§ 3.8 p.m.
§ Lord Strathclyde rose to call attention to the rise in personal and business taxation under this government, and the warnings of the International Monetary Fund on the dangers of the planned record levels of public spending; and to move for Papers.
§ The noble Lord said: My Lords, I am delighted to bring the issue of the massive increase in taxation over the past few years to the attention of the House this afternoon. There are two reasons for initiating this debate. First, I strongly agree with the increasing number of noble Lords who argue that this House should be given more chance to debate financial matters. For this to happen on an Opposition Motion is not satisfactory. Ideally, we should hold a major economic debate as a matter of routine in government time soon after a Budget, without prejudice to the later right of the House to examine a finance Bill. I hope that, in his response, the noble Lord, Lord McIntosh of Haringey, will confirm that in future we shall do so. 852 However, for the time being, we have given the House this opportunity. Indeed, when I look at the distinguished list of names on the speakers' list, I believe that that decision was right.
§ The second purpose of the debate is to explore the Government's economic record and their steady drift from new Labour back to old, perhaps the only example of alchemy managing to transform something shiny into something depressingly familiar. Higher tax, higher spending, more waste, no delivery; the broad facts are incontestable.
§ There have been 45 tax increases since 1997, adding up to the equivalent of 10 pence on the basic rate of income tax. According to the Chancellor's own figures, the overall tax burden has risen by 3 per cent of GDP since the Prime Minister said that new Labour would not need to raise taxes.
§ The Red Book also shows that the Chancellor has collected £8 billion more in tax this year than predicted only a year ago. I know that the House will not be deceived. Such modest tax cuts as were conceded in the Budget are not a refund of this windfall tax bonanza. They will do little to offset the effects of rising national insurance contributions, higher taxes on company cars and the imposition of even more absurd new taxes, such as the energy levy, which the CBI has warned will seriously damage UK competitiveness. The energy levy will do nothing for our environment. It will hit, though, many of our hardest pressed industries, including farming. We will reverse it.
§ As taxes have soared over the past few years, are we not entitled to ask what is the nation actually getting for its money? John Lewis shops have a slogan—"Never knowingly undersold". For Labour's spin doctors it is, "Always knowingly oversold". The Chancellor revels in a slogan that would bankrupt any business copying his example—"Less for more".
§ Let us look at the real world outside Mr Campbell's briefing room. Everywhere, people and businesses are getting less while they are paying more. In the NHS, hospital waiting lists are longer, GPs are in despair, nurse recruitment is in crisis. In education, class sizes in secondary schools are bigger, schools are drowning in bureaucracy, teacher shortages are worse than ever. In the fight against crime, there are now 2,500 fewer police officers than there were and violent crime is higher. In transport, the rail network is in crisis, bypasses around country towns and villages have been axed, and the London Underground has stagnated for four years while the Deputy Prime Minister has failed to make a single decision. And today the countryside faces ruin. How can anyone admire such a record? More effort has gone into re-presenting the same figures than into achieving a single additional police officer.
§ I hope that the House will agree that it could all have been so much better. In 1997, the Labour Party inherited an economy that was exceptionally strong. Unemployment was falling fast. If it had continued falling at the same rate as in the last three years of the previous government during the first three years of this Government, we would have broken through the 853 1 million barrier of unemployment on the claimant account last July rather than waiting until today. Inflation was low and falling; tax levels were lower than those of most of our main competitors; strikes were a thing of the past; and our economy was growing 1 per cent faster than the EU average.
§ Initially, the Government seemed to have learnt from the disastrous record of their Labour predecessors. They claimed that they had abandoned tax and spend; they made a great show of following the spending plans of the previous Conservative government. They basked in the rewards that followed. I welcome good news as much as anyone. It is good that unemployment has gone on falling and inflation remains under control. But, at the same time, would it not be just to recognise that the foundations of that success were laid long before this Government came to power? After all, even this Government's prudence was borrowed.
§ Sadly, in the past 18 months, the Chancellor has thrown off the mask; old Labour is on the move again. Taxes have soared; tax increases are hitting the creative and hard-working; regulation is now our greatest growth industry; our share of world trade has declined; and our growth rate has now sunk below the EU average.
§ Like every one of their Labour predecessors, this Government never delivers what they promise. They increasingly remind me of one of those postcards that drop through the letterbox decades after it was posted. We are so amazed that it has finally arrived that we ignore its late delivery and overlook that it was written a long time ago and sent to those who have long moved on.
§ The Government came to office talking of welfare reform, but they have unleashed the biggest extension in means testing in our history. They pledged no tax rises, but have taxed business and families more than any government in memory. What a rich irony it is that the Chancellor of the Exchequer calls himself prudent. The reality is that he has sought out everything that is far-sighted and prudent—and then taxed it. Pensions, savings, insurance, marriage, private health care, home ownership, even the family car, on every one of these items where prudent people try to put something aside, the Chancellor has targeted his tax rises. He has penalised the very virtues that he claims to uphold.
I cannot think of any tax rise more retrograde than his massive tax raid on pensions savings. It has cost people saving for pensions a truly shocking £5 billion a year, rising towards £6 billion next year. How can this assault and battery of prudence be defended? The Sunday Times put it rather well last weekend. It said:
it is like Gordon Brown leading a £25 million Brinks Matt robbery every day of the working year".
§ Little wonder that rumours abound that government Ministers are about to move their summer holiday venue from Tuscany to the Costa del Sol.
§ There is a simple test for governments who cannot stop patting themselves on the back: let them take pride in their achievements. Do not do it stealthily; do it with pride. Be open, be up-front, be honest. Is it too 854 much to ask? Let the Chancellor write to everyone going without because they have been told that they must save more for their pensions and let him explain why he has helped himself to their savings and made their retirements less secure.
§ Let him do the same to those buying their own home. Let him explain to professional families why it is "prudent" for him to drive them into years of additional debt and sometimes price them out of homes by savage increases in stamp duty. Let him explain to home owners in the south-east how their homes will suck their families into feeding the ever expanding appetite for inheritance tax. Let him explain to savers why he has cut by almost half the amount that anyone can put aside each year in tax free savings. It is no wonder that the savings ratio in this country has plunged to an all-time low, from 10 per cent to 3 per cent. These tax policies demolish government claims to support personal responsibility and long-term saving.
§ We, on the other hand, will support saving. We admire independence; we support freedom from dependence on the state. We will help 16 million savers by abolishing income tax on savings or dividend income, except at the upper rate, and we will take 1 million pensioners out of tax altogether by increasing the age-related allowance by £2,000 per year.
§ The Government, on the other hand, will not trust people to take care of their own money in retirement. They insist on their buying annuities; they distrust self-reliance and independence; they want people to look instinctively to the Government for care. The blunt truth is that they want gratitude. Mr Brown believes in the forelock society.
§ The effrontery of the Chancellor is seen in his expectation that people should be grateful for a feeble tax reduction in the Budget. We welcome the extension of the 10 pence band; we welcome any reduction in taxation from the Government. But what it amounts to is a Chancellor who last year gave us a 75p a week pension increase—and who was affronted when pensioners complained—now giving us a 69p tax reduction.
§ Well, he should not be surprised if taxpayers are cynical. After all, this is a "10p up, 1p down" Budget. Since 1997, the Government have put up taxation by £28 billion. A recent study by Pricewaterhouse indicated that two-thirds of the tax advantage that we enjoyed over our main European competitors in the mid-1990s has been tossed away. We now pay more tax than people pay in Spain, Germany, Ireland or Japan—not to mention the United States of America, where thanks to the recent defeat of the Democrats, people can now look forward to a 1.6 trillion dollar refund of their own money over the next few years.
§ Yet it took years before the noble Lord, Lord McIntosh of Haringey, could bring himself to admit what was obvious to everyone in the land—that new Labour had raised tax and broken the Prime Minister's promise that he had no plans to put up tax at all. Sadly, where once Britain was the free enterprise, low tax capital of Europe, it is once again becoming over-taxed and over-regulated.855
§ We even have a new phrase in the English vocabulary: "the stealth tax". Recently, the Centre for Policy Studies listed 45 different stealth tax rises. Even in the latest Budget we have seen more, such as the increase in VAT on spectacles planned for June; or the new quarrying tax that will hit industry for £380 million. One tax was so stealthy that the Chancellor did not even mention it: a special levy on middle incomes, a swingeing 7.5 per cent increase in the national insurance threshold. Some 9,000 police officers, 23,000 senior teachers and over 20,000 key NHS workers will be up to £3 a week worse off. Yet the absurdity is that these are the very people Labour says it wants to encourage. The moral of the story is this: there they go again—say one thing, do another.
§ Indeed, when the Chancellor singles you out for praise, that is the time to reach for your purse. We have already seen how he deals with prudence; he taxes it. Another favourite phrase of his, and of the Prime Minister's, is "the new economy". But look what happens. It gets taxed. The Inland Revenue's notorious IR35, so devotedly defended by the noble Lord, Lord McIntosh of Haringey, will drive the brightest and best firms in the new economy out of Britain in droves.
§ Another key buzz word is "enterprise". Well, it is a strange kind of help that the Chancellor gives to enterprise—he taxes it. The CBI calculates that the tax burden on British business has risen by £5 billion during this Parliament. New regulations have added another £12.3 billion to business costs. The contraction of manufacturing industry has accelerated, despite all those pre-election promises. Have we not yet learnt from bitter experience the dangers of loading tax on to business?
§ Government should take far more seriously the growing tide of profit warnings and the torrent of complaints from business about tax levels. The harder we make it for businesses to stay competitive, the harder the decisions they will face. Multinationals do not need to base themselves in Britain if higher tax is the result. Investors do not need to trade in the City and go on paying stamp duty when every other financial centre is cutting it. Small businesses do not need to expand, if all it means is more red tape, more interference and more tax.
§ The noble Lord, Lord McIntosh, never tires of telling the House how he, as a small businessman, cares for small businesses. But I fear that the noble Lord is becoming increasingly out of touch like everyone else after four years in a ministerial motor. Ministers can read out the brief, but they do not have to live out the life. They give us the highest petrol prices in the world, at huge cost to business and the countryside, but they never have to take out £50 to fill the tank. Indeed, I am told that Mr Brown has never filled up a car in his life.
§ Ministers do not see small businessmen sitting up night after night wrestling with the morass of inspections, regulations, form-filling and payroll complications that flow from every new Labour Bill. They do not know what it means to labour for a 856 lifetime to build and save and to know that it will be taken away on death in inheritance tax. The Conservative Party does understand those fears and worries—and when we return to office we shall not forget.
§ In the 1980s, Chancellors—most notably my noble and learned friend Lord Howe of Aberavon and my noble friend Lord Lawson of Blaby—set out with the laudable aim of simplifying the tax system. Mr Brown seems to have the opposite aim: to complicate the tax system. Never did I expect to hear the accountancy profession no less—the very people who gain most from Labour's tax complications—crying to high heaven for tax to be simplified. That is the measure of the Chancellor's achievement. It is as if the brewers were campaigning for prohibition.
§ My noble friend Lord Saatchi will deal with the difficult and uncertain prospects ahead and the alternative strategy that our party will follow. But I worry when I hear Ministers claim that they have conquered the economic cycle. That, after all, is the English translation of the soundbite drivel about boom and bust. We have seen in the past few months in America just how illusory talk of a new paradigm can be, how suddenly a storm can roll up in a previously blue sky, and how fragile business, investor and consumer confidence can be.
Even Mr Micawber would have seen something very troubling in the central Budget strategy of increasing spending faster than national income is likely to rise. When the pro-government Financial Times said that the Government had turned prudence into a matter of faith, not a matter of fact, the Chancellor ignored it. When the authoritative IMF warned of,
risks … tilted to the downside",
and said that it,
would be prudent to abstain from introducing significant new spending commitments … in the March 2001 Budget",
§ the Chancellor rebuffed the IMF.
§ Now, financial markets around the world are reflecting concerns about economic storm-clouds ahead as real companies in the real world are seeing their profits decline. But the Chancellor sails on blithely, like a surfer ignoring the red warning flags. If his faith is not rewarded, the people of this country will pay a heavy price in lost jobs, service cuts and even higher tax. As if the families, businesses and professionals of Britain have not already had to pay this new Labour Government far too much, for far too little, for far too long.
