That is a huge and enormously encouraging change.
I return briefly to the Government's inheritance: taxation down from top rates of 75 per cent. on earned, or 98 per cent. on investment, income to a top rate of 40 per cent. on all personal income; corporation tax down; a much more sensible structure for capital taxation; and trade unions, which used to run the country, now relegated to the much more important job of trying to improve the lot of their members. Privatisation has been a huge success. Had it not been thought a huge success, there would have been attempts to reverse it, which is not the case.
I remind the noble Lord, Lord McIntosh, of the extent of the restructuring which took place in the British economy over the 18 years of Conservative government. I shall take as examples eight major industries in this country in which the number of jobs has fallen by 1½million. The most dramatic fall is in the vehicle manufacturing industry, where, in 1978, 755,000 people were employed, and in 1996, 200,000. Yet with half a million fewer people half a million more vehicles were produced.
We all know that such restructuring is the product of two factors: international competitive forces and the opportunities provided by technology. It may all seem so easy, obvious and necessary now, but in 1978 it was not. At that time people were fighting to preserve those jobs.
1551 The second biggest change I have identified is in retailing where there are 426,000 fewer people. Has the efficiency of the service that retailing offers to the people of this country declined over that period? The third is in textile manufacturing with 300,000 fewer people employed.
I have always thought that underground coal mining was the most awful job and that the sooner people could be liberated from it, the better. The numbers employed in coal mining have gone down by 260,000. In the steel industry there are 200,000 fewer people; on the railways, 170,000 fewer; and even in agriculture, where there have been huge increases in productivity, there are 83,000 fewer employed. In the ports and docks there are 34,000 fewer people.
We have wonderful docks such as Felixstowe. It has to be compared with the old docks of east London. I remember that the first time I went there I saw dockers loading baked beans in small cartons which they were wedging together with motor car tyres. So there has been a huge change. The noble Lord, Lord McIntosh, said that North Sea oil revenue was wasted. The revenue from North Sea oil was used to make that structural unemployment tolerable. There could not have been a better use for that revenue.
Turning to today's problems, first, one must not forget that this Government presently appear to regard inflation as the number one economic priority, in the way the previous government did. That is very important. Inflation is a systemic problem in this country in a way that it has not been in other countries. There is an expectation here, and has been for generations, that no one should suffer from inflation, and that income should always be made up to compensate for it. As we all know, that merely leads to more inflation. It is a wholly unsustainable approach. The Government are doing right in keeping inflation as their top priority.
I agree with the noble Lord, Lord Barnett, that it is basically a good thing that monetary policy has been delegated to those splendid men and women on the Monetary Policy Committee of the Bank of England. It is the right policy. Given the particular problem that Britain has in regard to inflation, it is very hard for politicians to be brave enough to do the right thing about interest rates. To remove those temptations must be a good thing. My noble friend Lord Boardman said that he could think of differences between the United States and the Fed. and the Bundesbank and our system. But the paramount requirement to control inflation through the central bank is a greater similarity than whatever differences there may be.
We are now facing a real problem. There are recessionary forces facing us, yet we must keep interest rates high. And the high pound is a serious problem for British industry. Unemployment is now arguably too low in quite a lot of areas in the country. In November 1944, when Beveridge produced his Full Employment in a Free Society, he defined full employment as 3 per cent. or less. That was to allow for the structural problem. Every month, a document is produced, available in the Library, giving unemployment by 1552 constituency. I find it much the most useful indicator of unemployment. At present, out of about 650 constituencies 200 in this country have unemployment of 3 per cent. or less. Mostly that is in particular geographical areas in the south. The balance is a crucial problem, one which any government have to handle. In the 35 constituencies with the highest and the lowest levels of unemployment thank goodness none is now over 20 per cent. All the lowest are under 2 per cent. It is a remarkable situation. But there is a problem in knowing how to deal with both the problems that come from recession and the problems that always exist with inflation. At the moment the Government are probably doing the right thing.
I am however somewhat worried about the rate of increase of earnings. It is currently about 6 per cent. When earnings rise as a result of more overtime being worked, it is good because it probably means more efficient use of labour. What I am not sure about is how much of that 6 per cent. is due to unit wage costs and how much to increased use of labour through overtime. So it is a difficult figure to examine.
We must remember that manufacturing in this country is now only about one-fifth of total output. That is a huge change and yet in some ways it makes the economy easier to manage.
I wish to refer to two other points: first, EMU. I think the Government have taken the right line. I must admit that I am basically a sceptic on EMU for the simple elementary reason that the exchange rates take the strain. If we lose the ability of the exchange rate to take the strain, it means we must have either unemployment or cross-subsidisation. We know the difficulties that the Italians have in being prepared to subsidise the south and the difficulties west Germany has in being prepared to subsidise east Germany. There may be built-in problems which will emerge with the single currency. I hope they do not; I hope it is all a great success. But we are right to wait until we see how it works before we consider joining. It may be a cliché, but the decision that we will join when it suits Britain to do so is a sound position to take. I wish my own party would take a similar position. There would be no loss in doing so, in my opinion.
We must remember that we have the big advantage of having restructured our country in a way that France, for example, has not done. The French economy has still not been restructured. Every time they try to do it and people take to the streets, French governments tend to give in. That is unlike Britain where, when people take to the streets, public opinion tends to support the Government in power. It does not like people making nuisances of themselves on too big a scale on the streets. Sometimes that does not apply—with the poll tax, for example—but it did with the miners' strike. Public opinion in Britain seems to fall in behind the Government when they are trying to do something sensible. In France, I suppose it is because they do not have a parliament which will protect their citizens in the way our House of Commons is seen as protecting the individual. It is a different scene.
1553 Finally, I will say a word about public spending. It is a little unclear exactly what rate of growth has been assumed. I remember when it was raised, the noble Lord, Lord McIntosh, said that it was a rate significantly below some of the predictions. I fear that we may be going into a more rapid decline, but not because of our situation. I suppose Japan is the biggest single worry: no one knows who runs Japan. Probably it is no one; its prime ministers certainly do not. Possibly the civil servants do, but they do not do it well. They thought they could keep the Nikkei at 30,000 when it had fallen from 40,000, by intervening, but the Japanese ignored the axiom of my noble friend Lady Thatcher, "You can't buck the market". These are real worries and will be a problem.
I wish to conclude by underlining two questions which the noble Lord, Lord Barnett, asked the Government. Given that they have decided to put in these three years' expenditure figures, which may be dangerously high—the cash limit is an important point—I would hate to go back to Plowden. The noble Lord will remember that in 1953 there was invented the brilliant Plowden system which would allocate expenditure in resource terms. That led to Parliament being asked, year after year, for more and more supplementary estimates automatically because it had been agreed. That led to the situation in 1976 when the noble Lord, Lord Barnett, helped by the great Treasury mandarin, Sir Leo Pliatzky, realised the need to introduce cash limits. Those limits are still important and I hope that the expenditure pattern will be subject to them. Perhaps most important I hope it will also be subject to the growth rate which is actually achieved.
§ 5.46 p.m.
§ Lord Northbrook
My Lords, the Chancellor's Budget was delivered against the background of uncertainty of the overall effect on the world of the Asian crisis and in the UK, particularly over the health of the manufacturing sector. The Treasury forecasts of GDP growth that accompanied the Budget suggested a slower rise of 2 per cent. to 2.5 per cent. in calendar year 1998 compared with 3 per cent. in 1997 and 1.75 per cent to 2.25 per cent. in 1999, followed by 2.25 per cent to 2.75 per cent. in 2000.
More recent government forecasts such as those contained in the Economic and Fiscal Strategy Report 1998 show that the forecasts for 1999 and beyond have been brought back to the low end of the range. I believe they may yet have to be revised lower still.
Meeting the inflation target of 2.5 per cent. remains the Government's key priority. However, I have to disagree with the two previous speakers, in that the Monetary Policy Committee has in my view failed to take properly into account that the economy is slowing of its own accord, especially affected by the Asian crisis, and has continued to raise interest rates unnecessarily. To support my view, I note that the respected London Business School holds a similar opinion in a report published today stating that the MPC has greatly underestimated productivity improvements 1554 made by manufacturing companies in the past few years and so exaggerated wage inflation. The result of the MPC's interest rate increases has been to make sterling appreciate substantially, especially against European currencies. As a consequence, there is a great danger that due to our weakening competitive position we will be led into a recession. This is a word much more talked about recently, as companies even like the bell-wether ICI disclose how difficult life is.
Turning to more detail in the Budget, there were sensible measures to abolish advance corporation tax, to reduce mainstream corporation tax by 1 per cent. from April 1999 and to increase capital allowances for businesses in the first year in certain cases. The national insurance increases were, however, unwelcome, especially for service industries as they raise costs for employers in a sector where employment costs can be high anyway and the break-even point of £23,000 is not particularly generous.
Turning to personal tax, there was a pleasant surprise that income tax was broadly unchanged, although on the indirect tax front the increase in fuel taxes was an unnecessary additional blow to rural communities already suffering from hardship in other areas.
While at first glance the capital gains tax proposals were welcome, once the details were revealed it made an already complex tax a nightmare. Consider, briefly, a situation where an investor has held a share at 1982 and bought further shares since. If that share has a rights issue now and the shares are then sold subsequently to 6th April 1999, the calculation of the tax becomes immensely complex. First, you have to divide the shares into different pools pre-1982 and post-1982. Then you allocate the rights issue to those different pools and index them separately up to 5th April 1998. Finally, you apply tapering relief according to a complex sliding table—different of course between a business and non-business asset—not forgetting of course the free bonus year. If you do not know whether you are a basic or higher rate taxpayer you really are in trouble. The only beneficiaries of this complexity are the accountants, for whom it will be a dream. This desire to confuse can only be due to general ignorance of the mechanisms of the tax. It is certainly not simpler than the previous regime.
With regard to inheritance tax, I wish to make a comment on the plans to give the public better access to heritage assets which are currently available to be seen by written appointment. I have to declare an interest in that I am the owner of some heritage assets. It is apparent that the new access proposals will be a burglars' charter, since they may be able to gain access to a house under false pretences. It is my belief that the current regime is perfectly adequate for heritage assets access, especially as very full details are already available on the Internet which fulfils the need for security without deterring the genuinely interested person from locating and seeing the items concerned. In addition, wherever possible I encourage all interested local societies to visit. However, having recently been a victim of a burglary where heritage assets were lost, I feel I speak with experience on the problems of unlimited access. The proposal could well encourage the 1555 disposal of heritage assets as their owners, especially where they are elderly or housed in small flats where access is difficult, may feel that the Inland Revenue demands are too onerous.