§ My Lords, I beg to move for Papers.
§ 3.28 p.m.
§ Lord Barnett
My Lords, I begin by agreeing strongly with the noble Lord, Lord Strathclyde, at least in his request that, in future, we should have major economic debates at the time of the Budget in government time— although I am bound to say that we used not to have them for about 18 years previously.
857 The noble Lord is right. There have been substantial increases in what the Opposition have come to call "stealth taxes". There have also been, at least in the past year, increases in public expenditure. The noble Lord is therefore right on both counts. He would have more credibility if he were to tell us that all those stealth taxes, as he calls them, would be removed immediately by his party and all the major public expenditure increases would not take place. But, as he knows, the Opposition have agreed that if by any mischance they were to become the government on 3rd May, they would retain all the major public expenditure increases. So the noble Lord lacks credibility in everything he has said on both scores.
I note the expression "stealth taxes" and, as I have said, there have been increases. But the Tory charges in regard to stealth taxes are hard to sustain. Those are not my words. They come from an article in The Times, not a strongly Conservative newspaper. Anatole Kaletsky wrote last week:Tory charges about a massive 'stealth' tax increase under Labour are … hard to sustain".Those are his words. He is hardly a Labour supporter or a supporter of this Government.
On public expenditure, the noble Lord did not tell us about the savings that his party could make and intended to make. That is not surprising. However, it is not difficult to find some. After all, public expenditure is somewhere between £300,000 and £400,000 million. So finding the odd million or two would not be too difficult. Indeed, I can give the noble Lord an example: he could scrap the Barnett formula. I was rather surprised that he did not suggest that—or perhaps not, coming from his position.
Perhaps I may turn—as the noble Lord did briefly— to the "warnings" from the IMF mentioned in the Motion. The noble Lord did not speak at great length about them. I understand why. I tried to find them. I see the noble Lord is indicating that his noble friend will deal with them later. I look forward to hearing him. I tried very hard to find those warnings in the IMF document of 23rd February; I had some difficulty. In certain circumstances, and according to certain assumptions, one can, or may, make assumptions that indicate that we shall be in terrible trouble. But on reasonable assumptions, and on reasonable projections, the IMF comes to certain conclusions in its report, which the noble Lord did not quote. I could quote them, but I shall not do so in view of the time. However, if the noble Lord cares to refer to paragraphs 9, 10 and 14 in the report, he will see that they give full account of why the IMF thinks that the present economic position is both sound and, in its words—not those of the Chancellor of the Exchequer—"prudent", which is a favourite word of the Chancellor.
The IMF also concluded that the Chancellor was absolutely right on his "golden rule", as it has been called; in other words, a separation of current expenditure from capital expenditure. The many businesses to which the noble Lord referred make a clear distinction between current and capital expenditure, but perhaps his great business experience 858 did not allow him to tell us more about that. Even if the noble Lord could find the public expenditure cuts, he knows, as we do, that they would not be found immediately. So we are told that we would have a situation where tax cuts would be made, without public expenditure cuts. If one reads the IMF report carefully, it is clear that that is precisely the criticism that it is making. It is not making a criticism of the Government; it is making a criticism of the Opposition's policies. Therefore, I am not too surprised that the noble Lord did not quote from the report at length. I look forward to hearing what the noble Lord, Lord Saatchi, has to say.
So has the Chancellor of the Exchequer been prudent in his Budget? Well, he only used the word twice this time in his speech. In the past he has used it much more frequently. He told us that he has been prudent. Others have said the same; the IMF, and another unusual source, the director-general of the Institute of Directors—an organisation not normally so friendly to the Government. They all think he has been prudent. I am not surprised. In my own view, he has been too prudent because the £3.6 billion we have been told will be spent this year, with tax reductions, is, in practice, unlikely to be spent. It was also under-spent during the past year. I believe that he has been prudent. I would have much preferred a little less of the bits and pieces of tax cuts that most people have hardly noticed—and, indeed, will hardly notice—and rather more in the way of public expenditure.
I have something of a guilt complex on the question of public expenditure, because I spent more than five years doing something that I never wanted to come into politics to do; namely, cut public expenditure. I readily admit that I am talking about a very different economic environment. In those days, we had not inherited what the present Chancellor of the Exchequer inherited. I willingly concede that he inherited a much better economic environment. However, like the rest of us, the noble Lord, Lord Strathclyde, knows that there is a great demand for more expenditure, especially investment, in all areas of public life—education, health, local authorities, police, transport and, indeed, investment generally. To pretend that one can do all that and, at the same time, make major tax cuts is, frankly, misleading not just to your Lordships but also—if anyone is listening outside—to other people.
There are other areas in which I hope the noble Lord, and all of us, would like to see some improvement. I have in mind, in particular, child poverty. I believe that the Chancellor of the Exchequer is doing far too little when he talks about halving the level in 10 years. We should be doing far more.
I understand that "prudence" should be the slogan, although I point out to the noble Lord and to the House that 1.8 per cent inflation is such that we could, in my view, live with a little higher and a little more public expenditure. That is my personal view. The 1.8 per cent is in UK terms. If one looks at the "European" scenario—if I may be so bold as to mention that word in your Lordships' House—it will be seen that the figure is much lower.
859 However, worries have been expressed not only by the noble Lord when quoting selective parts of the IMF report, but also by a certain William Rees-Mogg, who wrote an article in The Times on Monday of this week, as his regular weekly contribution. The article was, as usual, very well expressed. I believe that he is known as the noble Lord, Lord Rees-Mogg, in your Lordships' House, but in the newspaper he is called "William Rees-Mogg". You can tell from the photograph that it is him, even though it may have been taken some time ago! As I say, the noble Lord can be relied on to put his facts very carefully and to express himself well; and he did so in that article. He talked about the disturbing consequences that might be possible for world trade. That is perfectly true: there is the possibility of dangers in that direction. Indeed, we have already seen evidence of that this week with the stock market collapses about which the noble Lord wrote. The noble Lord quotes his colleague, Mr Kaletsky, from whose article I also quoted, who asked last week:How long can Mr Brown keep us this largesse?The noble Lord rightly depends on growth assumptions, which he concedes have been particularly cautious. They are likely to be rather better than he has forecast—that is, better than they have been this year. But it could all go wrong in two ways, as the noble Lord, Lord Rees-Mogg, tells us, because of "formidable imbalances" in the United States and the Japanese failure to restructure. Indeed, the noble Lord goes on to say that if they do restructure, it will,cause pain, and probably slow world trade".That is a fair statement to make; it is also the sort of doom and gloom, no-win scenario, that one expects these days from others in the media rather than the noble Lord.
It is possible that Mr Brown will ignore the potential dangers; it is also possible that we could see the end of the world. That would be something even better to write about! But what would the noble Lord, or anyone else, have done in the event of such a scenario? We are not told. It is like the perennial pessimist: you sit at home worrying about it, doing nothing. On a wall that is situated somewhere near my flat in London, someone has chalked a phrase; namely, "Be pessimistic, you'll always be happy". If I may say so, that really fits the noble Lord's article. It would be absurd to plan now for that kind of catastrophe. We have a strong economy; indeed, if one reads the whole of that article, the IMF makes it quite clear that we have a very sound and strong economy. Therefore, it seems to me to be absurd to act now.
My experience as regards expenditure and tax—regrettably, as Chief Secretary to the Treasury for those five years—is that they are not set in stone. As of now, one can only say that the economic position is good and sound. I commend the Chancellor's Budget to the House.
§ 3.39 p.m.
§ Lord Taverne
My Lords, as this Budget is the last of the present Parliament, this is a suitable time to review the record of the Chancellor of the Exchequer and to look forward. I intend to concentrate on the main lines of his stewardship and paint with a broad brush. The noble Lord has made the IMF report one of the issues in the Motion that he has put forward for debate. However, like the noble Lord, Lord Barnett, I was somewhat surprised that there seemed to be no mention of it in his speech, although I understand that that will be remedied later. Until I read the report, I had assumed from press comment that it was rather critical of the Chancellor's stewardship However, it has been grossly misrepresented. The IMF report generally is one of high praise for the Chancellor's achievements. It does not condemn his spending plans or his tax record. Of course, it sounds a note of warning for the future because there are question marks about the impact of a recession in the United States, as the noble Lord, Lord Barnett, pointed out. There are question marks about world trade and about the future of our exports particularly if the pound continues to be strong, or even strengthens against the euro.
It points out that our record on productivity, except perhaps in the past two years, has been poor, especially outside the information, communications and telecommunications sector. However, to invoke this report—as some of the press have done—as some kind of condemnation or criticism of the Chancellor's overall performance is, to put it academically, rather like criticising someone's performance because he has been awarded an alpha minus instead of an alpha plus.
The noble Lord attacked the Chancellor's tax increases. He made the reasonable criticism—as have many members of the Conservative Party—that the Chancellor has rather tried to hide the extra taxes he imposed. Some of the extra tax take is simply the effect of economic growth, but some is due to tax changes. However, like the noble Lord, Lord Barnett, I find it hard to see how the extra money which he has given to schools, hospitals and law and order—in our view rather belatedly—could have been given without some increases in taxation. We on these Benches differ profoundly from the general tenor of the Conservative Opposition's criticisms in that regard.
We applaud the Chancellor for his management of the economy overall. To some extent our sound position was due to the actions of a previous Chancellor, Kenneth Clarke, who for some reason was not mentioned in the noble Lord's speech although he mentioned all the other Chancellors. It is not clear why he has been deleted from the records. While applauding the management of the economy overall, as has the IMF, we go further in our criticism than the IMF. We have three main criticisms. As I said, they are the very opposite of those of the Conservative Opposition. Two of them are connected. The first relates to the public services. The Chancellor boasts that he has avoided stop-go in the economy as a whole. But he has imposed stop-go on the public services with a vengeance: two years of stop, about one-and-a-half 861 years of go. At the end of four years he has left public spending as a lower proportion of GDP than it was when the Government took office. It is no wonder that so many Labour supporters feel deeply disillusioned.
You cannot run the health service, education or the police efficiently if you alternate famine with feast. Nurses have left the service; it will take years to replace them. Experienced nurses have left, new ones will take a long time to be trained. Experienced teachers have left. It will take years to train new ones. There has also been a tragic wastage of experienced policemen who will now be replaced with raw recruits.
Unlike the Conservatives we do not criticise the Chancellor for some tax increases. In fact, we would have supported somewhat higher taxation at the start of this Parliament to support a more gradual and even increase in public spending throughout the past four years.
Our second criticism concerns the poor performance in productivity noted by the IMF—1.5 per cent per year on average. We did not catch up with our European partners and we fell further behind the United States. Why was that? The IMF blames poor education and low investment. Education suffered because the Government refused to increase Conservative spending plans in the first two years. The Chancellor sought to boost productivity by a series of tax changes. They have made the system more complex. I know of no evidence that they boosted productivity. Low investment has been the key factor and here it is the high pound which has done the damage. It has played havoc with our manufacturing base.
What could and should have been done? I have no doubt that if at the beginning of this Parliament we had announced our firm intention to join the euro at a competitive exchange rate, we could have done so shortly after and the pound would have been much lower for most of the past four years. Industry would have benefited enormously. Of course, there would have been risks and some disadvantages. We would have faced some of the problems which the Irish now have with interest rates which are lower than are ideally suited to their particular circumstances. I accept that. But as the report of the Select Committee of this House on the euro showed, the evidence of all the Irish witnesses was that they had done better inside the eurozone than if they had stayed out and better than they expected before they joined.
Further, as the governor of the Bank of France testified, businessmen throughout the eurozone have no doubt whatsoever that their position has changed dramatically for the better. They all see the benefits of a single currency. Indeed, throughout the eurozone there has been the kind of fundamental restructuring of industry which one saw when the Common Market was first founded. We lost out then because we failed to join; and we are losing out now. We are losing out now because investment and productivity have suffered grievously from an uncompetitive exchange rate.
862 Indeed, the Chancellor's announcement about the euro on 27th October 1997 was in our view the biggest single mistake which the Government have made in the course of their tenure. At that time they would have won a referendum with a landslide. I sincerely hope that the chance has not been lost for many years to come.