An event which has taken place since the Budget but which will affect future government financial calculations is the Government's Comprehensive Spending Review. As a recent editorial in the Economist magazine stated, while growth rates of GDP cannot be predicted, one thing can. The Comprehensive Spending Review will mean comprehensively higher spending.
While the Chancellor and the spending Ministries have been bingeing after their 15-month fast, behind them is drifting the smell of the books being lightly sautéed. As alluded to in the short debate in this House last night on the Government's Economic and Fiscal Strategy Report 1998, the Comprehensive Spending Review is full of accounting tricks which may permit departments to raise spending by more than the overall figures suggest; for example, by allowing them to net off extra spending against fees and levies they collect. For instance, as mentioned in yesterday's debate, family credit—which currently amounts to around £2 billion of the social security bill—is to be replaced with a more generous subsidy called the working families tax credit. But because the working families tax credit is a tax relief, the Government argue that it should not count as social security spending. Thus it is presented as a £2 billion cut in benefit bills.
Potentially more seriously, the Government are changing the rules about dealing with departments' outside income. At the moment, if a department makes money from, say, renting land, the income is handed over to the Treasury. That will change. In future, many departmental receipts from rents, levies, fines and dividends will be for departments to keep and spend. And because the receipts will count as negative public spending, the extra money can be spent on top of the budgets agreed with the Treasury and will not show up in spending plans. The Government are therefore taking a gamble that buoyant economic growth will compensate for this departmental largesse which could be a dangerous policy if we face a serious slowdown.
The Chancellor earmarked £21 billion more to be spent on health and £19 billion on education over the next three years. There will be more for pensioners, more for scientific research, more for the poor in the Third World and more for the BBC World Service. It was difficult to think of a deserving cause that the Chancellor missed out.
The Chancellor promised to deliver big spending increases without sharp increases in taxation or borrowing. He stated that, although public spending would rise by 2.75 per cent. in real terms between 1999–2002, he will nevertheless keep the books in balance throughout the period. Can that be a correct assumption?
While last March the Chancellor's economic assumptions could have been called sensible, the subsequent actions by the MPC and the Comprehensive Spending Review now mean that there is a serious danger that his sums will not add up. By setting out his 1556 expenditure plans so far ahead, he leaves himself little room for manoeuvre if his forecasts are seriously wrong. And even though the Government believe they are being cautious, there is serious scope for error. Take, for one instance, social security. Note that this is the department where expenditure has not been fixed for the next three years. No wonder the Minister told to think the unthinkable resigned. His plans to cut welfare payments clearly failed.
In summary, the Finance Bill contained several sensible measures for businesses. It is what has happened since in terms of loosening the purse strings that may well make future Budgets much more unpalatable. To pay for all the promises in the Comprehensive Spending Review must involve higher taxes if my analysis of the slowing economy is correct, or higher borrowing, returning us to the "stop-go" economy that the Chancellor is so anxious to avoid.
§ 5.56 p.m.
Lord Bruce of Donington
My Lords, if there is one thing that the country may be grateful to the present Government for, it is their vitality. I have been in politics for a long time and have seen governments come and go. I have watched the vicissitudes of Ministers, some of them high and some of them low. But this much I know about Her Majesty's present Government. They have brought a new vitality to the whole of government. It involved and is still involving a detailed investigation into most areas of our national life. In my experience, this is the first time that it has happened in this way and on such a scale.
The Government appointed—and correctly appointed, though sometimes one may query their composition—various task forces, committees and bodies with vastly different terms of reference, granting them every facility to go into practically every aspect of the affairs of the country as a whole. And that is most welcome. Of course, it sharpens the responsibilities of those—fortunately or otherwise—who have been around for quite a time. It makes it extremely difficult to do anything that will in any way inhibit the terrific vitality of the present Government.
The Government are going to need every bit of that vitality. Ministers have had only one year to accomplish detailed reviews of their departments; to be able to know and become more certain of the way in which the whole system of administration works. That presented them and will continue to present them with considerable difficulties. Therefore I applaud the production—albeit in sketchy form; albeit heavily reliant on figures, not all of which are reliable—of a three-year forecast. That should commend itself to the country as a whole because the difficulties facing the Government are enormous. They reflect perhaps the difficulties of our country.
The Government may be optimistic—sometimes they have to be—even though they may know that there are what are called "dangers impending". Nevertheless they are right to express as favourable a view as they can and to put the best possible construction upon events that are taking place not only in the British economy but in the world as a whole. 1557 The difficulties are indeed formidable. They are set out in terms and from sources that should command considerable attention. For example, according to Dun and Bradstreet, business confidence has sunk to a five-year low in the wake of the Bank of England's unexpected decision to raise interest rates and to go on raising them. The group's survey of 1,400 finance and managing directors showed that confidence is falling in the service, retail and wholesale sectors as well as in manufacturing. Expectations of profits are at their lowest since 1993 and confidence in export prospects at its lowest since the survey began 10 years ago.
I speak of matters which your Lordships know, which you have read and which you may or may not have discounted. Oxford Economic Forecasting expects that business investment will fall from a growth of 10 per cent. in 1997 to 5.5 per cent. this year and less than 1 per cent. in 1999. Moreover, it will not have escaped your Lordships' attention that the balance of payments, the balance of trade, is once again in deficit—mainly of course involving our trade with the European Union countries. This is not at all comforting.
Today's CBI survey called upon the Bank of England to cut interest rates as manufacturing and business confidence fell to its lowest level for seven years. This is on page 8 of the Financial Times; it is not an irresponsible source. The survey also found that domestic orders in manufacturing fell in the last quarter for the first time in more than two years, while export orders dropped at the fastest rate for 12 years. The strength of sterling has worn down exports.
These are not matters of imagination. It is clear that opinion is virtually unanimous in the business circles that matter that the slow-down in the economy, which is now manifest and cannot be denied, is due to the high level of the pound, which squeezes exports, and a slowing of domestic demand from consumers following last year's rise in interest rates.
There are dangers ahead. I venture to suggest that when these vigorous and wholly admirable inquiries which are now in progress are complete there will be changes in policy. There have to be changes in policy. To hope to keep down inflation by slowing down growth is the silliest proposition that can ever be put. Yet there is an apparent acceptance of the inevitability of growth going down, not up. Surely any accountant knows perfectly well that the higher your output the greater the overhead recovery; the lower therefore the relative cost. If you start lowering production, the first thing you get is a rise in costs. This is known to all accountants—certainly it is well known to my noble friend Lord Barnett, who is an eminent accountant to my certain knowledge.
How do we deal with these problems? Certainly not by ignoring them. We will not be helped in any way until we get a more accurate presentation of the figures. At the moment—as my noble friend Lord Barnett will confirm—the figures are presented as a mixture of cashflow figures on the normal cash-in, cash-out basis, plus, but only partially so far, the introduction of resource accounting. That, as my noble friend well 1558 knows, will bring the Government closer into conformity with the accounts produced by business enterprise.
I have read through the papers on resource accounting and how it will be introduced. It is clear that for a time our figures will not be as reliable as we would like. Nowhere is this better illustrated than by our reliance on completely unreliable unemployment figures. The noble Lord, Lord Marlesford, referred to 2 per cent. and 3 per cent. unemployed. He is quite right of course. In the coalition White Paper of 1944, 3 per cent. unemployment was reckoned to be full employment. It is much higher than that now.
On the basis of the claimant count, unemployment was low at 1,400,000. When it came to the ILO category, which covers people who had looked for work in the past four weeks, the figure was 1,807,000. If you take into account the Labour Force Survey as carried out by the Government, the total number who are economically inactive, which is the official definition for people who wanted a job but had not looked for one in the past 12 weeks, was 2,387,000, giving a total without a job of somewhere near 4 million.
Over the past few years—and everybody knows it—I have taken the liberty, without contradiction from many sides of the House, of putting forward the accurate figures produced by the Royal Institute of Statistics. These have not been queried. We are not dealing with a situation in which there is any leeway on the question of unemployment. We are dealing with an economy which, whatever people in the City think—and they tend to think that they are the whole economy; that if they are doing well everybody else is—is doing very badly indeed. We have to do something about it.
What shall we do? First, we shall have to re-examine the doctrine put forward by the Chancellor of the Exchequer in his Statement on 14th July, when he said:To achieve this"—that is, the Government's objectives—two fundamental economic reforms have been undertaken for the long term: to take monetary policy out of party politics through operational independence for the Bank of England".—[Official Report, Commons, 14/7/98; col. 187]I repeat that the Chancellor referred to taking monetary policy "out of party politics". But what are the politics of the bankers? My experience not only in this House but also in another place has indicated to me that bankers tend to have politics of their own and that they are most certainly non-party. Party politics as such are vital in a democracy. Democracy is exactly about dissent, about putting forward proposals and having them criticised. One need only consider the way in which the debating Chambers of this House and another place are set out to realise the truth of that. Our Chambers anticipate the clash of progressive argument.
Was the Chancellor saying to himself, "I must put temptation behind me. I fear that I might be weak enough to produce a Budget which favours one party or another. Am I confident in my judgment?" If he was really saying, "I don't trust myself. I don't trust my judgment", that was grossly insulting to himself because I am sure that he is a man of considerable intelligence 1559 and dedication. The Chancellor referred to taking monetary policy "out of party politics", but that is exactly what happened in the 20 years immediately after the war and immediately before we entered the then European Economic Community or the Common Market. We had run out of ideas. We were bored and we were tired. It was exactly because party politics did not exist then that we got ourselves into that intellectual inertia. I am all for argument.
The Earl of Dartmouth
My Lords, I thank the noble Lord for giving way, but how would he feel about our interest rates being determined by a central bank in Frankfurt?
Lord Bruce of Donington
My Lords, my feelings on that are already well known, but the answer is in the negative. I would most certainly not approve. My noble friend Lord Barnett made the observation in his recent report on the single European currency—he is bound to regret it sooner or later—that some, if not all, economists were in agreement with having the single currency. I venture to think that that is a slight exaggeration.
Let us have vitality of argument. Let us not assume always that our opponents are wrong and that we are always right. Let us have a real examination of the real facts. We shall then be able to find the solutions, by discussion, as we have always done in this democracy of ours. I am most reluctant to suggest to the House that the Chancellor of the Exchequer could not make his own decisions—
Lord Bruce of Donington
My Lords, I am coming to that, fear not.