Let me turn to the future. For the next few years public investment will increase at a high rate, somewhat higher than the underlying or actual rate of economic growth is likely to be. Stability should not be affected for a while because the public finances can stand the strain. But by 2004 the rate of increase now planned will be unsustainable without major changes, as the IMF pointed out. Either spending plans must be cut back or taxes must go up. That is the fundamental choice we face.
The Conservatives' preference is quite clear: on no account must taxes be raised because high taxes hurt the economy. Their preferred model is that of the United States; so is that of most City commentators. They contrast the low tax, low spending and dynamic economy across the Atlantic with its recent high rate of growth and low unemployment on the one hand, with the so-called "sclerotic" economies across the Channel, weighed down with high taxes and high spending which have resulted in low growth and high unemployment.
I favour the European model. The popular contrast is misleading. Despite its undoubted success in recent years and its many admirable features, it is far from clear that the American model is more successful economically. There has been a kind of see-saw in the relative progress of Europe and America. Sometimes Europe grows faster; sometimes America grows faster. In the past five years, possibly the past decade, the United States has been up. Before that Europe was up. In the next five years Europe is likely to be up again. If one looks at the past 30 to 40 years, Europe has probably been the more successful. Indeed. if one looks at the productivity figures produced by the IMF—they are of great importance and enormously significant—one sees that despite the so-called "sclerosis", the claimed debilitating influence of high taxes in Europe and the great spurt from IT in the United States in the past five years, productivity per hour is higher in Germany and France than it is in the United States. Even in recent years, growth in the Netherlands, Ireland, Spain and Portugal has certainly matched that of the United States.
Of course, there is a downside to the picture. If we compare ourselves with the rest of the European Union, it is clear that they pay more in taxes. The Liberal Democrats sometimes give the impression that the answer to every problem is high taxation, but of course it is not. Taxes can be oppressive, they can limit freedom and they can stifle initiative. Nor does spending money automatically produce results and improve services.
However, certain vital qualities of a civilised society can be achieved only if we are prepared to pay for them. We should not only compare our taxes with 863 those of our European partners, but compare our health service with that in Germany or France, or the standard of their secondary schools, their vocational training and the level of skills of the average worker in industry. That is why their productivity is so high. We could also compare their railways and public transport with ours—or, for that matter, the average crime rate or the number of people in jail.
Over the next four years, the next Government will have to choose what kind of society this country wants. I prefer the European route. We do not want new cuts in public spending in the last two years of the next Parliament. If we want to achieve standards in our schools that approach those on the Continent and standards in our hospitals that a modern, civilised society is entitled to demand, public services must have priority, even if some taxes have to rise.
§ 3.51 p.m.
§ The Lord Bishop of Hereford
My Lords, I am considerably embarrassed to find myself speaking at this point in the debate. I should like to correct any impression that your Lordships may have acquired from my position in the list that I have any expertise in this complex and technical subject where angels fear to tread, let alone Bishops. I had hoped that the Government Whips' Office would slip me in at the end of the list of speakers.
I shall make three simple, brief points from what I hope is a non-partisan point of view. First, as the noble Lord, Lord Taverne, has just said, high taxation is not necessarily to be deplored. Indeed, it is to be welcomed, provided the money raised is used wisely for necessary and beneficial public expenditure in the interests of social justice and for the common good. Samuel Augustus Barnett was rector of Whitechapel at the turn of the last century. St Jude's was a depressed, poverty-stricken parish. he had inherited the traditional Victorian assumption that poverty could be put right by voluntary giving, but he quickly became convinced that that was not the case. He coined a phrase that all Christians ought to know and affirm:God loveth a cheerful taxpayer".The noble Lord, Lord Taverne, has just compared levels of public expenditure in this country with those in certain other European countries. On public transport infrastructure and some aspects of the education and health services, we are the poor relations. There is nothing to be proud of in that. The Government should boldly resist any mutterings that may come from the IMF and continue to make good the backlog of many years of neglect of public expenditure in this country.
My second point—this was mentioned by the noble Lord, Lord Barnett—is to welcome the Government's recognition of the problems of child poverty and the attention paid to the issue in the recent Budget. However, even with the help that was announced recently, child poverty will remain a problem and a scandal in this country.
864 There must be questions about the Government's ideological link between the best levels of child tax provision and the obligation to work, especially for single parents. Childcare must be an option for parents that carries no financial penalties. I understand where the Government are coming from and acknowledge the vital importance of work to the national economy and the fact that work outside the family home brings a proper sense of dignity, purpose and satisfaction to those who undertake it. However, there can be no more important work than childcare, which, by and large, is best delivered by parents. Means testing— targeting benefits—must make common sense, provided it is comprehensible, the system is manageable and the benefits are claimed. That is a considerable proviso.
My third point is a very specific one, relating to the small print of the Budget. Some of your Lordships may have missed this point. When the rural White Paper finally appeared in November last year, one paragraph in it brought great rejoicing to the hearts of Church people. It was in the context of a section affirming the usefulness of church buildings for community purposes. It stated:We are acting to support the community role of churches in rural areas. … we have announced that we will seek European Commission agreement to our proposal to reduce the rate of VAT (from 17½ per cent to 5 per cent) payable for repairs and maintenance on listed buildings which are also places of worship".We had been campaigning for that change for a long time, because the Churches pay far more in VAT on repairs than they receive in English Heritage grants in recognition of the part that they play in maintaining this significant aspect of the national built heritage. The most reverend Primate the Archbishop of Canterbury welcomed that proposal, but, alas, the Chancellor failed to persuade Brussels. We warmly welcome the Chancellor's Budget announcement of financial compensation to offset the refusal of Brussels to allow the reduction. The Churches will in practice benefit from a level of 5 per cent VAT on repairs to listed buildings.
I raise the question of whether the provision should be limited to listed buildings. The heritage constraints on adaptation of listed buildings for community use are very severe in many cases. Church buildings that are not listed are much more readily adaptable. The heritage lobby will not get involved in proposed changes to the internal arrangement and furnishing of such church buildings. If the provision was designed specifically with the aim of making rural churches available for community use, why is it limited to listed buildings? Did the Chancellor believe that Brussels might more readily agree if it were limited to listed buildings? Can that point still be pressed? We warmly welcome the compensation package, but we hope that the Government will continue to press the case in Brussels for a reduction in VAT not just on listed buildings, but on any other church building if the work would make it available for community use. Thus far, we welcome and are grateful for that development.
§ 3.57 p.m.
§ Lord Howe of Aberavon
My Lords, I follow the right reverend Prelate with pleasure and acknowledge the importance of some of the points that he made. I hope that he will forgive me if I address the more substantial underlying theme that was so effectively presented by my noble friend Lord Strathclyde. Like the noble Lord, Lord Barnett, I am delighted that this House has an opportunity to consider the Budget at this stage and wish to see further progress in that direction.
I endorse one point made by my noble friend. There is mounting anxiety at the rapidly growing complexity of the tax system. Part of that is due to the changes being made to meet the point raised by the right reverend Prelate about help for children. I recognise the need for that—indeed, I stressed in my maiden speech in the other place a hundred years ago the need for something like a tax credit system that would reach the people who deserved and needed it. However, the complications remain exceedingly difficult and are only one aspect of the tax jungle that the Chancellor is rapidly extending. It was said last year by chartered accountants that the tax system was,irrational, confused, damaging the economy and out of control.I suspect that the Budget will do nothing to improve that. I am grateful that the Chancellor continues to be committed to the Tax Law Rewrite project, which will at least simplify some of the issues.
My real anxiety is that put forward most formidably by my noble friend—the mounting incompatibility between public expenditure commitments and expectations of economic well-being over the longer term. I stress that it is over the longer term, because that was part of the point made by the noble Lord, Lord Taverne.
I was a little disappointed by the speech of the noble Lord, Lord Barnett. Over the years that we have sat opposite each other in this House, I had begun to form the impression that he was something of a reformed character. But his words today could have been taken straight from one of the speeches he made during the years between 1974 and 1979 when the unspeakable defended the indefensible.
§ Lord Howe of Aberavon
My Lords, I am prepared to acknowledge, as we must, that the Chancellor is entitled to a modest degree of self-satisfaction for the most immediate outlook. He is, indeed, probably the first Labour Chancellor ever to have been in the position of introducing a pre-election Budget in which modest short-term generosity was compatible with responsible economic guidelines. I believe that no other previous Labour Chancellor has had that opportunity. That is for a reason that has already been mentioned.
If one compares the position today with that as it was on 1st May 1997, outlined by my right honourable friend John Major in the other place a couple of days 866 ago, on 1st May 1997 growth was projected at 3.5 per cent per annum and inflation at 2.5 per cent; unemployment was falling fast and so was the public sector deficit. It is on the basis of those figures—growth that had started in 1992 before our exit from the exchange rate mechanism—that the Chancellor has been enjoying the second half of a period of eight years of sustained economic growth, built on the foundations laid by his predecessors, the most recent of whom—I am more than glad to add to the role of honour mentioned by my noble friend—is my right honourable friend Kenneth Clarke.
Therefore, to that extent, the Chancellor has done okay so far and, in some aspects, entirely well. He has recognised the need for strict control of monetary policy, and he has taken the step, which many of his predecessors would have liked to take, of giving more responsibility for that to the Bank of England. That has brought economic benefit and also political relief for the Chancellor because that matter is now being handled by another department. It was a logical consequence of our more tentative moves in that direction.
Thus far, he has also followed a reasonably disciplined fiscal policy. I do not mean disciplined in every respect but at least in the sense of maintaining a balance. He has followed, although by a different name, the medium term financial strategy which I was derided for pronouncing in 1980. He has endeavoured to follow the same guidelines, but he has done so in two rather curious ways.
During the first part of his reign, he stuck to our published spending plans for two years. Then, almost simultaneously, he accelerated it. We have seen a substantial growth in planned public expenditure accompanied—although, again, not from the outset—by a steady growth in the tax burden. As the noble Lord, Lord Taverne, said, for a long time that growth was not acknowledged and not disclosed. However, in the end, they came clean and acknowledged it. I shall not go over the components that made that up.
The basis for my real worry is concern about the future. Those spending instincts are developing into spending plans, notably as outlined in the Budget speech. Moreover, they are not only outlined; they are proudly proclaimed. I am worried by the tendency of the Chancellor in that context. Although he speaks,within our cautious fiscal rules",he is committing himself to increasingly extravagant projections. Education spending, he says, is,set to rise by 5.2 per cent. a year even after inflation".Health spending is,rising by 50 per cent. over five years".—[Official Report, Commons, 7/3/01; col. 308.]The projections go on further and further. Transport—he finally gets carried away, at col. 303, in a transport of delight—is,set to rise by 20 per cent. a year over the next three years … [in] our 10-year plan of £180 billion public and private investment".867 There, I fear that he is coming close to counting chickens long before they could ever be hatched.
Overall, he says, at col. 307:We will increase spending not by 3.4 per cent. a year, as we planned … but by 3.7 per cent. a year.alongside his forecast growth rate of 2.25 to 2.75 per cent. That is based upon a dangerously boastful belief that he has conquered boom and bust.
He is coming close to catching the occupational disease of economic managers, not excluding the chairmen of reserve banks as well as finance Ministers, who have come to believe that at least in their own country, whatever may happen elsewhere, they have abolished the economic cycle. I have to confess that even ex-Chancellors sometimes succumb to that illness. By the end of the 1980s I had been away from the Treasury for five years, and, even then, I was making speeches on the other side of the world praising the success of our economy in terms that made it sound as though we had learned to walk upon the water.
I make that concession by way of demonstrating to the Chancellor the risks that he faces. It is almost explicit in the following sentence from his speech:Britain must not repeat the short-termist mistakes of the 1980s—unfunded, unaffordable tax cuts, high interest rates"—of course—cuts in necessary investment, with no fiscal rules. We will not return to boom and bust".—[Official Report, Commons, 7/3/01; col. 308.]In the catalogue of what he there condemns, what is the difference between "unaffordable tax cuts" and unaffordable spending programmes? That is the real worry. Reversing spending would be much more painful and much more disruptive than reversing tax cuts. As the noble Lord, Lord Taverne, pointed out, that is the importance of the warning clauses in the advice from the International Monetary Fund. That body said:The magnitude of planned expansion in public spending is not without risks … It would be prudent for the March 2001 Budget to refrain from new spending commitments".Of course, that advice has implications. If we are seeking to say that we can enhance public services without raising taxes and without having unduly extravagant public spending plans, then we as a nation must begin to contemplate some aspects of the European model. European countries, for example, spend on health approximately half as much again as we do as a percentage of GDP. That additional half comes from the private sector. Therefore, it is a model that we must certainly examine. It has nothing to do with privatisation of the health service but concerns looking elsewhere to raise the finance to improve the services as we want.
868 I return to the point that we are really debating. The risk of trouble for this economy is much greater. Here, I quote the IMF:If the downside risks coming from abroad were to prevail … it would limit room to cut interest rates and would worsen the exchange rate overvaluation",and, again, I agree with the noble Lord, Lord Taverne, it would make it harder for us to join the euro—as indeed we should.
Those downside risks are not to be discounted when we look at Japan, which has constant and chronic problems, when we look at the hazards in the United States, and even when we consider the hazards of foot and mouth disease. I should not like to be in the Treasury now, counting upon a secure economic future on which to build the increasingly extravagant spending plans foreshadowed in the Chancellor's Budget. That is the real risk that we face. One can get carried away. There is no job more exhilarating, with its public acclaim and success, than that of the inhabitant of No. 11. And there is no acclaim more dangerous for those who hold that office.
§ 4.8 p.m.
§ Lord Haskel
My Lords, I congratulate the noble Lord, Lord Strathclyde, on having selected tax as the topic for debate today. There is no better topic than tax to illustrate the contrast between a Tory administration and a Labour administration. During the Tory administration perhaps the rich paid less tax, but the poor certainly paid more. As a result, a quarter of our children were born into poverty and half of our pensioners lived in poverty. But, by careful targeting, four years of Labour administration have seen 1 million children lifted out of poverty—170,000 in this Budget alone. Next month, we shall see most pensioners lifted out of poverty, too.
During the Tory administration, the tax and benefits system condemned millions of people to the poverty trap and the low pay trap. By careful management of the tax and benefits system, during four years of Labour administration steps have been taken to destroy those traps and to make work pay. Despite that, the gap between the richest and the poorest deciles of our population is still widening. So much for the claim that increased taxes are destroying initiative.
There was a time when the Tory Party cared about the poor as well as the rich, but the single-minded crusade to cut tax benefits only the rich. The success of my right honourable friend the Chancellor is not only that has he recognised the plight of the working poor and remedied their situation but also that he has seen to it that the better-off can benefit from their hard work and entrepreneurial activity. He did that by bringing the tax and benefits systems together. That is a sensible move because it stops the curious situation in which the Government hand out benefits with one hand and take them away with the other through tax.
That is why we all now benefit from Labour's tax policies. The basic rate of tax has been cut to 22p and the new lop rate has been extended. It gladdened me 869 that the noble Lord, Lord Strathclyde, welcomed that. Indirect taxes vary according to the lifestyle of the family. Noble Lords can always find a family who smoke, drink or drive an inordinate amount to boost their tax payments. Equally, however, tax credits have to be taken into account because they are very real tax reductions to the people who receive them.
Families claiming the working families' tax credit are £30 better off compared with those who used to claim family credit. Nearly 300,000 more families claim WFTC than claimed family credit. Families with children will have their taxes cut by up to £20 per week in the year of the child's birth, and by £10 a week from the second year. That means a tax cut—I stress that word—for around 5 million families. In any case, a family with children and with someone in full-time work will be guaranteed a minimum income of £225 a week from October this year.
It is that personal tax system that makes work pay and gets people out of the poverty trap. The minimum wage means that people will get fair pay. Maternity and paternity pay mean that mothers and fathers will be able to spend more time at home with their young children. That shows that the tax and benefits system encourages family life. I am surprised that noble Lords opposite do not welcome that; I have often heard them voicing support for family life.
To claim that we should pay less tax because we have a surplus is too glib. We should not forget that we also have large debts on which we are paying interest. Most taxpayers would agree to give priority to paying off their debts. That would save us from repeating the mistakes of the past and returning to the stop-go system which has been so damaging to our economy. By paying off debt, the Chancellor can smooth out the economic cycle by dealing with fiscal policy over the entire cycle—in good times and in bad. Of course, the cycle will not be abolished, as the noble Lord, Lord Strathclyde, seemed to suggest, but it can be smoothed out. That is what my right honourable friend the Chancellor is doing.
That is why I think that warnings from the IMF about planned levels of public spending are overstated. They do not fully take into account the fact that the Government have cut public sector net borrowing by £44 billion since 1996–97. That enables us to balance the budget over the cycle and in good times and bad. I wonder about the report. According to the Financial Times, the dispute between the Treasury and the IMF about how we manage our finances has been going on for some time. The Financial Times tells us that while the IMF staff economists criticised the golden rule, the directors generally praised the UK's economic performance. The IMF staff economists are mainly concerned about the possibility that the Chancellor's public spending plans will push up interest rates. Well, interest rates are a matter for the Monetary Policy Committee. It. was interesting to hear the authoritative views of my noble friend Lord Barnett, who is a member of the Bank of England Monetary Policy Committee.
870 I do not know how the noble Lord, Lord Strathclyde, can claim that we are paying more business taxes than other European countries. We have less tax on corporate income and lower employer social security payments than most of our competitors in the European Union. Our rates are certainly below those of France and Germany. Indeed, the 10p starting rate of corporation tax is the lowest in any major industrialised country. Our VAT rate is also comparatively low and the VAT threshold, at £54,000, is the highest in Europe.
In addition, allowing small companies to benefit from cash accounting in their VAT returns means that their VAT burden is effectively reduced. Small businesses and, soon, larger companies will be able to reduce their tax liability by claiming research and development credit if they invest in new products. So as far as the burden of taxation is concerned. British companies are at the lower end of the scale, which gives us cause for satisfaction.
However, we are also at the lower end of the productivity scale, as the noble Lord, Lord Taverne, reminded us, which gives us cause for worry. Sadly, there appears to be no correlation between tax levels and levels of competitiveness and productivity. Indeed, the opposite seems to be the case. Although our tax levels are well below those of France and Germany, our productivity on average is 20 per cent below theirs. Our future prosperity is not so much a matter of tax, as the noble Lord, Lord Strathclyde, seemed to think, or of the exchange rate. as the noble Lord, Lord Taverne, suggested, but of skills, innovation, investment and competitiveness. We should be concerned about productivity growth, not the level of taxation.
I have to agree with the noble Lord, Lord Taverne, that closing the productivity gap will raise our standard of living. We will achieve that not by cutting taxes and hoping that deprivation, fear and insecurity will create the work-force we require; improving skills and investing in high-quality public services in health and education will produce a work-force which will close that gap. However, fiscal incentives are not enough. Business and industry also have to do their part.
The TUC has got the message. It has developed the Partnership Institute to help firms to raise productivity. Employers' organisations in engineering, steel and other manufacturing sectors have also come together to meet the productivity challenge. I welcome those positive initiatives.
As the right reverend Prelate the Bishop of Hereford reminded us, there is more to managing the economy than simply saving money by cutting taxes. Delivering social justice and sound stewardship are also important, as is raising our standing of living through productivity growth. The Budget meets all of those challenges.
§ 4.18 p.m.
§ Lord Blackwell
My Lords, I welcome the opportunity to speak in this debate alongside such 871 distinguished contributors. In supporting the Motion, I should like to touch on some of the political and economic messages that can be drawn from the Government's tax and spending policies.
It is now becoming clear that the Government genuinely believe that the state can and should intervene to shape people's lives. They believe that more government is better. They do not accept, as I do, that the lessons from the past are that public intervention is more often than not wasteful and distorted and that freedom and choice depend on containing the state's role and making it as small as possible. That is demonstrated by the projected size of the Government's spending programmes and by the intrusive way in which they have determined their spending and taxation programmes.
I shall start with the facts. Total expenditure—by which I mean current expenditure and investment—is projected to grow by more than 4 per cent in real terms over the next three years, rising from 38.4 per cent of GDP to 41.1 per cent of GDP. I calculate that to be an extra £62 billion at today's prices. How is that growth in spending to be funded? If one goes through the Red Book, it appears that taxes rise by about £40 billion at today's prices. The rest comes from the projected fall in the government surplus, going from a surplus of £16 billion in 1999–2000 to a net borrowing projected of £10 billion in 2003–04. That is a turnaround of £26 billion from surplus to deficit in four years. It contrasts with the picture in the final Budget report of the previous government which showed a growing budget surplus in the early years of this new century.
The Government claim that their last Budget was fiscally neutral and therefore prudent. This misses the point that adding spend to existing plans where spend and taxes are growing faster than GDP necessarily means transferring expenditure from the private sector to the public sector. To reduce the argument to an absurdity, one could double expenditure and taxes and still claim that it was fiscally neutral. Clearly, that would have a major impact on the economy and would not be prudent. The fact is that if expenditure grows faster than GDP, as is planned, that part of the transfer from the private to the public sector not achieved through taxes will have to come through higher interest rates and higher inflation.
In the current circumstances, the Government cannot rely on higher savings to make up for the increased share of GDP appropriated by the Government. The Bank of England issued a quarterly bulletin recently that points out that the savings ratio has already fallen from 10 per cent in 1997 to 3 per cent in the third quarter of 2000. As the Bank of England points out, this is not because there has been an excessive boom in consumption, which the Bank estimates at being fairly stable at around 4 per cent growth a year, but, according to the Bank, it is because of,falls in post tax income growth relative to consumption".That means that as the Government have increased the tax burden faster than GDP, income has taken the cost. That increased tax burden imposed by the 872 Government led directly to the sharp fall in the savings ratio as people sought to maintain their consumption patterns despite the rise in taxes. With a 3 per cent ratio in the last quarter, it leaves little room for the savings ratio to fall further as taxes continue to rise.
This is not a sustainable position. It occurred during a period when public expenditure rises have been buffered by a significant decline in interest payments resulting from the low inflation levels and low interest rates in place when this Government took office and which have worked their way through to the benefit of lower public debt charges.
This pattern of public expenditure growing faster than GDP is clearly unsustainable beyond the short term. More than that, as my noble and learned friend Lord Howe pointed out, it creates clear risks if economic growth falls, if taxes fall and surplus turns to deficit even more rapidly.
Beyond the risks of economic downturn that my noble friend mentioned, one of the other serious risks is if there is an unwelcome fall in the stock markets and asset values in the coming year. The Bank of England points out that it is only the rise in asset values over the past few years that has led consumers to feel comfortable with the lower savings ratio. If their confidence is shaken, savings will rise and consumption and GDP could fall rapidly. Then the Government's careful plans would soon look completely threadbare.
It is not just the macro issues upon which I wish to comment in looking at the Government's spending plans. I believe that the Government are ignoring the disincentive effects of higher taxation on economic growth and are making a judgment that they are better able to spend money than individual citizens. Much of the tax increase comes from fiscal drag from economic growth, which means that governments raise the tax burden unless they take action to offset that. In addition, research published by the Centre for Policy Studies—I declare an interest as chairman of that body—shows that even before the previous Budget the Government had introduced 45 tax increases over the past four years, accounting for a net £11 billion per year extra tax burden or, cumulatively, £36 billion over the course of the Parliament on top of the tax rises that came as a result of fiscal drag.
Those rises included £6 billion a year out of pension funds which will result in more future pensioners being dependent on the state. They include over £2.5 billion in direct tax increases, much of it paid by the low income families who, with the other hand, the Chancellor seeks to help. There have been over £2 billion of new taxes on business on top of the high yield from corporation tax and the burdens of regulation which increase costs and prices and will reduce investment and jobs. I say to the noble Lord, Lord Haskel, that that is no way to raise productivity in the economy.
It is wrong to believe that one can raise taxes without destroying wealth or raising money by cycling through a government bureaucracy which takes several pence in every pound simply to pay for tax 873 collection and public administration costs, even if one believed—and I do not—that that spending is generally as well placed as if left in the hands of the individuals who earned it. It is wrong, too, to believe that one cannot contain public expenditure without hitting at the quality of health or education services. Health expenditure, for example, accounts for only 12 per cent of total government spending. It grew above the rate of economic growth by some 3 per cent a year in real terms under the last government, despite the fact that the overall share of the economy taken by government spending declined during that period. It is a question of priorities, effectiveness of government spending and living within one's means. It is not a question of public expenditure being a necessary good; in many cases it is an unnecessary bad.