I am most reluctant to suggest that the Chancellor is eventually coming round to agree. In his latest speech, to the News International Conference on 17th July last, he concluded with these remarks:Great causes to argue and fight for".That is probably good news not just for those who believe that to be the case, but for a global media which I hope will continue to be interested in what we say. I repeat that the Chancellor referred to:Great causes to argue and fight for".Let us do just that.
§ 6.14 p.m.
My Lords, the noble Lord, Lord Bruce of Donington, hymns the vitality of the new Labour 1560 Government. Should they ever reach the level of the old vitality displayed by the noble Lord and perhaps even combine that with his command of, and attention to, detail, the Government will have made real progress.
I share the noble Lord's concern about the accuracy of the figures on which the Government are operating. On a previous occasion, I treated the noble Lord, Lord McIntosh of Haringey, to a long diatribe on why I feel that the inflation rate, for technical reasons, is overestimated by perhaps 2 per cent. The noble Lord, Lord Bruce, has today questioned the unemployment figures on which the Government are operating.
The noble Lord also addressed the question which interests me almost as much, which is: how is the level of wage inflation estimated? Wage inflation is inflation only if it means that increased wages are being paid for the same output for the same job. I believe that we are in danger of creating in people's minds the impression that wage inflation is running at 6 per cent., although that is a long way from the truth of the actual level of wage inflation.
As is usually my custom on these occasions, I do not wish to engage in a long and general speech. I should like to address one particular aspect of this Finance Bill—with any luck an aspect on which the noble Lord, Lord McIntosh, will find that he has not been briefed. On this occasion, however, I am not seeking an answer, although I would be grateful for a gentle smile of approval. What I would really appreciate is a considered and complete letter at some stage over the next couple of months addressing the points that I raise.
Clause 155 sets out the basis for the code of fiscal stability. It includes the words:The key principles are transparency, stability, responsibility, fairness and efficiency".Under Clause 156, provisions are made for annual reports to be made to Parliament under the code. That is an interesting and worthwhile approach to economic management. What I want to do today is to urge the Government to expand those principles and practices to the ordinary taxpayer and to commit themselves to making the ordinary taxpayer's life simpler and easier. More and more, the ordinary taxpayer is being asked to take on responsibility for his own tax affairs. Self-assessment is but the most recent aspect of that.
More and more lower paid and unsophisticated people are coming within the tax net. Someone can be a taxpayer if they are paid only £2 an hour, let alone the minimum wage. There are almost 4 million self-employed people, about half of them with profits of less than £7,500 a year. The Government are encouraging self-employment as a way out of unemployment for people who are otherwise unable to make use of their present skills. Many people have a couple of part-time jobs going at any one time. People may move from one job to another in rapid succession. For ordinary people, the existing tax system is ill adapted to both of those practices.
Those who have complicated financial affairs are generally wealthy enough to employ accountants. As part of the great union of accountants in this House, I applaud the Government for introducing capital gains 1561 tax legislation which is so complicated as to increase their earnings! That seems to me to be a very worthy part of what the Government are doing! My concern is for the ordinary taxpayer, for someone who is certainly not rich enough to employ an accountant and whose basic affairs are simple. However, as the Chartered Institute of Taxation's low income action group pointed out, the taxation arrangements that are applied to that income can be fiendishly complicated.
Like, I suspect, many Members of your Lordships' House, I do not understand how the Inland Revenue arrives at my PAYE coding. It is an obscure system. The figure just arrives from the Inland Revenue and I suspect that few among us question how the Revenue arrived at it. It sets out to reconcile a system of deductions and a system of credits—and they do not match particularly well. That is complicated by the Revenue's commitment to trying to deal with any past under or over-recovery of tax rather than adopting an end-year position. All of that makes PAYE coding extremely complicated for people who are changing jobs or have a succession of part-time jobs. That can result in people being substantially over taxed. That can be a great inconvenience to people who do not earn a great deal of money, although they may get it back in the end.
The taxation system that is applied to the married couple's allowance combines odd rates, odd rules and frequent changes and is difficult to comprehend. The additional personal allowance for children is horrendously convoluted. It has difficult forms and it is difficult to understand how to take advantage of it. Even before the recent changes in dividend tax there were considerable difficulties in relation to pensioners' savings.
I understand how these complications arise. When the Chancellor is putting together a Budget the underlying legislation cannot be written because the civil servants do not know exactly what is in the Budget. The process of getting a finance Bill through so that the Government can be financed does not allow for complications and the smoothing out of the system to be addressed in the way that it might be. I also understand why finance Bills do not seek to redress past inconveniences and difficulties. One always has winners and losers and one is merely creating unhappy people without achieving any great benefit at the time.
I urge the Government to recognise that there is a difficulty here. A good number of people are being asked to take responsibility for their tax affairs while being faced with an unnecessarily complicated situation. I urge them to follow their own principle in Clauses 155 and 156 and make a declaration that tax laws shall follow the same five principles: transparency, stability, responsibility, fairness and efficiency. I add to that simplicity and comprehensibility so that the ordinary taxpayer has some hope of improvement over the years. I also ask the Government to commit themselves to making an annual report on progress. The Government have put in place a system to ensure that they improve the whole economic management of the nation and it is one in which clearly they believe. What works for the nation may well work for the tax system. There is no 1562 particular imposition or anything that binds them to any particular course of action, but over time the interaction between the ordinary citizen and the tax system should improve.
I have some immediate and practical suggestions to the same end. First, from time to time various people have urged that there should be two separate finance Bills: one dealing with the immediate matters emerging from the year's Budget and one dealing with technical matters. That would perhaps allow the technical Bill to be published in advance and certainly to be discussed over a longer period, because it would not incorporate matters of fiscal urgency for the Government. If the Government pursued that policy I believe that it would be a good vehicle for rules and regulations to be simplified. They could be exposed and considered at length and comments could be received from the public. The whole process of simplifying the tax laws could be taken out of the mad rush in getting through the Finance Bill.
Secondly, one of the final acts of the right honourable Harriet Harman was to initiate the setting up of a team to provide benefits advice to the elderly. I believe that that would be a perfect vehicle to provide taxation advice to the elderly. The Inland Revenue estimates that over 1 million old people get taxation wrong and lose out every year. The Chartered Institute of Taxation points out that the elderly have particular problems with their tax. Many of them deal with more than one tax office and most of them are reliant on hard-to-follow Inland Revenue literature. The various bits and pieces of the Inland Revenue have an inconsistent strategy for dealing with elderly people. The Inland Revenue has settled on the telephone as the means of communication, whereas old people need to be communicated with in writing so that they can consult others and take time in reaching their decisions. The taskforce that is to be set up by the Department of Social Security appears to be a perfect vehicle for the Treasury to make use of to alleviate some of the admitted Treasury iniquities which older people suffer in dealing with their tax affairs.
Thirdly, I suggest to the Government that they follow the US and Australian examples and support voluntary groups that give free tax advice to those on low incomes. The Inland Revenue is notably friendly to the small taxpayer. Generally, the Inland Revenue is helpful, courteous and does its best, but staff numbers have been falling. A voluntary group staffed by experts who give their time freely is likely to be more efficient and cost-effective than if the Inland Revenue takes on the job itself. In addition, a voluntary group would be seen by the individual taxpayer as being independent of the Government. That must be an advantage. The Inland Revenue cannot completely escape suspicion. However nice it may wish to be on the surface, there is always the element of the "traffic warden" about it. There is already in existence an excellent small charity that provides that service. I refer to Tax Aid, which is a charity of which the noble Lord, Lord Barnett, is a patron. In its own small way it does an excellent job and provides a nucleus upon which the Government may consider building to make advice available to the low paid on how to sort out their tax affairs.
1563 As I said at the beginning of my speech, I do not expect a detailed reply from the noble Lord today. However, I should be grateful to receive a detailed letter.
§ 6.26 p.m.
The Earl of Dartmouth
My Lords, I humbly apologise to the noble Lord, Lord Bruce of Donington, for my ignorance of his views about the desirability or otherwise of Britain joining the single currency. By way of extenuation, he may well be ignorant of my views on the same subject.
I am very grateful to have this opportunity to speak on the Finance (No. 2) Bill because this is an area in which I have some small knowledge. Monetary policy has been very ably addressed by the noble Lord, Lord Barnett, and by my noble friend Lord Boardman. My noble friend Lord Marlesford has been more than eloquent in outlining the golden economic legacy of which this Government are the inheritors. I intend to restrict my remarks to drawing the attention of the House to three specific taxation measures in the Bill and their constitutional aspects. From these I shall draw some general and, I hope, interesting conclusions.
First, I address the abolition of retirement relief for small businessmen. This has been a long established relief whereby the proprietor of a small business can sell up, retire and pay no capital gains tax on the first £250,000 of proceeds. The Bill proposes to phase out that relief completely within four years. In four years' time the proprietor of a business in this category will be liable to capital gains tax at the full rate. People make rational decisions especially when encouraged to do so by the tax system. The inevitable effect of this abolition will be to encourage many proprietors of businesses in this category to sell up immediately before the tax relief begins to be phased out.
This clause in the Bill enables me to make a very important general point about the economy. The government party has been tremendously successful in getting some chairmen of big corporations to support them, or at least to acquiesce in what they are doing. However, when one looks at the pattern of employment over the past 15 years the fact of the matter is that big corporations have been reducing their activities and contracting out—they call it down-sizing—and therefore they have substantially reduced the number people they employ.
The maiden speech yesterday of the noble Lord, Lord Alli—he is not in his place today—who is a principal in a substantial independent television production company, enables me to give a graphic illustration of the point. Only 10 years ago Yorkshire Television and Tyne Tees Television employed, as independent companies, over 2,000 people. Today both companies have been merged and are owned by Granada. A good estimate of the numbers that Yorkshire Television and Tyne Tees Television together employ today is fewer than 300. The government party and the Chancellor are right to be concerned about unemployment and jobs. But they will not be getting the new jobs in television that they want from their new 1564 friend, Gerry Robinson, Chairman of Granada. On the other hand, they may just get some of these jobs from the noble Lord, Lord Alli, and his other colleagues in the independent television production sector. Likewise, in other industries and in other sectors it is not the Government's new friends who are chairmen of big corporations who will be providing jobs. The jobs for the millennium will come from small businesses and small businessmen, some of whom will be the big businesses of tomorrow. I submit, therefore, that it is extraordinarily ill-judged for the Government to put forward this measure in the Finance (No. 2) Bill, phasing out retirement relief. This simply gives a built-in incentive for proprietors of small businesses to sell up forthwith.