Finally, I turn to the complexity of the spending programmes. We have a government who have introduced penny packages aimed to reward or penalise specific interest groups according to whether or not they fit the Government's autocratic definition of that which they approve or disapprove. There is an attempt to mould the behaviour patterns of the nation around what the Government and the Chancellor of the day seek to approve and think we ought to approve. I believe it is a dangerous trend for taxation and expenditure policy to go down that intrusive route of trying to define individuals' lifestyles. It exposes the danger of a rising tax burden.
I believe that we need less government, not more; a lesser role for government in running inefficient public services; less intrusion by government into the way we run our lives; less of a role for government in handing out our money to pursue their own special interests; more money left in the hands of individuals, families and entrepreneurs to build wealth and to enjoy the freedom from state diktats that come from being able to exercise independent choice rather than being dependent on what the state provides.
§ 4.28 p.m.
§ Lord Woolmer
My Lords, listening to the debate, it is clear that the Opposition seek to raise the issue of, "Can you trust Labour in government to handle the economy'?" I remember that before the previous election they said, "Don't trust Labour, re-elect a Conservative Government". The electorate gave their verdict that lime and, I suspect, will give the same verdict in a few weeks. The answer from the Front Bench appears to be that there is a question mark at present about whether or not one can trust Labour and that we should look at the IMF report. I shall return to that subject in a moment.
The view of the noble and learned Lord, Lord Howe, appears to be that one can probably trust them now but in three or four years' time there will be problems. Interestingly, the kind of expenditures that the noble and learned Lord thought might raise problems in the future appear to be endorsed by the Conservative Party in saying that it will honour all these spending plans. I am not entirely sure where that leaves the Conservative Opposition. We heard very little about what spending they would cut or which 874 stealth taxes they would reverse. They appear to approve of everything we are doing, but are not clear about what they would do in their place.
The Motion before your Lordships' House today refers to the IMF report. I should like to confine my remarks to themes arising from that. As I read the report—I am sure that most noble Lords have read it also—it makes clear its support for everything that the Labour Government have been doing. It confirms the sustained economic growth, the low inflation rates, the low interest rates, the increase in private investment and the fact that those gains are due to strengthened macro-economic and structural policies, improved monetary and fiscal frameworks, credibility of monetary policy, operational independence of the central bank—the Bank of England—and so forth. Any reasonable reading of the IMF report would conclude that it is overwhelmingly supportive of, and endorses, Labour policies.
It perhaps was not a surprise that Mr Neil Collins, writing in the Daily Telegraph on 15th February, wrote in glowing terms about the economy. He said:There is a blessed land, so they say, where the rate of inflation is lower than the rate of growth. where there arc jobs for all, and where the government spends only what it raises in taxation. The land believe it or not is called Britain … It's tough to have to say so, but Gordon Brown has judged the big picture brilliantly'".I concur with those sentiments.
As has been said, the IMF report deals with two themes, one of which is productivity. I shall not have time today to address that particular matter, but II agree that it is an issue of enormous, long-running importance. It must be a puzzle to all parties that, despite the many economic reforms—I willingly accept that they were initiated by the noble Baroness, Lady Thatcher, when she was Prime Minister, and have been followed through by successive governments, including the Blair Government—such as deregulation and the freeing up of labour and capital markets, productivity performance in Britain still remains behind that of our competitors. I am sure we shall return to that issue time and again over the next few years.
The first theme of the IMF report related to short-term fiscal and monetary policy and was really concerned with whether or not the Government would be tempted to have a spending spree Budget in election year. Indeed, on page 13 the report states:it would be prudent for the March 2001 budget—an election year budget—to refrain from new spending commitments or substantial tax cuts".So the first question is: in an election year, was this a sound, prudent Budget? Can the electorate feel that the Government handled the economy soundly not only throughout their period of government but also, importantly, in an election year? I believe that the answer to that will be a resounding "yes".
Before the Budget, the markets in the City had assumed and built into their expectations a boost to the economy of around £3 billion to £4 billion. The amount of boost in the Budget was in fact £3.5 billion—bang in the middle of those expectations. It was indeed a cautious and prudent Budget. Given that 875 was so, can we assume that the Government will go forward in a prudent way in the years ahead? The noble and learned Lord, Lord Howe, has his doubts. Let us review that matter.
My noble friend Lord Barnett referred to the fiscal rules. The golden rule of borrowing only to invest and not to fund current spending has been fully met. The rule of ensuring that public sector debt does not rise above 40 per cent of GDP has been more than met, as the IMF report confirms. In fact, it is projected to decline to 31 per cent of GDP by 2004–05.
But the electorate have every reason to ask how the Conservatives performed when they were in government. The noble and learned Lord, Lord Howe, properly refers to his own introduction of the medium-term financial strategy, the MTFS. Of course, that was in 1980. But if we look at the performance of the Conservatives in their last seven years of government, from 1991–92 through to 1996–97, we find a deficit on the current budget year in, year out, averaging over 4 per cent of GDP. That is equivalent in today's terms to a budgetary overspend of £35 billion. On the Order Paper today we are debating a Motion that is concerned about an increase of £3.5 billion. The electorate will have no great difficulty in comparing the Conservatives in government and their deficit of £35 billion year in, year out, with the surplus of this Labour Government.
The ratio of public sector debt to GDP in the 1990s, under a Conservative government, rose sharply to exceed 40 per cent. That was in fact because the Conservative government were borrowing to fund current expenditure. Public sector investment under the Conservatives fell in real terms from £15 billion in 1978–79, to just £5 billion in 1996–97. The record of the Conservatives in office in public investment was truly appalling.
It was precisely because of those cuts that our schools, hospitals, roads and railways got into such a mess, the result of which we are seeing today. It is that backlog of budgetary weakness and neglect of public services that the Labour Government have had to tackle. First, Labour had to get the budget back into sound balance, to restore the nation's finances and reduce public debt. Next they had to begin the process of investing in our education, health and transport services—a task which will be central to the Labour Government after the next election.
What does the IMF have to say about the priorities of the Labour Government? On page 16 the report says that it agrees,with … the need to enhance public infrastructure and human capital while maintaining a sound overall fiscal position. The priority placed on education and investment [is] well founded, given the strong fiscal position and evidence that the United Kingdom's weak productivity performance [is] partly attributable to inadequate public infrastructure and skills deficiencies".Far from being critical of the Labour Government, the IMF report endorses that they have the right priorities. At the same time as tackling the country's economic needs, the Labour Government targeted affordable tax cuts to help working families, to provide 876 a better deal for pensioners with most help to those who need it most, and to provide much-needed support for women and children.
In their last few years in office, the Conservatives had a record of budgetary deficits, spiralling public debt, and of deep cuts in public investment, leaving our roads, railways, schools and hospitals in an appalling state. The Labour Government have begun the process of putting all those soundly right, with the right priorities and, at the same time, targeting tax cuts and social benefits on those most in need. In the coming weeks I believe that that record will be one that the electorate will endorse.
§ 4.39 p.m.
§ Baroness Hogg
My Lords, in a general debate like this I always find it difficult to know what interests to declare. Since I will touch briefly on business taxation, I should perhaps start by saying that I am chairman of Frontier Economics, deputy chairman of 3i, a director of P&O Princess, GKN and two investment trusts.
I should like to start by joining the chorus of praise for my noble friend for initiating this debate; I hope that it will become a fixture. It is timely both because of last week's Budget and because of the symbolic but extremely welcome news that the long fall in unemployment that began in the early 1990s has brought the figure for those claiming benefit to below 1 million. It is also timely because we have been reminded over the past couple of days of the volatility of markets and the sharp fall in the market value of Britain's major companies.
Although it is by no means the most significant of these events, I shall start with the Budget. As many noble Lords have already said, the actual changes made in the Budget are very small. I welcome some points in the Budget in respect of taxes on new enterprises and the changes to capital gains tax, though the latter is still too complicated. However, the overall impact on the tax burden is very small. The widely-quoted figure is of the order of £3.5 billion. In fact, about £2 billion of that was already known to the markets, because those were matters put out to consultation last autumn, when—let us face it—the real pre-election Budget took place. It was a very small addition, which makes only a very short inroad into the rise in the burden of taxation that has already been mentioned by a number of noble Lords.
I shall not further emphasise that matter. Suffice it to say that I am delighted to see the spread of honesty from the Labour Benches in recognising that this has taken place over the past three years, and I have far too much respect for the Minister's integrity to believe for one moment that he will attempt to deny that it has occurred.
The figures in the Red Book slightly understate what has happened to the burden of taxation. The reason for that is a brilliant new Treasury wheeze by which new benefits in the form of credits are expressed as a reduction in taxation and, therefore, a dampening down of the rise in the tax burden. Taken to its logical conclusion, that approach would treat the entire social security budget as a tax cut.
877 Perhaps I may now deal with the other side of the Budget; namely, expenditure. If the Government are displaying the considerable honesty of later this year going to the country as a high tax and high spend party, perhaps we should, having dealt with the first point, now look a little further at those spending numbers. At the moment, of course, spending is not historically at all high. Public expenditure as a proportion of national income is at approximately its lowest level for 30 years and that is because the Chancellor spent his first three years squeezing public spending, but also—and this is an important point—because he is having some difficulty increasing it. He has substantially undershot the mark.
There are two very good reasons for that. The first is that the great ship "Whitehall" is rather slow to turn round. The second is that, although much emphasis is placed on buildings, public spending largely relates to people, and the hiring of people has to be paid for. With unemployment in the UK at its present level, and with pay having been held down in the public sector, the Government are finding it extremely difficult to hire people to deliver public services. The kind of increases that they now intend to put into their plans cannot be delivered without a sharp increase in relative pay.
The public sector unions have been giving the Labour Government a fairly easy ride. But it has to be said that the market is not so sentimental. The sight of health service managers, heads of schools and education authorities scouring the world for people to fill positions should deliver a clear message.
A big issue is going forward about the pace of change in public services—the speed at which public spending can be increased and public services improved. If I am right that it requires a sharp increase in relative pay, and if that were to lead to a general increase in the rate of earnings, there would be issues for the Bank of England to consider in relation to the control of inflation.
Having dealt with the achievability of public spending targets, I turn to the question of their sustainability. The more that goes on pay, the less there will be available to increase the volume of public services. Looking forward, one then asks the question: what happens after one or two years of increase in public expenditure? We have the plans up to 2003–04, which is not that far away. What do the Government propose to do after that time? On their own account, they have been fairly cautious in relation to growth forecast, although they have not allowed for the possibility of recession. As other noble Lords have said, they will have to borrow again. They will cease to get that wonderful benefit from a reduction in debt interest, because debt interest by then will, of course, rise again with the new borrowing. How do they intend to finance further increases in public spending to maintain the momentum of improvements in public services?
The Red Book charts a path for tax in relation to national income. That flattens out from this point onwards. But I have to say that that is what the 878 Government said last year, since when the tax share of GDP has gone up by one full percentage point. I do not understand how the Government can maintain the momentum of public spending going forward without also again increasing the tax burden.
I cannot resist ending by taking up the challenge put forward by the noble Lord, Lord Barnett. As I am blessedly free from any policy responsibilities, I shall respond to him by saying that I think it is high time that the Barnett formula was reconsidered. The noble Lord does himself less than justice. I am sure that I do not need to remind him, he having done a certain amount of work on the matter, that the intention of the Barnett formula at the time of its introduction was to reduce the massive disproportion in expenditure north of the border.
Perhaps I may remind your Lordships of the present extent of that disproportion. The Government spend 25 per cent more per head in Scotland than in England.
§ Baroness Hogg
My Lords, £5 for every £4 per head spent in England. I find it quite unconscionable that the Government should have gone through the whole process of devolution without addressing that disproportion. I do not believe that they can leave it in abeyance for very much longer, because it is now a source of deep resentment in England. Do not misunderstand me. I am more than happy for the Scots to vote themselves that higher level of public service. The effect of the money may be seen in terms of shorter waiting lists and in terms of higher spending per pupil in Scottish schools, right across the board. However, I do not understand why parts of England that have no higher levels of income per head should have lower levels of expenditure per head. I do not understand why they should have to pay for the Scots to have that advantage.