The next area I want to address is the proposals for capital gains tax. I very much to want to be constructive in what I say, and I must credit the Chancellor for re-establishing the distinction between short-term and long-term capital gains for taxation purposes. However, his proposals abolish the indexation of capital gains for the purpose of establishing the tax liability. There is a very important principle at stake here. Since indexation was introduced it has meant that the taxpayer has had to pay tax only on the real gain made after taking into account inflation. The effect of the abolition of indexation means that the taxpayer is now potentially liable to have to pay tax on artificial gains. This means that, should the Government make a mess of managing the economy so that once again we get roaring inflation, perhaps because of excessive Government expenditure, it is the Government who would then benefit from their own mismanagement. The taxpayer will be paying tax on the illusory gains created by the very inflation for which the Government would have been responsible. This is a very serious point which I suspect will give great concern to many taxpayers in the future.
The further aspect of the Bill's proposals for taxing capital gains is, as ably described by my noble friend Lord Northbrook and my noble friend Lord Lucas, their breathtaking intricacy. I, too, am a Fellow of the Institute of Chartered Accountants and I should declare what might be termed a reverse interest. Many of my fellow accountants will in future years be kept in a style to which they have hitherto not been accustomed because of the sheer complexity and difficulty of the Government's proposed rules on capital gains tax. I would therefore characterise the entire section on capital gains tax as ill-thought out.
The next aspect of the Bill which I propose to address—and this will be the last specific measure I shall cover—is the Government's new plans for taxing the corporate sector. The headline rate of corporation tax remains mercifully low. However, the Government are requiring corporations to bring forward tax payments so that tax payments will now be made on a quarterly basis. There is nothing particularly wrong with this in principle and it is indeed a practice in other countries. However, the immediate effect is the cost to the corporate sector of an additional £2 billion per year based on the principles of net present value and discounted cash flow.
1565 As my noble friend, Lord Howell, stated yesterday with his customary knowledge and eloquence, there are storm clouds brewing in the Far East about which we should all be very concerned. It looks very much as if a downturn in the British economy is imminent, not least because such a downturn is also imminent in the United States economy. As I showed yesterday in another debate, the cycle of the British economy mirrors that of the United States. It is not a question of whether this is a good or bad thing; the fact is that it does so already.
The Government are currently and quite rightly looking to the corporate sector to create, among other things, new jobs, to increase investment and increase productivity. There is almost never a good moment to heap another £2 billion in concealed taxation on the corporate sector, but I submit to the House that the fiscal year 1998 could hardly be more ill-timed to do that very thing.
Finally, there is in the Finance (No. 2) Bill a constitutional aspect which I feel will be of great interest to your Lordships. I made my maiden speech just over two months ago, although it seems much longer, in an important opposition debate which related to the impact of the Government's policies on the authority of Parliament. I certainly never suspected that it might be appropriate to return to this subject in the context of the Finance (No. 2) Bill. However, what is interesting about the Finance (No. 2) Bill is not so much what is in it but what is not in it. There is nothing in it, for example, about the Government's welfare-to-work programme, which is a centrepiece of their entire economic programme. There is nothing in it about expenditure, which is in any case now separate. Most worrying of all, there is nothing in it on large sections of the tax changes which are to be presented by means of statutory instruments and secondary legislation. These have not even seen the light of day, let alone been scrutinised by either House. The Government is bypassing Parliament yet again.
I would categorise that aspect of today's Finance (No. 2) Bill as being thoroughly evasive. This is important. Everybody is affected by tax, not least very low paid people, as ably stated by my noble friend Lord Lucas. There is enormous expertise on this subject in both Houses of Parliament. It would be highly desirable if the Government would take full advantage of that expertise; otherwise the taxpayer will be the loser.
In summary, therefore, and this is my closing statement, I believe that this very brief tour of a few specific areas of the Finance (No. 2) Bill enables the House to come to a conclusion about the whole Bill. As I have demonstrated in relation to certain of its specific parts, this Bill is ill-judged, ill-thought out, ill-timed and evasive.
§ 6.37 p.m.
§ Lord Desai
My Lords, we customarily debate the Finance Bill after it is no longer relevant because circumstances have changed. I should like to urge the Government to adopt a practice which I believe I can claim to have started about four years ago so that we 1566 debate the Budget Statement, if not the Finance Bill, in the very week in which the Budget is presented. Since we cannot amend it, we might as well discuss it. What is the point of not allowing us to discuss the Finance Bill? I believe that it was possible until last year, but this year it was not possible. As I expect the present Government to be in power for a long time and that we shall get to some sensible management of parliamentary business, I believe it will be a good thing to have the Budget Statement debated early on. Then we would not need to bother about the technicalities of the Finance Bill.
Secondly, I also very much welcome the suggestion made by the noble Lord, Lord Lucas, about dividing the Bill into its more technical and less technical aspects. I am perhaps the only person to speak in the debate who is not an accountant. I am not an expert in taxation. I am much more interested in the economic messages that the Budget sends out. We should be able to discuss those after the Budget much more quickly and sensibly. The technical parts can be left to people who actually understand them and who can amend the Bill properly.
My right honourable friend the Chancellor has made a number of major statements. In this debate we have discussed the Budget and the Comprehensive Spending Review. We have also referred to the independence of the Bank of England and have looked forward to the single currency.
Change has rightly been made in the setting out of the economic framework of Her Majesty's Government. That change began under the previous government. We now have consensus about the economic framework to be set out. My right honourable friend has sharpened it by hiving off monetary policy to an independent Bank of England, leaving himself only the fiscal policy.
I wish to draw attention to another change. At the same time he has taken the view—he and I disagree on it—that fiscal policy is an instrument only for long term growth of the economy. Fiscal policy should not be used for short-term stabilisation purposes. Monetary policy should be used for short-term stabilisation purposes. I am not a great friend of an independent Bank of England, but I am not willing to go to the stake on the issue. I am not worried about the independence of other central banks but about their competence or otherwise. I have never been quite sure about the Bank of England; I have said this before. It is a competent body. However, once the Monetary Policy Committee is set the task of controlling inflation, it cannot be asked to do other things. Monetary policy has only one instrument—interest rates. A monetary authority can fix either the quantity of money or interest rates.
§ Lord Higgins
My Lords, I am grateful to the noble Lord for allowing me to intervene. He talks of the Bank of England controlling monetary policy. Would it not be more accurate to say that it is controlling interest rate policy? The two are not the same. As regards monetary policy—the control of the money supply—that appears still to be under the Treasury.
§ Lord Desai
My Lords, I thank the noble Lord for that intervention. In modern financial markets no one 1567 controls money supply. It is very much influenced by what various financial institutions decide to do with financial innovations. As we discovered during the great monetarist days of the 1980s, with M1, M2, M3, M4, and so on, the monetary authority is no longer in charge of the money supply—perhaps base money but very little else. But it can control interest rates. However, it is only one instrument. Therefore it can have only one objective. Once one sets inflation as a target, it will use interest rates to control inflation. But one cannot add other objectives. The Bank of England or the Monetary Policy Committee does not have the instrument to pursue other objectives.
One of the few things we know in economics—we do not know many—is that one has as many instruments as one has objectives. Unless one hands over economic policy completely to the Bank of England Monetary Policy Committee, that committee will not be able to achieve more than one objective. It may be that the objective should not be control of inflation; that is another issue. The objective may be to ask the Bank of England to achieve full employment. I do not know how it will do that, with the only instrument being interest rates. That is not a good instrument for pursuing that objective. But given that the brief of the Bank of England is to control inflation by interest rates, there is still a role for a fiscal policy for short-term stabilisation.
This is an intellectual argument; it is not a party political point. There is a substantial body of theory in favour of what the Chancellor is doing, although I disagree with it. I believe that there is still scope for fiscal policy in the short term to do various things that monetary policy cannot do to stabilise the economy. I think that the disagreement will continue until some future date.
In the Comprehensive Spending Review my right honourable friend rightly set out the long-term public finance framework—what economists call the steady state. But there is a great deal of misunderstanding about this. The Comprehensive Spending Review does not tell you what will happen year on year. For example, the cyclical component is longer anyway. The cyclical component will obviously be rather large. The surpluses of £7 billion, £9 billion and £11 billion are the long-term steady state surpluses. I would expect—I am sure my right honourable friend knows this too—that the outcomes on both expenditure and revenue will not be as laid down in the Comprehensive Spending Review because that is a long-term picture.
As the Chancellor pointed out in his November Statement, we shall have a slow down of the economy. The recession in the economy was forecast as long ago as November. It has nothing to with the Asian crisis but with other issues. However, given that there will be a slowing down of the economy—we do not know whether it will be a soft or a hard landing—some of the surpluses may be absorbed by cyclical spending and we may have to borrow. Alternatively, the surplus may be larger than expected. But the Comprehensive Spending Review involves the steady state picture of the economy for the next three years; and I believe that the actual outcomes will be different because the economy will not be in a steady state. It never is. If my right honourable 1568 friend achieved his great dream of eliminating boom and bust, I suggest to the noble Lord, Lord Marlesford, that he would be eliminating capitalism. Perhaps it will require socialism to have an economy of no boom and bust, but while capitalism lasts we shall have a cycle—and a cycle will be our problem.
Today we face the difficulty that we are not sure whether the recession will be a soft or hard landing. Some noble Lords may have seen an excellent article by Mr. Gavyn Davies in the Independent on Monday. He pointed out that it depends on whether one thinks of the long-term rate of growth of the economy as 2.75 per cent. or 2.25 per cent. Noble Lords often make critical remarks about economists. They must understand our problem. Even meteorology has more resources for data collection than the economists. We shall not find out where the economy was in July 1998 for about six months. One is asking economists to drive a car on a rainy night with fog, with no steering wheel and almost no indication of the speed of the car. When I was young I used to think that I could build mathematical models that would precisely control the economy. The older I get, the less faith I have in such things.
§ Lord Howell of Guildford
My Lords, the noble Lord is making a fascinating speech. I appreciate a great deal of what he says. But if, as I am sure is right, the measurement of the economy is becoming more and more obscure, in particular in a global context, how can short-term fiscal changes—changes in taxation—influence it? That is what he argued at the beginning of his speech.
§ Lord Desai
My Lords, I am grateful to the noble Lord for that intervention. I always give the analogy of climbing a mountain in a fog: one step at a time is all right; I know where the next step is.
In my car I can do the next 10 feet or 10 yards but beyond that I do not know. We are asked to write out this fantastic map from here to eternity and say, "The short term will take care of itself." The long term is much clearer because we make assumptions—for example, 2.25 per cent., 2.75 per cent.—and draw nice little lines.
A myopic decision-making rule would perhaps be better if one is trying to stabilise the economy. I am not against making long-term plans but the basic problem for the British economy has always been that short-term stabilisation has defeated Chancellor after Chancellor.
I should like to say a word in that respect. I referred to the article by Mr. Gavyn Davies. He said that much depends on what we thought the long-term rate of growth would be. To say that if the economy is fast-moving it will be a soft landing and if it is slow-growing it will be a hard landing, is correct but not good enough. I should like to argue that mere micro-economic aggregates are misleading us about where the economy is. It is not that the economy is growing faster or slower but that there are imbalances in the economy. Consumption is growing too fast and 1569 investment is not growing fast. Services are growing and manufacturing is not. The south east is prospering and the north is not.
Monetary policy cannot tackle these problems. It is not possible for the Monetary Policy Committee, even given infinite wisdom, to do anything about that with a single interest rate. We need a combination of a variety of regional policies and environmental policies and perhaps a little thinking about the exchange rate if we are to tackle the problem of unemployment in the economy to which my noble friend Lord Bruce of Donington drew attention. I do not believe that there is a single natural rate of unemployment in the economy. There are a variety of natural rates in the economy and they depend on what we are able to do by way of structural policies.
In conclusion, I should like to say that it has been argued that somehow unemployment could rise because of wage bargaining. Many noble Lords have pointed out that it is not wage growth that matters but wage growth relative to productivity growth. So it is the growth of unit labour costs that matters rather than wage bargaining.
I believe that Professor Robin Maths pointed out, when the Monetary Policy Committee last met, that the growth of earnings depends very much upon technical matters, like how one treats bonuses. If one strips bonuses out, the wage growth is much lower than if one keeps bonuses in. What really matters here is not wage growth but whether the economy is able to sustain outward growth and employment growth. As soon as we stop having employment growth one may suspect that something is going wrong.
I believe that one of our problems is an over-valued exchange rate. I do not think we should start debating the lack of productivity growth in manufacturing. Even with the best of productivity growth you would not be able to employ people if the exchange rate is over-valued. That, perhaps, is something we cannot do much about. But I believe that if we are ever to join a single currency, we will not join at the present level of exchange rate. We may be able to join when it gets nearer to 2.70. I know that my noble friend is becoming impatient and so I shall sit down.
§ 6.55 p.m.
§ Lord Jacobs
My Lords, I understand that I am speaking in what is known as the gap. I have only been here for nine months and I only learnt about it today. I apologise and I shall not detain your Lordships for long.
I should like to begin by saying that I echo the words of the noble Lord, Lord Desai, concerning the time when this House debates the Finance Bill. It was a great shock to me, when I arrived nine months ago, to discover that Finance Bills, monetary matters and even main economic matters play a small role in this House and that there is no authority or power for us to do anything other than perhaps occasionally debate them, as on this occasion, far too late to have any influence.
1570 That came as a surprise to me. This House probably has more industrialists and business people of experience than the other place. Therefore, I should have thought that they would at least have something to contribute. That is as it is, but maybe it will be possible to debate such matters at an earlier time in future.
Broadly speaking, I agree with the Government's budget policy. I approve of their economic stance from the day they took power. They were still faced with a £20 billion budget deficit and their prime objective was to maintain a tight fiscal stance and to reduce that deficit as rapidly as they could.
The Government have been criticised in some quarters—not, I am glad to say, here tonight—for proposing to increase public expenditure at a significant rate for the next three years. Having maintained a tight fiscal stance for two years, their rate of increase is not that great, taken over a five-year period. The previous Government increased over five years by 2¼ per cent. a year. This Government are proposing taking five years overall to increase public expenditure at the rate of 1¾ per cent. a year. So their growth in public expenditure is slower. But what they are doing is at least letting public expenditure grow when the budget is in surplus rather than deficit. That is something for which I strongly commend them.
I have one criticism of the budget. I should like to echo the words of the noble Earl, Lord Dartmouth, regarding capital gains tax. I confess that I, too, am a chartered accountant, although not practising these days. However, I helped to advise one or two people on the new provisions for capital gains tax. Frankly, the principles that they proposed were extremely good, that is that we should have a short and a long-term capital gains tax. With that I heartily agree.
However, when they take away indexation of capital gains tax they might as well have left it alone. The net effect of the two, if you compare one with the other, is very little indeed. This is a country of fairly low direct taxation. It compares favourably with America except in one respect, which is capital gains tax. There, we are now significantly worse off. We were not when we had indexation; we compared reasonably, although we had a much higher rate of tax. I hope, come the next budget, that the Government will have had enough representations—or rather will have listened to those representations, as they will certainly receive plenty—and will improve the situation next time.
The area that I should like to comment on does not directly come into the budget but has been referred to by several noble Lords earlier; that is, the question of the role of the Monetary Policy Committee.
§ Lord McIntosh of Haringey
My Lords, I hope that the noble Lord will forgive me. The Companion says that any speaker in the gap should confine his remarks to four minutes.
§ Lord Jacobs
My Lords, having been informed that I was entitled to speak, I was not told of that fact. I therefore apologise. Would I have permission to speak for one more minute?
§ Lord Jacobs
Thank you. My Lords, I should like to say that the approach of the MPC regarding wage 1571 inflation is quite unrealistic. It says that if wage increases continue at a higher rate it will have to slow them down. It does not have regard to the fact that all negotiations on wage increases are based on the headline rate of inflation. That is what unions look at, and what all negotiators look at. It is impossible to get around that point.
§ 7 p.m.
§ Lord Newby
My Lords, this has been a most extraordinary portmanteau of a debate covering a broad sweep of macro-economic policies and detailed issues and technicalities of business taxation. The point made by a number of noble Lords about the way in which this House discusses such issues bears further consideration. It has been demonstrated again today that within this House there is significant expertise on all these matters. Yet in a debate which will last less than three hours we are attempting to cover issues which in the Commons are dealt with in the Budget debate and on Second Reading and at all subsequent stages of the Finance Bill. In my view, that is unsatisfactory. As was suggested by the noble Lord, Lord Desai, we could discuss the Budget Statement within a week of it being made.
As we come next year to look at the composition and functions of this House, we should look again at the way in which it addresses economic and financial matters. The proposal made by the noble Lord, Lord Lucas, which has been around a long time, about a second technical tax Bill would be worth considering at that stage.
I turn, first, to the overall economic position, the way in which the Chancellor has formed his judgment and the future of the economy. It is crystal clear from our debates today and yesterday that we are at a stage in the economic cycle when it is uniquely difficult to see any far distance into the future. The fog on the mountain described by the noble Lord, Lord Desai, is particularly thick at the point when the economy is turning from a period of sustained growth into the downturn and vice versa.
That is noticeable, for example, if one looks at the point when the noble Lord, Lord Lawson, as Chancellor, was forming his Budget judgment in 1986 at the beginning of what subsequently became known as the "Lawson boom". The advice he was getting both internally from the Treasury and externally was not that he should be preparing for a boom but that the economy was faltering and that he should be stimulating it rather than dampening it down. That demonstrates the difficulty of the position in which we find ourselves not least because there is the major external uncertainty over which we have no control; namely, the short to medium-term future of the Japanese and the other Far Eastern economies.
A great deal of discussion has been directed today at the workings of the Monetary Policy Committee and its specific decisions. We on these Benches have supported the establishment of that committee. Some of the criticisms we have heard today remind me of the position in which a football manager sometimes finds himself when the team is not doing as well as people 1572 might expect and there is a star player or another team selection to be made. There is perhaps a sense that he should be bringing on Beckham or Owen, but the manager believes that perhaps now is not quite the time. That is an analogy to the Monetary Policy Committee.
There is a widespread sense shared by many Members of this House that now is not the time to be putting up interest rates but probably the time to be bringing them down. Like the football manager who has become used to a longer term series of decision making and who has to live by the decisions, there is greater caution on the part of the Monetary Policy Committee. My preference would be to give it the benefit of the doubt for the time being. Although it would not be the unanimous view of the House, we on these Benches believe that the committee is but a transitional body between the Chancellor of the Exchequer setting interest rates, having been advised by the Bank, and interest rates being set for a European single currency in which the UK will be playing a full part.
We welcome many aspects of the Government's overall fiscal stance and budgetary policy. As my colleagues in another place have been ready to point out, we have some concerns about the vulnerability of the Chancellor's plans and about a number of risks contained within them. I shall mention only three. The first relates to inflation and the extent to which the Chancellor's expenditure plans depend on the inflation targets being met. The noble Lords, Lord Barnett and Lord Marlesford, asked whether in setting out cash limited expenditure for the next three-and-a-half years the Chancellor really did mean that it was cash limited or whether, if inflation were to rise beyond that set out in the Government's plans, the cash limit would be relaxed. So far, the Government's statements have been confusing.
In the Economic and Fiscal Strategy Report, the Chancellor stated that the cash figures would be reviewed if inflation varied substantially from the forecast. Yet on 18th July, when he appeared before the Treasury Select Committee, he said:I am not proposing to make any additional cash payments. These are budgets that they have to work within".I suspect that the truth is that if inflation exceeds the targets the Government will take all the options open to them in part and slightly increase the expenditure to take account of increased inflation. They will somewhat increase borrowing so that it takes some of the strain and they will probably raise taxes in order to make up any remaining shortfall. But given that the inflationary outlook is not wholly clear, and given that the Government have not met their inflation targets, there is an implied risk in the Government's forward inflation figures.
The second point—I apologise to noble Lords who heard me make it yesterday evening—relates to the contingency reserve, which is now at a negligible level. It stands at more than £8 billion over a three-year period to cover government spending of £1.1 trillion. In the first two years of that three-year period, those amounts are 0.5 per cent. and 0.7 per cent. respectively of government expenditure. I am not sure what the level was when the noble Lord, Lord Barnett, was 1573 Chief Secretary to the Treasury, but I suspect that it was 2 or 3 per cent. rather than less than 1 per cent. I do not believe that a contingency reserve of less than 1 per cent. can be described as a prudent figure. There is a risk.