§ 4.48 p.m.
§ Lord Oakeshott of Seagrove Bay
My Lords, I follow the noble Baroness by declaring an interest as a director of an investment trust and as an investment manager for pension funds and charities. Like many noble Lords, I also had great difficulty finding criticisms of British economic policy in the IMF directors' report. So rare were they that I wondered whether the noble Lord, Lord Strathclyde, had read the report before he framed the wording of his Motion. Having read the report myself, I would certainly have given Gordon Brown at least nine and a half out of 10. I could disagree with my noble friend Lord Taverne about what variation of alpha we give him, but that is probably rather too Oxford élitist; let us stick to simple numbers.
The only real criticism that I found in the report was of the weak productivity performance of the UK between 1995 and 1998. However, it also reported that there had been an encouraging improvement during 879 the past year and a half. If it had a criticism, it was that investment in public spending on education and training was too low, not too high. That was the only criticism of any substance. I turn to the tax objectives that Labour set themselves in their last manifesto. They said:New Labour will establish a new trust on tax with the British people. The promises we make we will keep. The principles that will underpin our tax policy are clear: to encourage employment opportunities and work incentives for all; to promote savings and investment; and to be fair and to be seen to be fair".Progress towards two of those goals can fairly easily be measured. Testing on the third is rather more subjective.
I shall examine them in turn. The first aim is to encourage employment opportunities and work incentives. With unemployment below 1 million, its lowest level since 1975, the big picture is clearly excellent. But the regional picture of employment and economic development is less benign. There are 33 parliamentary constituencies with unemployment levels below 1 per cent. Every one is in south-east England.
The pattern is just the same when we see what has happened to unemployment during the past year. Of the 25 constituencies where unemployment has fallen fastest, 21 are in the South East, with only three in the South West and one in Scotland. There is none in any other region. In the 25 constituencies where unemployment has risen in the past year, or where there have been the smallest falls, not a single one is in south-east England. There are four in Scotland; two in Northern Ireland; four in Wales; one in the North West; six in the West Midlands; seven in the East Midlands; and one in the South West.
So, the Government's overall record on unemployment has been good but they have allowed economic growth to become dangerously unbalanced, with overheating in the South East, all the associated problems of housing strain and pressure on public services, but a more patchy pattern elsewhere. When one examines the areas in which unemployment remains stubbornly high, a single theme comes through clearly as one looks at the names of the constituencies. Overwhelmingly, they are dependent on manufacturing and they are suffering from an overvalued exchange rate. Britain is still a very open economy. What really matters to so many of the depressed areas and regions is to have a competitive and stable exchange rate, particularly against the euro, as my noble friend Lord Taverne pointed out.
I turn to the second of Labour's three objectives; to promote savings and investment. The Bank of England's Quarterly Economic Report, which was recently published, contains an interesting article about that. It points out that the household savings ratio in this country has fallen from 10 per cent in 1997 to 3 per cent today. There are a number of reasons for that and wealth effects are one of them, but on one of Labour's three key objectives of tax policy—that is, to promote saving and investment—the Government have clearly failed. That is hardly surprising when by 880 far the biggest change in tax policy has been the removal of the dividend tax credit from pension funds at a cost of £5 billion to £6 billion. After all, regularly paying into a pension fund is still the most important form of regular, sustained, long-term saving for the hardworking families about whom Gordon Brown is so keen to talk.
I turn to the third and more subjective aim. How is Gordon Brown doing on being fair and being seen to be fair? I suggest that, unusually, he is doing better on the reality than on the spin. He has taken more out of higher earners' pockets through national insurance contributions and higher stamp duty on house moves than if he had broken the New Labour taboo against putting up the basic and higher rates of income tax. He has given substantial help to poorer families through tax credits and the national minimum wage and the real increases in spending are at last coming through on health and education, as he wriggles out of the eye-wateringly tight straitjacket which he imposed on himself during the first two years.
However, redistribution by stealth, which is what he is doing, is a dangerous game for a left-of-centre Chancellor. You can get away with it for a few years if the public finances are buoyant, the world economy is strong and if you get the odd bit of help, such as £22 billion from mobile phone licences. But the trouble with that policy is that the losers tend to work out what is going on rather more quickly than the gainers and the losers tend to shout louder than the gainers, with plenty of sound and fury from the Tory press.
If you are a radical Chancellor, in the long term it is far safer to make the case openly and with conviction for using the tax system to fight poverty and inequality, as the noble Lord, Lord Barnett, pointed out. Tell the country what you are doing and why. That is the way in which you build popular support for the day when the economic climate turns foul. That day may be coming sooner than we think, as the irrational exuberance of world stock markets and American consumers last year is now showing every sign of giving way to irrational despondency at the other extreme. Nor in our British case do we yet know—and we should not underestimate—what the one-off economic costs of the foot and mouth epidemic for us may be.
Overall, the Chancellor is not doing badly. But we on these Benches urge him to raise his sights. The purpose of prosperity is not to win plaudits—and they were plaudits—from the IMF; it is to end the grinding poverty in which so many of our people still live and to rebuild the creaking public services—education, health and public transport—on which the whole country depends. If the Government have the courage to raise that banner—the banner of fair taxation—they will have the whole-hearted support of these Benches and they will also have the unique combination of support from the noble Lord, Lord Barnett, and God, who loves a cheerful taxpayer, as the right reverend Prelate the Bishop of Hereford told us.
§ 4.56 p.m.
§ Lord Desai
My Lords, I agree with the noble Lord, Lord Strathclyde, that we in this House need a debate on the Budget soon after its presentation. I believe that I have a small footnote in history because I pioneered the practice a few years ago. For two years running, we had a debate on the Budget the day after, on a Wednesday. For various reasons, that practice was discontinued, but I believe that we could again have a debate on the Wednesday after presentation of the Budget. I am pleased that the noble Lord, Lord Strathclyde, favours resuming the practice. That is as far as I shall agree with him—we may as well get the good news out of the way.
If any of your Lordships were to appear on the television programme "Who Wants to be a Millionaire?", and if Chris Tarrant were to ask, "In the past 50 years, which Chancellor increased the tax burden the fastest? Was it Healey, Howe, Brown or Lamont?", you would be best advised to ask me—to ask a friend—before you answer. It was the noble Lord and learned Lord, Lord Howe, who increased the tax burden from 33 to 38 percentage points during his chancellorship. Even the noble Lord, Lord Lamont, to whom I pay tribute for his tax-raising capacity during the 1990s—
§ Lord Howe of Aberavon
My Lords, will the noble Lord be kind enough to acknowledge that for several years I was engaged in clearing up the debris left by the noble Lords, Lord Barnett and Lord Healey?
§ Lord Desai
My Lords, I always give credit to people who raise taxation because I am a great fan of taxation. But 33.4 to 38.9 per cent is a good achievement during one chancellorship; and 38.9 has never been exceeded. I am pleased to say that the noble and learned Lord holds the record and I respect that.
It is not difficult to cut the tax burden. As my noble friends Lord Haskel and Lord Woolmer said, you can always borrow money. If you add up the tax burden and government net borrowing, you see that the tax cuts of the 1990s were bought by the large public borrowings which accompanied them.
Again, if you were to be asked, "In the past 30 years, under which party the net borrowing was negative four out of five times?", please do not answer, "Conservative". It happens to be the Labour Party. The noble Lord, Lord Jenkins, started the rot by having a Budget surplus and my right honourable friend the Chancellor has continued that practice and produced a negative net borrowing.
Therefore, as regards fiscal responsibility, we are on fairly good ground. However, I was somewhat distressed by the Chancellor's habit of repaying the debt. I am not a great fan of repaying the debt but I am told that he has promised not to do it again soon. I believe that he will reduce it to 29½ per cent and then resume the good habit of taxing and spending. What can one do other than tax and spend? One cannot tax and not spend; and to spend and not tax is not very good either. A prudent person taxes and spends so that the budget is balanced over the cycle.
882 When my right honourable friend says that he wants to end boom and bust, he does not mean that he will abolish the cycle; he means that he will not exacerbate it by bad macro-economic policy. In the 1980s, shocks from outside the system were exacerbated by bad macro-economic policy, which was why inflation doubled twice, spending hit the buffer of7½ per cent of PSBR, taxation was 38.9 per cent and so on. It is important to take a long-term perspective and balance the budget in such a way that we do not exacerbate the cycle. If the Chancellor has run the economy properly and is lucky enough to have the money, at the margin he makes the choice whether to give a tax cut, have more public expenditure or repay debt.
My only criticism of the Chancellor—he knows that I have said it before—is that I would not have started to repay the debt so soon, but that is his choice. He is a Scot and I am not, and we all have our preferences. I believe that a gross amount of public under-investment in the British economy, to which my noble friend Lord Woolmer referred, was such a serious problem that my right honourable friend had to do something about it. However, being a cautious man, he did not do anything immediately because be would have been criticised by everybody, including the party opposite. He waited a while and, being a politician, gauged the political and economic cycle correctly so that there was a good Budget, not a bad one, at the time of the election. Even so, I must give my right honourable friend credit for his very modest tax cuts. A tax cut of £4 billion is one half of 1 per cent of GDP. That is hardly enough to make one get out of bed. As far as concerns the Chancellor's fiscal prudence, the Motion before the House can be safely rejected.
I turn to the International Monetary Fund. One is slightly embarrassed because the first item to make the headlines on 22nd February was co-authored by one of my former students. I always thought that he had problems—but so did the IMF. I have never been very trusting of the macro-economic expertise of the IMF because it has been wrong about practically every crisis in the past 10 years. Be that as it may, I shall even take praise from the IMF. One cannot make biting criticism of the economy. We now have one of the best macroeconomic dispensations that we have had for a long time.
I agree, and have said before, that the good times started after our exit from the ERM when the noble Lord, Lord Lamont, was able, through good taxation, to reduce the budget deficit. Mr Kenneth Clarke continued that practice. I believe that the Conservative Opposition should say, "We started stealth taxes and you have stolen them from us. How dare your. I believe that stealth taxes were invented by the noble Lord, Lord Lamont, who learnt never to disturb the basic rate of income tax. One can always adjust other things around it and get a much higher rate of taxation. He learnt the trick from which we have all benefited.
I turn next to productivity. I believe that the numbers to do with productivity are fairly dubious. Everybody talks about our output per worker or per hour being low, and so on. Being a professional 883 economist, one is aware that when one talks about productivity one is measuring one's ignorance rather than one's knowledge. But if one looks at output per unit of capital the UK has one of the most efficient economies, but nobody points it out. All of this breast beating is out of order, and one will probably pursue the wrong policies if one tries to pursue productivity. The important point is not how well our productivity compares with that of others; it is bad enough to do it for our own country. What is important is that productivity grows enough so that we are able to afford a decent life for everybody.
As long as the economy is on a growth path, and we can afford public investment plus growth in private consumption and a reasonable amount of taxation, that is a successful macro-economic policy. That should be our concern, not comparisons with Italy, the United States, Germany or others. I believe that those numbers are wholly dubious. My noble friend Lord Haskel shakes his head because his son happens to be the local expert on this matter. Be that as it may, I still believe that productivity is dubious.
I have one minute. I support the observation of my noble friend Lord Haskel that we still have a very considerable amount of inequality. As the Whips turn round, I conclude by saying that we have a large amount of inequality. I shall sit down.
§ 5.6 p.m.
§ Lord Stevens of Ludgate
My Lords,The art of taxation consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing. Why do something the hard way when you can do it the easy way? We call this stealth taxes".I am indebted to Samuel Brittan and others for that quotation. Last time it was education, education, education; this time it is the economy, the economy, the economy. Having failed with one they now try another. If I may refer to the speech of the noble Lord, Lord Woolmer, everything that is wrong with education, the health service and transport is the fault of the previous government. It is strange that the economy is all to the credit of the present Government. My noble friend Lady Thatcher in her time helped to make staggering changes for the better in British competitiveness. That is Labour's inheritance. What has it done with it? The tax system is now so complex that even the Revenue has trouble coping. This year's Budget report runs to a staggering 225 pages, and at a time when most of the tax changes just tinker with the problem.