The third risk—the risk we have spent most time discussing—relates to growth and to what happens if the Government's plans on growth are not met. Clearly, the Government are making plans for a soft landing. As the Minister reminded me yesterday evening, the majority of commentators are predicting that. He also accused me of being unduly gloomy about the prospect. I was not doing that. I was pointing out that because of a number of decisions which the Government have already made they have tightly boxed themselves in in terms of their response to any downturn in growth without breaking election pledges on taxation, the golden rule or the other constraints which individually would make sense but when taken together provide a tight fiscal box for the Government to remain in.
Those are the three risks that we feel are inherent in the Government's fiscal and growth plans. As I said last night, we are not hoping that those risks prove to be realities. When we are assessing the Budget and forming our views on the Chancellor's overall stance, it is fair to take those plans into account.
I turn briefly to three specific matters in the Finance Bill which cause us concern. In one or two cases, I should welcome a ministerial response. We have had a limited discussion on ACT today. It is clear that, whatever the merits for the overall abolition of ACT, a whole raft of anomalies has arisen which the Government have so far failed to rectify. In another place, amendments were moved to attempt to deal with the problem of the impact of the change on members of the public who are non-taxpayers and who have to pay tax for the first time on their dividends. It amounts to about 300,000 people paying on average an additional £75 per year. By definition, those people are poor and that is an impost which I am sure the Government did not intend as one of the consequences of the abolition of ACT. However, it is an impost which has flowed from it. While the Paymaster General in another place has accepted that the situation is unsatisfactory, nothing has so far been done about it. I should welcome anything which the Minister will say about how that may be tackled next year.
Another matter which has been raised by a number of noble Lords, including the noble Earl, Lord Dartmouth, and the noble Lord, Lord Boardman, was the abolition of capital gains tax retirement relief. We totally support the concerns raised in that regard. It is extraordinary that a tax-neutral change which has to do with the laudable aim of encouraging people to hold capital for a longer period has the effect of benefiting those whose assets are extremely high and hitting those whose assets are very low, with a cut-off at about £0.5 million.
Again, that seems to be an outcome which the Government cannot have desired. A number of suggestions have been made, not least from the Forum of Private Business, about how a transitional relief could 1574 be introduced and how an additional taper could be put in to ensure that no small business was worse off. That is an issue to which we should return in another year.
The final tax change to which I should like to refer which has not been discussed at all this afternoon relates to the introduction of the individual savings account. We welcome the ISA proposals in general and welcome also the process by which the Government have sought to introduce what is a complicated and technical change. Quite a significant change has been made as a result of the consultation and the more recent consultation on the CAT marks. The principle behind having a simple CAT mark is entirely laudable. Some of the arguments which have been made against the proposals on behalf of the independent financial adviser industry do not bear too close a scrutiny, given the recent history of bad advice to low-income earners. However, it is quite clear that significant changes could be made to the proposals contained in the Treasury discussion document on CAT marks and I hope that they will be taken into account.
In that consultation document, the Treasury said that it will be publishing draft regulations this month. I understand that that is not the case. I am not surprised because so many suggestions were made and to accommodate them all, or even a large proportion of them, will take time. But perhaps the Minister will give an indication of when those regulations may be forthcoming. As it is almost certainly the case that they will be published during the Recess, will he give some idea of the subsequent parliamentary timetable which may be followed? They are peculiarly important regulations in terms of a significant tax change which will affect potentially very large numbers of small income earners.
This has been a fascinating debate. As I said at the start, in some ways it has been unsatisfactory because it has tried to do too much. I hope that as one looks to our further debates on those issues, they can be conducted with a rather more rational division between a macro-economic discussion and the technical matters contained in any future Finance Bill.
§ 7.13 p.m.
§ Lord Higgins
My Lords, it will come as no surprise to your Lordships' House that I disagree fundamentally with the opening remarks of the Minister with regard to the Government's economic inheritance, both for the reasons which my noble friend Lord Marlesford put forward with regard to structural changes over the past 20 years or so and for the other reasons put forward by, for example, my noble friend Lord Dartmouth. I take the view that this Government had the best economic inheritance of any government since World War II.
What surprised me was the Minister's remark that there had been an inflationary boom in prospect and the Chancellor had taken firm fiscal action to stop a consumer boom. If there is one thing which this Chancellor has failed to do it is to take action in relation to the consumer situation. Not only that, but he has also taken action which has tended overall to deter savings, which is the other side of the coin to consumption. The 1575 two go together. I do not know what the Minister was talking about when he spoke of that firm action to curtail consumer expenditure.
The reality of the situation is that after two budgets, two Finance Bills, an economic and fiscal strategy report and a Comprehensive Spending Review, I fear the situation now is that the position which the Government inherited is being frittered away. On top of that we have clearly had a complete reversal of the Government's declared strategy in a number of important respects, in particular as regards a major U-turn on public spending and more specifically on social security spending. I note that in his opening remarks the Minister referred to many increases in public expenditure but significantly did not mention the extremely substantial increase in relation to social security expenditure.
Since I have not spoken before in one of these debates, I thought it appropriate to carry out some research into earlier debates. I was struck by a remark made by, I believe, the noble Lord, Lord Desai, when he said that the House of Lords debates Finance Bills after it is too late to do anything about them. That is probably the reality of the situation as regards the specific tax proposals. As the noble Lord, Lord Newby, pointed out, the debate this afternoon has contained a number of speeches on specific tax matters, but in addition to that we have had a wide-ranging debate on the state of the economy. Therefore, I wish to make one or two remarks on the specific proposals before I turn to the broader issue.
I have great sympathy with the view expressed by both the noble Lords, Lord Desai and Lord Newby, as regards the future structure of this debate. There is a strong case for us to have an opportunity to debate the Budget soon after it takes place.
In that context, I wish to say also, and again agree with the noble Lord, Lord Newby, that the case for a separate taxes management Bill is overwhelming. It is not all that long ago that the Finance Bill was contained in a single volume. It then became two volumes. We now have 409 pages of volume II entirely devoted to schedules. That is at a time when I understand that a committee under the chairmanship of my noble and learned friend Lord Howe of Aberavon is trying to simplify the existing structure of tax legislation. It is going far faster than my noble and learned friend and his committee can possibly hope to keep pace with. Therefore, the case for those matters being debated quite separately—on the one hand, the Chancellor's proposals as far as they affect the economy and, on the other hand, the technical stuff, which I am almost inclined to describe as "garbage", which turns up in the other more esoteric aspects of the matter—is overwhelming.
As regards the specific measures, my noble friend Lord Boardman referred specifically to corporation tax and challenged the Government on the overall situation. The Minister gave the impression that the overall effect of the Chancellor's proposals over the lifetime of this Parliament would be to reduce corporation tax and the revenue derived from it. My understanding is that that is not the case. No doubt the noble Lord will correct me if I am wrong. If I am correct, I hope he will say that 1576 the overall impact will be to increase corporation tax, taking all the measures into account, rather than otherwise.
Similarly the noble Lord, Lord Newby, and my noble friends Lord Lucas, Lord Northbrook and Lord Dartmouth all referred to the capital gains tax changes with regard to retirement relief. I share the views which they expressed in relation to that. The issue of ACT has been debated already at considerable length and I do not wish to detain your Lordships' House on that subject now.
However, as we are talking more and more about the overall economic situation in terms of a three-year period, I should like to draw your Lordships' attention to the matter which we debated at some length during the proceedings on the Social Security Bill some while ago; namely, the Budget Statement made by the Chancellor of the Exchequer on 17th March in another place, in which he said:Further reforms will also ensure that no one pays national insurance for the first £81 of their weekly earnings. All employees earning between £64 and £81 will have their rights to benefits protected".—[Official Report, Commons, 17/3/98; col. 1106.]Noble Lords will recall that in the debate on the social security legislation there was much dispute about whether the Chancellor of the Exchequer referred to "further" or "future" reforms. However, at all events, it was a major feature of the Budget speech and was certainly picked up in press reports. Nevertheless, your Lordships will look in vain to find any reference to it in this Finance (No. 2) Bill. As this is a matter involving some £1.3 billion, we should at least ask the Government whether this will happen at any time over the three-year period which we are considering, or whether it is simply some aspiration for a time far into the future which will not be relevant to our discussion of the overall economic situation.
I should like to pick up on another point that I raised yesterday; indeed, I have raised it three times now but have not as yet received an answer. I refer to the way in which the figures are presented and the extraordinary way in which the substantial sum of money involved in the working families tax credit—some £5 billion—has been shifted out of the budget of the Social Security Department and put into a so-called "accounting adjustment", together with a further £10 billion covering various other items. Clearly, the overall effect is very important. The Minister was kind enough to say last night that he would give me a clear answer in that respect.
The Minister referred to a particular response that the Government had given which he described as evidence that had been given to the Treasury Select Committee in another place. However, I have managed to obtain a copy of the relevant document and it does not cover the point that I was making originally; namely, whether it is the case that the Office for National Statistics does not approve of the way in which this matter has been handled. Indeed, the amount has been shifted out of the social security budget into the so-called, "accounting adjustment".
1577 From time to time there are occasions when one can say that such matters are a tax reduction or a public expenditure increase. But this is not a matter of that sort. Although it is to be handled by the Inland Revenue, the reality is that something like 80 per cent. of the working families tax credit will actually be cash which is handed out. One cannot conceivably regard that under any possible rules as a tax reduction. I am sure that the noble Lord, Lord Barnett, would not take that view. It is only if one assumes that everything that everyone has belongs to the Government that such a handout could be regarded as a tax reduction. Therefore, it is most important to clear up the issue. Equally, it is clear that, as far as concerns the reality, one ought to add back the figures into the social security budget.
I have one further point to make on public sector borrowing. Again, I hope that we will receive an answer tonight. The Government's objectives have changed significantly since the Budget was announced in March and this finance Bill has stemmed from it. We were told in March in the Red Book that, from the year 2000, there would be a budget surplus in each year until the end of the planning period. My understanding is that that is not so. We were told that there would be a reduction in the national debt; but again my understanding is that that is not so. We were also told that there would be a reduction in the percentage of national income taken by the state from now onwards to the end of the period. Again, my understanding is that that is not so.
My noble friend Lord Lucas referred to Clause 155 of the Bill. That deals in some considerable detail with the code for fiscal stability which is actually embodied in this legislation. Had that code been formulated in March, it would have had to be radically rewritten by now. Quite clearly, there has been some fundamental change in the Government's overall policy between then and now. That brings me to the major point; namely, the major reversal which has taken place.
The declared policy of the Government before the election and immediately afterwards was very clear: it was to pay for increases in the budget of the education and health departments from savings on social security. That simply has not happened; indeed, it has been a demonstrable failure. Regrettably, in some ways, we have seen that reflected in the decisions as far as concerns the composition of the Government during the past few days. In passing, I feel bound to say that I greatly regret the fact that Mr. Frank Field felt unable to go on serving in the Government. Certainly government of any quality and of any party need people with the kind of expertise and experience that he has.
However, the proposals which were made were clearly not implementable and, therefore, were not implemented. But what strikes me as quite extraordinary is that we now have a new Secretary of State for Social Security, Mr. Alistair Darling, the former Chief Secretary to the Treasury. As Chief Secretary to the Treasury, Mr. Darling was presumably trying to achieve the Government's objectives of reducing the amount of money which was spent in the social security budget. As far as one can see, he ought to have been pressing 1578 on an open door as regards social security Ministers. However, between them, they failed to cut the welfare budget and, correspondingly, there has been a massive change in the Government's overall policy. We have been assured by the Prime Minister and others during the past few days that it has all been a terrible mistake but that now Mr. Darling will sort it out. It is not simply a case of him being a poacher turned gamekeeper or a gamekeeper turned poacher; indeed, in effect, he is a gamekeeper turned gamekeeper. But the birds have already flown.
We have been told time and time again—indeed, by the Minister last night and again today—that the Government are now planning public expenditure over a three-year period. Unlike periods in the past when previous governments always looked at such matters over a three-year period but did not seek to set them in concrete, such plans are now fixed and cannot be changed. But those plans include a massive increase in social security expenditure. Therefore, I hope that the Minister will be able to tell us today what the actual outcome will be. Will it suddenly be the case that these plans are not as set in concrete as they were before, or will we have a cut in the social security budget which Mr. Darling, having failed to achieve it as Chief Secretary, will now manage to do as Secretary of State for Social Security?
That brings me to the overall situation with regard to public spending in relation to this Finance Bill. It is sometimes said that the danger lies in the increase which is now planned, in contrast to what was thought to be the case last March when this Finance Bill was coming to fruition. We were told then that there was a danger that there might be spending into a recession. Of course, it is always possible to do that if one has a boom or bust and stop-go policies, which the Government have declared they are not going to have. We are told that there will be a sustainable rate of economic growth, and I shall turn to that point in a moment. However, the Government have really short-circuited that boom and bust process.
I turn now to certain points which many noble Lords have raised during the course of this debate; namely, the situation as regards the independence of the Bank of England. Many press statements issued in the past few days have indicated that the Chancellor of the Exchequer is supporting the policies of the Bank of England. But, in that context, it is important to realise that the Bank of England, independent though it may be—or at any rate is said to be—can only operate within the context set by the Chancellor of the Exchequer.
That brings me to the points made by the noble Lord, Lord Desai, with regard to fiscal policy. The Government's failure to do what they said they would do in the comprehensive spending policy document means that there is bound to be upwards—not downwards—pressure on the Bank of England Monetary Policy Committee to increase, not to decrease, interest rates. The Chancellor cannot wash his hands of the whole affair. What he is doing is setting the framework; what the Bank of England is doing is simply spelling out the consequences.
1579 It is tempting to go into the point, which I made in an intervention to the noble Lord, Lord Desai, as to whether the Bank of England is concerned only with interest rate policy and not monetary policy. My feeling is that monetary policy is still in the hands of the Treasury as regards the funding of the PSBR. However, it is unfashionable to talk of M1, M2 or M3, which used to preoccupy many of us some years ago. Therefore I shall not pursue that point. However, I shall pick up a point which a number of noble Lords have made, for example, the noble Lord, Lord Barnett, my noble friend Lord Northbrook and my noble friend Lord Birdwood, with whom I have discussed the matter. He had hoped to be present this afternoon but was unable to be here. I refer to the point of whether the guidance to the Bank of England should be changed and whether the Chancellor of the Exchequer should ask it either to change its timescale on this matter—that point was made recently in Mr. Kearn's National Westminster review—or should tell it that inflation is important but it must also take into account growth and the overall economy.
This debate has been rather divided between economists and accountants. I declare myself in the first camp rather than the second. In that context I think there is a problem here as regards the way in which the Bank of England operates. I take the point of the noble Lord, Lord Desai, with regard to one instrument and one objective. I suspect that point may have been missed by some of the accountants. In all events I think it would be difficult for the Bank of England to change its remit in the way suggested because effectively it would take over the whole of economic policy, not just the determination of interest rates.
The overall effect of this Finance Bill, and particularly the public expenditure change, gives one real cause for concern with regard to the future of the economy. That is a matter which all of us must regret. That situation has manifested itself more and more. I refer to recent statements by the board of Rover, or the CBI, or this morning's statement by the London Business School. I refer also to the points made by the noble Lord, Lord Bruce of Donington, with regard to productivity and the exchange rate. It is extraordinary that the Chancellor of the Exchequer should have attacked particular companies on their productivity without really examining whether they were service companies or manufacturing companies. I do not think there is any doubt that the effect of the public expenditure exercise, combined with the effects on monetary policy and the effects on interest rates, and the upward rather than downward pressure on the exchange rate, will have a serious effect on many sectors of the economy. I fear that we are heading for "stagflation", to use an old-fashioned term.
While the Government have said that they are aiming for a high and sustainable rate of economic growth, the reality is that the rate of growth which they now anticipate is, by historic standards, remarkably low. I declare an interest as a governor of the National Institute of Economic and Social Research, which has suggested that the rate of growth may be minimal for the remainder of this year and probably only about 1580 1.5 per cent. or so the following year, and not much higher the year after. By historic standards those are low rates of growth. We may avoid a recession—although I fear that may not be the case for reasons I have mentioned—but we are in no great danger of a boom or bust situation because the rate of economic growth I have mentioned does not indicate any major change. I believe we face the prospect of higher interest rates, more borrowing, and—as a number of noble Lords have suggested—higher taxation, too. That, after a year of the new Government is a gloomy picture.
Certainly there is one thing which is true: forecasts of all kinds are extraordinarily unreliable. I see that the Minister nods his head in agreement. Just 18 months ago I said in another place that I was making my final speech on a finance Bill. That was after 33 years of speaking on finance Bills with the noble Lord, Lord Barnett, and others. As there is often more than one finance Bill in a year, I suppose I have spoken on more than 40 finance Bills. They have varied greatly in quality but this one gives me considerable cause for concern for the future.
§ 7.36 p.m.
§ Lord McIntosh of Haringey
My Lords, the noble Lord, Lord Higgins, ended his speech by saying that forecasts are notoriously unreliable. I nodded approval because I was reminded of Casey Stengel, the manager of the New York Yankees, who said exactly what the noble Lord has said. He said that forecasts are notoriously unreliable, particularly when they concern the future. They are the worst kind, he said.
We have been criticised for the timing of the debate on the Finance Bill. I was interested to hear the point made by my noble friend Lord Desai, which was echoed by the noble Lords, Lord Jacobs and Lord Newby, and finally by the noble Lord, Lord Higgins. As my noble friend will remember, we had a debate on the economic situation soon after the Budget because that was in Opposition time. If there is any lesson to be learnt perhaps it should be learnt by the Opposition Chief Whip, who might wish to devote some Opposition time to a debate on the economic state of the nation immediately after the Budget when your Lordships' undoubted expertise may have greater influence than it is likely to have some two days before the Summer Recess.
Noble Lords complain that we do not have an input into taxation matters but that was, after all, the result of the Parliament Act 1911. That Act was enacted because Lloyd George's "People's Budget" of 1909, having been debated in all-night sittings in the House of Commons all through August and September with Cabinet Ministers speaking in relays to defend the budget, was then overturned by the House of Lords, plunging the country into chaos. I do not think that we want to go back to that situation. I think we should maintain our inferior status as regards taxation.
The debate was of great interest to me. As has been said, so many noble Lords who took part are accountants and economists. I am a mere market researcher and therefore I must do my best to keep up. I was interested to note that, for once, overall approval for the Budget 1581 and for the Government's economic strategy came from both Opposition Benches. Not all Members of both Opposition Benches approved of it, but it was useful to have support from the noble Lords, Lord Marlesford and Lord Jacobs, for what we are trying to do.
I have listed 14 topics that I must cover. Therefore I shall race through as best I can. First, there is the fundamental issue of growth forecasts and whether we are being prudent in our spending plans and in our taxation plans. The noble Lord, Lord Boardman, said that the spending review commits everything that we have available. My noble friend Lord Barnett said that we should take pessimistic forecasts seriously. The noble Lord, Lord Newby, made the same point. My noble friend Lord Bruce referred to the CBI surveys indicating a downturn in business expectations. All of those things are true. It is true that we should take a particularly prudent view of public expenditure and public revenue in the light of the likely future for the economy. That is exactly what we have been doing. Indeed, in the Comprehensive Spending Review and the Economic and Fiscal Strategy Report, we have down-sized expectations on the previous position. The result is that our expectations are very much in line with the expected growth of the average independent forecasts and, importantly, our spending projections are based on the lower end of the ranges. We continue to expect growth of 2 to 2½ per cent. this year and 1¾ to 2¼ per cent. next year. Our spending projections are based on the lower end of those ranges.
But in many ways there are still buffers between us and the disaster that so many noble Lords take some delight in forecasting. First, we are over-achieving on the golden rule. The margins on the current Budget build up with surpluses of £7 billion, £10 billion and £13 billion. Our short-term projections, as I said, are on a lower growth path than they were before. Let me be precise about what they are now—what I have given are the earlier figures. The figures are: 2 per cent. in 1998 and 1¾ per cent. in 1999. That is in line with the latest view of most independent forecasters.
We have made cautious assumptions which have been audited by the National Audit Office, including: a 2¼ per cent. trend growth instead of the previous 2½ per cent; only direct effects of our Spend to Save programmes; a modest downward trend in VAT receipts as compared to the flat trend that we assumed before; and reserves in both the Annually Managed Expenditure and managed Departmental Expenditure Limits. I say to the noble Lord, Lord Newby, that there are significant reserves. However, they are less necessary when public spending has been set out in a firmer way for three years than when it is for only one year. The opportunity for departments to plan their expenditure more effectively is very much greater with three-year planning. I simply do not accept that our expenditure plans or expectations of revenue are unsustainable. Of course departments must stay within the cash limits, as they have always had to do. But the buffers that I have described are enormously important.