I apologise for quoting figures which have already been quoted. Since 1996 government tax revenue has risen from 35.2 per cent to nearly 38 per cent of GDP. At the same time it has become increasingly difficult for the man in the street to understand what is going on. Even after the Chancellor's changes, income tax receipts have risen from £69 billion in 1996 to £104 billion this year. Tax revenue has risen by more than 33 per cent since 1996. Even the Chancellor has found it difficult to admit that taxes have gone up. His Budget speech omits significant details. You have to 884 read the small print with great care. Is this what the Government call "open government"? For example, we now know that the rise in the upper earnings limit for national insurance contributions from £535 to £575 a week will hit middle-income earners who pay basic rate tax. The extension of the 10p tax band—a tax cut for all—adds a pitiful 69p per week. After adjusting for the Chancellor's so-called three-year spending plans—the last year of one overlaps the first year of another—his increased spending raises the NHS budget by 0.7 per cent next year. It is enough to confuse Einstein.
Nearly 1 million people have failed to register for the new children's tax credit. Nearly 300,000 people have failed to register for the working families' tax credit to which the Government believe they are entitled. These are the Government's figures. They had an opportunity to think the unthinkable and really reform the health, welfare and education systems but failed to do so.
Spending more money, however limited, will not achieve it. Let us consider the percentage of the education budget taken by local authority supervisory bodies. Look at the supervisory bodies in the NHS and the lack of proper management in the wards where it all starts. Let us get rid of some of the administrators and bring back the ward sister; and encourage rather than discourage patients to opt out of public health. Look at the paperwork. Even a golf club half-way hut—I emphasise "hut" and declare an interest as a golfer—has to keep records of its fridge temperature and its cooker heating capabilities and is subject to regular inspection. Is that really justified by the risks involved? Before we know it, Members of Parliament will have to take exams and pass regular tests.
The 45 new taxes raise £36 billion, yet the Chancellor congratulates himself on the lowest inflation for 30 years and the lowest long-term interest rates for 35 years although he did not admit taxes had gone up until 13th March last year. However, the financial markets do not seem to agree. The FTSE 100 index is more than 20 per cent off its peak, and there is a nasty collapse going on in the United States.
The UK current trade deficit is over £20 billion, and must, because of a slowdown in growth in the United States, widen further. That may be financeable unless we start to become even more entrapped in the pro European monetary union debate. If the UK were to vote for further European integration, our problems will be just starting; namely, 80 per cent tax, including employer and employee, on standard wages. People have disputed this figure. If they wish to see my tax returns in France I shall be happy to supply them. Fifty per cent plus of GDP is taken in tax by government. The list goes on. That will really make our exports uncompetitive, which is exactly what some of our European competitors want. The problem is fundamental. Do we want to be a European style welfare state or to have a US style of capitalism with lower taxes, less regulation and services left largely to local authorities and/or private enterprise?
885 The Chancellor remains convinced that he can spend our money better than we can. Only four months ago spending was due to grow at 3.4 per cent per annum. The figure is now 3.7 per cent per annum. Even on his figures, he will be borrowing again in two years' time. Again he has missed the chance to reform the health service and education. How could any organisation, the largest employer in the land, cope with the proposed 50 per cent increase in its budget efficiently? It could not. A large amount would be wasted.
Last month manufacturing output dropped by nearly 1 per cent, the largest monthly fall since August 1997. Admittedly, manufacturing accounts for only 20 per cent of the economy. Industrial production is now nearly 1 per cent lower than a year ago. According to the Office for National Statistics, real disposable incomes have risen at the lowest rate for 30 years. The private sector is running a large financial deficit, some 4 per cent of GDP. As we have been told, the saving ratio has fallen from 11 per cent in 1996 to 3 per cent. That is clearly not sustainable. Why is there such a large and rapid turnaround of sentiment in the United States? Put simply, there was a negative savings ratio of minus 1.5 per cent last year, followed by a loss of confidence and very rapidly the private sector tries to save again. The economy can move 5 per cent in GDP in a few months, which is what it has done.
What is the answer to all these pending or even imminent problems? The IMF skirts with the dilemma. The way to solve it is to let the economy free. Do not control every aspect of life from the centre. Give industry back its freedom. Stop the ever-increasing regulation. Even now there is support for more regulation in pension fund markets. I have no idea how it will work: reduce the power and scope of the state; protect the weak and the poor; but for those that can look after themselves, let them get on with it and then the IMF may have no reason to continue to criticise our economic plans. The Chancellor will not agree. He imposes more restrictions on businesses. The minimum wage seems to go up even if prices do not. His spending plans assume that tax revenue will continue. How can it when he is quietly killing the goose?
§ 5.14 p.m.
§ Lord Harris of High Cross
My Lords, I very much enjoyed the contrasting opening speeches from the three main parties. I especially enjoyed the sparkling performance of the noble Baroness, Lady Hogg. I wish she had more time to tell us the extent to which this almost comically Scottish-dominated government favours the Scottish electorate. I thought that required further examination.
My view runs rather more radical than to that of the Front Benches. I come not only to bury Gordon Brown but also to highly praise him. From the vantage point of the IEA back in 1957, it was not only on taxation that the record of both governing parties inspired little confidence. As the noble Lord, Lord Barnett, may remember, those were the days of monopoly trade unions, protected state industries, 886 incomes policies, central planning, multiplying subsidies, universal welfare, budget deficits and, of course, the consequent inflation.
The earliest brief stand against ever rising government spending was in 1958 when the then Chancellor, Peter Thorneycroft, with his Treasury colleagues, Enoch Powell and Nigel Birch, resigned over a mere £50 million. Today that would be equivalent to £1 billion. That was "super Mac's little local difficulty", if I remember correctly.
If the Thatcher Government's demolition of union monopoly released new Labour from the TUC's inflationary grip, it was the 1979 Budget of the noble and learned Lord, Lord Howe of Aberavon, which put tax-cutting high on the political agenda. With his first Budget he reduced personal taxes.
Yet although Gordon Brown has not followed that example, nevertheless, with two cautions, I would give him high praise—higher praise than most post-war Chancellors, save possibly the noble and learned Lord, Lord Howe, whose Budget was particularly important.
My first caution is that the full credit does not properly belong to Mr Brown and his advisers alone, since—as other noble Lords have said—he has built on the unacknowledged Tory legacy of stability bequeathed by his predecessors, the noble Lord, Lord Lamont, and Kenneth Clarke.
My second caution is that Gordon Brown's outstanding inflation record over, so far, four years, has been achieved only by abdicating control of monetary policy to the Bank of England. Since I was among the first in this House warmly to applaud that bold departure, I might be permitted to remind the House of a certain irony. When the first majority Labour Government under Mr Attlee came into power in 1945, they could not wait to nationalise the Bank of England. That was among the first steps that they took. Here we are 50 years on when new Labour has, in effect, privatised the Bank of England; restoring that key power to Threadneedle Street.
My reason for wishing to bury the Chancellor—as well as to praise him—is that he looks to be in serious danger of fulfilling the political adage that all success tends to end up in failure. To explain that danger it is necessary to ask why Gordon Brown's Monetary Policy Committee was what the noble Lord, Lord Healey, would have called "a jolly wheeze". It is generally agreed that, since Keynes, successive Chancellors, irrespective of party, have been under incessant pressure to cure recessions or win elections by stimulating the economy with lower interest rates or taxes. The logic taught by Milton Friedman was that expansionary monetary or fiscal policies were like drink, with the good effects coming first to be followed by a nasty hangover some time later.
The value of the Monetary Policy Committee is simply that it removes the bottle from the reach of chronic tipplers. In short, it depoliticises monetary management. But on Friedman's logic, the removal of 887 one weapon from the Chancellor's political armoury exposes the tax system all the more to manipulation for party advantage. Unfortunately, Mr Brown has shown himself no less inclined than the worst of his predecessors to yield to the temptation to fiddle with taxes. Here we have a born interventionist and social engineer, with a missionary—even Messianic—zeal to cure the ills of the world, with his hand not only on the tiller, but in the till.
To return to Friedman, increased government spending, like inflation is politically popular in the short run. But gradually, cumulatively, it raises costs, blunts incentive and, above all, it discourages everyday economy. Not even an Aberdonian spends other people's money as cautiously as he spends his own. And Mr Brown does not even come from Aberdeen. Indeed, he comes from nearer Glasgow where I am told they all have holes in their pocket.
Part of the technique of Mr Brown has been so to complicate the tax system, with perpetual, fiddling changes, that only experts can work out exactly what he has been up to. Accordingly, like others, I rely on the Institute for Fiscal Studies—many years ago, the noble Lord, Lord Taverne, played an important part in its development—to tell us that the Chancellor has raised taxes altogether by £24 billion to bring the total above £380 billion a year. As a proportion of national income, that represents an increase of 2.5 per cent to 40 per cent next year. That is different from some other figures, but I stick with the IFS calculations.
The lesson I would draw from the Chancellor's mixed record is that he is no more to be trusted with unchecked discretion over taxes than his predecessors could be trusted with control over interest rates. My proposals for reform are therefore twofold. First, as I have long argued, the Monetary Policy Committee should now be instructed to lower its average annual target for inflation from the present 2.5 per cent. That would still be sufficient to reduce the value of money by more than 80 per cent over the average expectation of life today—from £1 to 20p over some 80 years. As the present inflation rate is nearer 2 per cent, a reasonable programme would be to shave the target down by perhaps 0.5 per cent every four years to give us the boon of stable money and lower interest rates in 10 or 15 years.
My second reform would be to depoliticise the tax system by creating an independent taxation policy committee alongside the Monetary Policy Committee. Its task would be to review the Chancellor's Budget proposals, in advance of them being delivered to Parliament, against a target of reducing the total burden of taxes from 40 per cent of GNP to Colin Clark's safe figure of 25 per cent of GNP over a similar period of, say, 15 years.
Once launched, the expectation of stable money and lower taxes would bring earlier promise of unheralded prosperity, individual responsibility and consumer freedom to choose more leisure and that gracious living for which many new Labour and other Members of the House provide such an enviable example.
§ 5.24 p.m.
§ Lord Sheppard of Didgemere
My Lords, unfortunately, the noble Lord, Lord Desai, has left the Chamber, but perhaps he will read my advice in Hansard. He should not ring a friend; he should ask the audience. But he should be careful because sometimes the electorate is not quite as predictable as people think. I say that because we both come from the LSE and we know that there is "on the one hand" and "on the other hand".
For a few moments, I should like to take noble Lords away from the discussion on the recent national Budget. I shall deal with one specific aspect of business taxation that has not yet arrived. It is a tax to come. This Government have often indicated that they fully realise that successful business is vital to achieving a growing standard of living for all. We welcome that recognition. They have also said that relationships between business and government should be open and constructive. At this point I should probably declare all types of interest. I am a businessman, chairman of London First and a stealth tax payer. Against that background I wonder why the Government's recent Green Paper, Modernising Local Government Finance, proposes an extra tax on business in the form of a supplementary business rate.
As noble Lords will know, the proposal is for an additional surcharge on top of the national rate already paid by business. This surcharge would be set and controlled by local authorities. It is proposed to start at 1 per cent but increase to a maximum of 5 per cent of the normal rate at the end of five years. That will be a burden on all businesses, but it will particularly hit small businesses, many of which are already fighting to survive.
Having declared my interest as chairman of London First, perhaps I may refer to London. In London alone, a 5 per cent levy would add £150 million per annum to business costs. The Green Paper proposals include a reserve power whereby the Government could require "rate rich" authorities—whatever that may prove to mean—to pay part of the supplement to other areas. That may not be Scotland; I do not know. In reality that would probably be used to increase the £19 billion a year of taxation already raised in London but spent elsewhere.
The proposed supplementary business rate is a "back door" tax unless it delivers local benefits and has prior business consent. There are no guarantees that the extra moneys will be targeted to achieve specific local improvements that business wants. There is not sufficient safeguard to prevent local authorities from using it to fund existing borough services. The proposed arrangements for consulting business are complicated and bureaucratic. It gives us all kinds of general lessons on tax as well as this specific one. The proposal does not allow business a real say in how the extra money is spent.