1582 The noble Lord, Lord Higgins, returned to the charge that he has made before about social security expenditure. I say to the noble Lord again that social security expenditure, at 2 per cent., is below the expected rate of growth and below the expected rate of inflation. That is a reduction in real terms.
But, more importantly, social security expenditure is not so much the kind of hand-out expenditure that we had, given the higher unemployment in the 1980s and early 1990s, but is much more positively family related expenditure. I mentioned that in my opening remarks. Our deliberate intention is to reduce child poverty. We believe that to be a profoundly important investment in our future. If that counts as social security expenditure, then so be it. Whatever our plans are, they are to cut spending in areas of failure, not spending on positive benefits. The aim is to cut child poverty and poverty among the disabled and the long-term poor.
We talked about the role of the Monetary Policy Committee and the respective role of monetary and fiscal policy. Although there was disagreement, it was not particularly on party lines. Some of the distinction made between monetary and fiscal policy has been too facile. Of course the Monetary Policy Committee considers fiscal matters, and the Treasury considers monetary matters including the question of money supply. But delegation of decision-making on short-term interest rates to the Monetary Policy Committee means that the Government cannot, as in the past, rely on fiscal drag, an inflation tax to cover up a poor control of public expenditure. That is important in relation to the remarks made by the noble Lord, Lord Lucas.
I say to my noble friend Lord Desai that in that respect we have not abjured using fiscal policy for short-term ends. What we are saying is that it should be used, if necessary, for short-term ends but always within the context of the golden rule for the economic cycle as a whole.
I now turn to the issue of the golden legacy to which the noble Lords, Lord Marlesford and Lord Higgins, appear still to adhere. I find that increasingly extraordinary as we move away from the election. Thanks to the boom-bust policies of the party opposite, the past 20 years have seen the two deepest recessions and one of the largest booms since the war. It cannot be denied that that is the case. They have damaged growth, held back investment and cost jobs. Last May we inherited an economy that was in the middle of another short-term inflationary boom caused by the fact that the then Chancellor refused to accept the advice of the Governor of the Bank of England and take the necessary action. We inherited a history of excessive government borrowing and rising public debt, while public investment had been neglected. The burden of public debt under the previous government doubled from 1991 to £350 billion; that is about £15,000 for every family in the country. It cannot be said that that was a golden legacy, however one attempts to massage the figures.
We were criticised by the noble Lord, Lord Higgins, who has raised the matter before, for the treatment in the accounts of working families tax credit. The situation is very straightforward. Income tax credits count as 1583 government expenditure when payments to an individual exceed that individual's total income tax liability. As the noble Lord said, that is money that is handed out. The position of mortgage income relief at source (MIRAS) or life assurance premium relief at source (LAPRAS), is exactly the same as it was under the previous government. In other circumstances it is negative revenue which reduces government receipts. But 80 per cent. of working families tax credit will count as government expenditure. It will appear in Annual Managed Expenditure and therefore it will appear in Total Managed Expenditure. There will be no departure from previous practice. All the definitions have been approved by the National Audit Office and the Office of National Statistics, which will make a final decision about the accounts when they receive the European System of Accounts update for 1995, in September this year. Nothing underhand is being done. Nothing is being concealed. There are no smoke or mirrors of any kind.
§ Lord Higgins
My Lords, I am deeply grateful for the trouble that the Minister has gone to so far as this matter is concerned. Is he saying that 80 per cent. of the working families tax credit will appear as part of the social security budget?
§ Lord McIntosh of Haringey
My Lords, I did not say it would appear as part of the social security budget; I said it would appear within the Annually Managed Expenditure. Frankly, I do not know the answer offhand as to in which category it will appear, but it will appear as public expenditure. Anyone can aggregate or disaggregate the figures as they wish.
We then had some debate about wage inflation. The conflict between the fears of the Treasury Select Committee which reported today and the London Business School which reported this morning is significant. We do not in any way underestimate the dangers of wage inflation. We systematically seek to separate out wage increases which are the result of increases in productivity from those which are not. We are properly concerned about the latter category.
Noble Lords also referred to the unemployment figures. The noble Lord, Lord Marlesford, expressed great interest in the constituency figures, which are only claimant unemployment, whereas, as my noble friend Lord Bruce rightly recognised, we have moved from emphasis on the claimant unemployment to internationally recognised figures for employment based on the Labour Force Survey. I believe that that is a recognised improvement. There was criticism from the noble Lord, Lord Boardman.
§ Lord Marlesford
My Lords, that may well be but the fall in the figure of unemployment is quite remarkable. In the United Kingdom between the years 1996 and 1998—a period for which, in terms of unemployment, the previous government had some responsibility—total unemployment fell by 37 per cent. 1584 It may be that absolute figures are different, depending on whether you use the ILO or the claimant measure. The proportion of the fall is very considerable.
§ Lord McIntosh of Haringey
My Lords, of course, and no one denies that there has been a fall and the two sets of figures go in parallel. I remember the late Lord Wyatt of Weeford accusing me of throwing 500 people onto the dole by using higher figures derived from the Labour Force Survey. He said: "Where shall we find the money for them?"
I turn now briefly to the remarks of the noble Earl, Lord Dartmouth, about secondary legislation. There has been no change in the practice. The same proportion of tax legislation arises in secondary legislation or primary legislation as in the past. Secondary legislation is useful because it allows for proper consultation with the professions and business and other interested bodies.
As for corporation tax, there was general agreement that we ought to get rid of advance corporation tax. Doing so meant that we had to change the method of payment of corporation tax. We did so by phasing in over four years the system of instalments. That change applies only to 20,000 out of 700,000 companies in this country.
The change means an increase in corporation tax take in one single year, but after that the figures are the same as they would have been in previous years, except that, as I made plain in my opening speech, corporation tax is at a lower level than ever. I repeat to the noble Lord, Lord Higgins, that in total we shall take £1.5 billion less in corporation tax over the period of this Parliament than would have been the case under the old system.
On capital gains tax, I do not accept even the view of accountants that the situation will in the longer term be more complex. Of course, while we have indexation and the taper for investments which cover both periods, we have to calculate on both bases. But in the longer term, first, the indexation calculation is frozen and will never change again. Secondly, in the longer term there will be fewer and fewer indexation calculations and more of the simpler taper calculations. The most important point about capital gains tax—I refer to those who mentioned the abolition of retirement relief—is the distinction which is made between business assets and other assets. I believe that that is an important change for small businesses. I sold the majority share in my business in 1988 after 25 years. Because I was under 60, I did not receive any retirement relief at all. Retirement relief was subsequently improved, although it was extremely difficult to get.
However, with the taper, all the investments which I had had in a business asset over more than 10 years would have been taxed only at 10 per cent. That is a real improvement for small businesses. Therefore, I do not accept the charges which have been made.
On heritage assets and conditional access, we shall be quite flexible. For example, the conditional access requirement could well be fulfilled not by a "burglar's charter" but by having the assets exhibited in a local museum or gallery for part of the year. That has been generally welcomed and negotiations are still going on about it.
1585 Starting with the noble Lord, Lord Boardman, there have been criticisms about the distinction between capital and current expenditure. I must insist that the distinction which we are making—and we are doing it, not just talking about it as it has been talked about for 40 years—is consistent with the national accounts. It will be consistent with the European System of Accounts and it will be made to work. The important point is that when there is any disposal of assets, whether directly by central government or by local government, the receipts from that disposal of assets will be required to be used for investment purposes and not for tax cuts or for current expenditure, as they were under the Conservative government.
I must correct something I said earlier about growth projections in the Economic and Fiscal Strategy Report. I misread something that I had been told. In fact the growth projections for the Economic and Fiscal Strategy Report and the CSR were the same as those in the Budget. I apologise for that mistake.
I have dealt with working families' tax credits. I must reply to the noble Lord, Lord Higgins, about his understanding that it is not the case that we are continuing to plan for a surplus on current Budget accounts. I have given the figures. We are still planning for a surplus on the current Budget of £7 billion, £10 billion and £13 billion over the next three years. Government plans show net debt falling to less than 40 per cent. of GDP, which is exactly what we were saying before. It is only sensible to look at the debt in relation to the size of the economy, not in cash terms.
Some doubt was expressed as to whether there would be upward pressure on interest rates as a result of our spending plans. The Monetary Policy Committee has met since our spending plans were published and it did not raise interest rates. So I believe we can be assured of that.
The noble Lord, Lord Newby, expressed concern about advance corporation tax abolition and the effect particularly on elderly shareholders. The Paymaster General has undertaken to review the position of shareholders of modest means who are non-taxpayers. He has met Age Concern to discuss it and will announce his decision as soon as possible.
I shall write to the noble Lord, Lord Lucas, about the issue of tax simplification to which he referred. But it is a general concern. We recognise its importance. We think that self-assessment, after the first year, will make life much easier for taxpayers rather than the reverse. For tax returns submitted by September, self-assessment will not be required. Therefore, anyone who is in any fear of being confused by complicated tax has only to submit his return by September to get out of it. We have even won prizes for our instructions from the Campaign for Plain English, and that surprised me as much as it will surprise your Lordships.
§ Lord Higgins
My Lords, I do not underestimate for one moment the difficulty of replying to a debate like this and I apologise therefore for interrupting the Minister again. However, were we not told in March 1586 that there would be a reduction in the National Debt during the course of this Parliament? Is that still the case?
§ Lord McIntosh of Haringey
My Lords, we were told that there would be a reduction in the National Debt as a proportion of GDP, and that is what will happen. That is what I understood the noble Lord to be talking about.
A specific point was made by the noble Lord, Lord Higgins, in relation to CAT marks for individual savings accounts. We have just completed the consultation exercise on that and shall be considering the responses and announcing the decisions in due course. Therefore I ask the noble Lord to be patient on that matter.
I am sure that I have omitted many other aspects of this debate. It has been extremely complex, long, and well informed. I am grateful to all noble Lords who took part in it. If I have missed out any points that I ought to have covered, I shall certainly write to noble Lords, though whether I shall do so in the next two days is another matter.
I believe that, on the whole and with few exceptions, there has been some consensus that the Government are tackling the economic problems of this country with a degree of seriousness which the country, in due course and now, will commend, recognise and respect. 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 9th March), Bill read a third time and passed.