A supplementary business rate on the lines proposed would do nothing to encourage businesses truly to get involved in their local areas by, for example, taking ownership and leadership of regeneration projects. 889 Incidentally it would be levied on occupiers, although it is often property owners who have the greatest long-term interest in a locality.
Is this just another whine from business about taxes being too high? No, I am talking about how the tax is levied. Fan of the criticism of the Government's taxation policies is that one does not find them until one reads the small print issued by the Inland Revenue a few days after the Budget.
The supplementary business rate proposal is an example of how not to work with business. The Government claim that they are trying to work hard with business. The alternative is to pursue the business improvement districts' approach as outlined in the Bill, which has passed through this House but has not been progressed following its introduction into the other place.
Perhaps I may briefly remind the House about BIDs. They are "town improvement schemes" that work. One can see them operating successfully in New York and other parts of America. One can see the improvements. Business improvement districts are statutory ventures, financed by an addition to property tax, and is thus an additional cost to business. However, under that law, it can be levied on all businesses in a locality only if the majority of those businesses have voted in favour of the creation of a BID. Compulsion is of course necessary to stop freeloaders.
Business improvement districts introduce intensive localised management in particular areas. They may embrace only small blocks or they may cover a much wider area. They deal with matters such as local employment opportunities, improving security and maintenance in an area and undertaking promotional activities. In this country they would, in my view, encourage greater partnership between business and local authorities.
Why has the Bill come to a stop in the other place? I understand that the Treasury has stated that it sees this as a tax. To my knowledge, it has been saying that for a long time and certainly it has said that over the past four years. It is a levy which would put up the costs of business. But the difference would be that business communities would be able to vote for and against the levy. It would not take place unless a vote had been taken. I am not trying only to reduce tax—much though I may wish to do that—but to seek a better means of how to use a tax. No such vote will take place on a supplementary business rate.
What lessons can be learnt from this when we return to the general subject of tax? There is too much bureaucracy. God knows how many experts have to be employed actually to understand the increased taxes being levied. If you are running a small business, you cannot afford to employ those extra people. Something is wrong with our taxation system. Similarly, if business taxpayers—although this point would apply to people outside of business—do not feel part of the decision-making process, it is obvious that they will reject the taxes by calling them stealth taxes, hidden taxes and so forth—and they would be right to do so.
890 I ask the Minister to try to persuade the Government to reintroduce the BID Bill, even though that may not be the best way to approach this. In that case, I would be quite happy to wait until the local finance Bill comes along, at which point I shall simply rewrite it so that the BID proposals can be put in.
If any government want genuine business involvement and an open and constructive relationship with business, the bureaucracy must be cut out and an open style introduced. As one aspect of that, let us opt for the BID approach.
§ 5.32 p.m.
§ Lord Tomlinson
My Lords, I should like, first, to congratulate the noble Lord, Lord Strathclyde, both on the fact of this debate and on his impeccable sense of timing. To have selected the very day that it is announced that unemployment has fallen below 1 million and to choose the very week in which opinion polls have shown clearly that we have the most popular Chancellor of the Exchequer since polling records began and a Budget that has received one of the highest levels of public approval shows the noble Lord's great courage and judgment.
In the Motion, the noble Lord, Lord Strathclyde, clearly invokes the International Monetary Fund. I can only believe, having listened carefully to his speech, that, after someone else had drafted the resolution, he must have got around to reading the report. He then must have decided that the best way to invoke the International Monetary Fund was to ignore the report as if it had never happened. However, I do not think that the noble Lord can expect to get away with that.
We have heard all kinds of quotations from the report. Usually I am not one to embrace the International Monetary Fund with a great deal of enthusiasm, but even people like me can find points in it—in particular from the directors' meeting of the fund, following publication of the report—where the United Kingdom Government are commended on their strong performance as regards the United Kingdom economy. In the discussion held in Washington on 23rd February, the directors went on to say that,plans to increase public investment in infrastructure and human capital are justified in light of the evidence",and that they,welcomed the Government's efforts 'to enhance competition, innovation and entrepreneurship'".That was the judgment of the directors of the International Monetary Fund.
The directors continued by saying that they agreed that,sound fiscal and monetary policies, underpinned by transparent medium-term policy frameworks as well as the sustained implementation of structural reforms, have contributed to the strength of the economy in recent years".They concluded this part by saying that they,expected output growth would remain robust",and that the,prospects for inflation remain benign".891 There is a great deal more where that came from. I am sure that, if the noble Lord, Lord Strathclyde, wants to read the directors' report and executive summary in full, he need only make a quick telephone call to Steve Field in the Treasury Press Office. No doubt he will then be speedily supplied with the text.
§ Lord Strathclyde
My Lords, I hope that the noble Lord will forgive me. I pointed out in my speech, and I do so again, that the IMF also said—this was the point of my Motion—that the Government would be prudent to abstain from introducing significant new spending commitments in the March 2001 Budget.
§ Lord Tomlinson
My Lords, no doubt the noble Lord listened in detail to the context in which my noble friend Lord Woolmer placed that quotation. However, I am sure that the noble Lord, Lord Strathclyde, does not feel particularly proud of having to scurry through a multi-page report to find one comment that was critical and of ignoring everything else. The rest of the report from the International Monetary Fund was a paean of praise to the economic management of this country.
In his remarks, the noble Lord, Lord Strathclyde, gave me the impression that, basically, he believes two things: that taxes are too high and that services are under funded. It follows, therefore, that he wishes either to cut taxes or to spend more. In fact, his right honourable friend in another place, Michael Portillo, appears to want to do both. He wants to cut taxes and to spend more. Shortly after the Budget he told us clearly that Labour's spending plans were unaffordable. He went on to say that,Labour is spending £600 more than the country can afford for every taxpayer",That equals £16 billion. So Mr Portillo wants to see £16 billion-worth of cuts on the one hand, but he promises no cuts; simply a formula which states that he will match Labour's spending plans. Talk comes cheap. "Less tax, more services", is an easy incantation. "Cut taxes and match spending plans", is an equally easy incantation. But that is not an economic agenda. That is a fraud. If a company outside this House issued a prospectus on that basis, the people responsible would have their collars felt and would be locked up.
I come now to some of the important aspects of the Budget of my right honourable friend Gordon Brown. I turn first to the important question of debt repayment and the consequences which flow from that. Here, unlike my noble friend Lord Desai, I warmly welcome that debt repayment and its consequences. Last year, the Government repaid £9 billion-worth of debt. This year, the record is even better. As the Chancellor pointed out in his Budget speech,this year the net cash debt repayment will be £34 billion. This is more debt repaid by one British Government in one year than all the total debt repaid by all the previous British Governments of the last 50 years".—[Official Report, Commons, 7/3/01; col. 297.]892 Next year, debt repayments—that is, the cost of servicing our debts—are to be £1.5 billion less than were forecast in the Pre-Budget Report. That means that, in total, they will be £3.5 billion less than in the current year. That represents £3.5 billion which can be spent on services rather than on servicing debt. The fund will be available not only this year, but next year, the following year and each year that we have a government and a Chancellor who will keep debt under control. It is a permanent benefit for expenditure.
Once that is combined with other things that have happened since 1997—for example, it is clear that the Government have been able, because of the fall in unemployment, to reduce social security costs by £4 billion annually—you can then start comparing the aggregation of the reduction in debt servicing and the reduction in social security costs. You will find that in the period 1979–97—the period of the previous Conservative government—42 pence in every extra pound was spent on either debt servicing or social security. Today, the Budget suggests that that figure will be only 16 pence in the pound.
That has very clear, direct repercussions on major areas of policy. In 1997, we spent more on debt servicing than we spent on the schools' budget. Today, we are spending £10 billion more on the schools' budget than on debt servicing. The benefits of the Budget this year continue to be based on the principles of financial and economic prudence. By repaying debt, the Government rejected the opportunity to create a pre-election bonanza.
The modest extension of public spending was, in my opinion, well targeted. It was targeted on families, public services, fairness and social justice, modernising road transport, increasing employment opportunities and, yes, on building stronger businesses and business opportunities.
Above all, this arose while delivering a strong and stable economy; an economy which is praised by the British people, envied by other governments, supported by the IMF report and substantially welcomed by it. It is only the disappearing membership of the Conservative Party and its diminishing band of supporters, which we read about in the Sunday press with so much interest this week, which cannot welcome the Budget for what it is: good news for Britain and good news for the British people.
The noble Lord, Lord Stevens of Ludgate, who is no longer in his place, said that it is difficult for the ordinary man in the street to understand what is going on. I think He underestimates the ordinary man in the street. The ordinary man in the street understands this Budget; he supports this Budget; he values its priorities. With his support, it will the Labour Government who produced the Budget who will be going on to a second term in order to continue their work of building an economically strong and socially just Britain.
§ 5.43 p.m.
§ Lord Boardman
My Lords, I share the congratulations to my noble friend Lord Strathclyde from the noble Lord, Lord Tomlinson, but for very different reasons. My noble friend quite rightly referred to the points that the noble Lord did not want to read out, while the attack made by the noble Lord was quite out of context.
Perhaps I may refer to the remarks that the noble Lord, Lord Tomlinson, made about borrowing. I do not know whether the noble Lord has a copy of the report but, if he has, I suggest that he turns to page 209, which deals with the net cash requirement. It shows there that £19.5 billion had come in from "unanticipated spectrum receipts". They were nothing at all to do with the present Government or the Chancellor of the Exchequer; they were a lovely windfall.
§ Lord Tomlinson
My Lords, of course they were. Does the noble Lord think that the tooth fairy produced them.
§ Lord Brooke of Alverthorpe
My Lords, the £19.2 billion surely arose as a result of government decisions to run the telephone auctions, the licence auctions.
§ Lord Boardman
My Lords, the previous Government had built up these various technologies, the sale of which enabled this windfall to fall into the lap of the present Government. However, whatever the cause of it, let us refer to what is stated here, which is that the £19.5 billion is being used to reduce the debt.
Turning to the Chancellor's speech, he refers to forecasts, plans, projections, adjusting for the economic cycle, being locked into a tight fiscal stance, and so on. He then goes on:Because of this and because of the spectrum cash proceeds, we are able to repay debt. Last year we repaid £9 billion. I can tell the House that this year the net cash debt repayment will be £34 billion".—[Official Report, Commons, 7/3/01; col. 297.]So that was entirely due to the unanticipated receipt of the spectrum proceeds, which will be eroded by reductions of debt repayment in future years.
The noble Lord, Lord Tomlinson, suggested that the debt reduction was due to the Government's prudent financial management. That had nothing to do with it. I suspect that the noble Lord's comments were perhaps planted in a brief, and those who have not read the brief do not understand what they are talking about.
While I am commenting on previous speeches, perhaps I should say to the noble Lord, Lord Taverne, that investment in this country has been higher than investment in Europe. I think that the noble Lord was suggesting that we would have higher investment than we have at the moment if we were to join the euro. That is not so according to the figures that I have.
The noble Lord, Lord Woolmer, referred to the golden rule of borrowing only to invest and said what an excellent rule it was. It sounds attractive, but how do you decide what you are investing in. School meals? 894 Obviously they are current account. School buildings? I do not know; I think that they are probably capital account. A battleship? Where is that covered? That problem will be left entirely to the Chancellor to decide to suit his own particular books.
I was going to refer to the remarks made by the noble Lord, Lord Desai, but as he is not in his place I shall not do so.
Turning to the summary of taxation, we have been quoted figures that it has increased since Labour have been in office by 3 per cent of the GNP. That is an enormous amount of money. It has gone up from 35.2 per cent to 38.2 per cent in that period. Those figures are taken from the Office of National Statistics. The noble Lord, Lord Haskel, referred to those figures, but he put an altogether different slant on them. If he reads the books and the figures, he will see that taxation has increased by 4 per cent of GNP while the Labour Party has been in government.
That very heavy burden has been inflicted by a great number of stealth taxes. At the time of the last election, the Chancellor understandably said that Labour would not increase income tax. It has not done so. He has, in fact, reduced income tax, but he has used a very skilful device to increase a whole variety of other taxes. These increases have not dropped on people in one block and all at the same time—they have been spread out—but the Government have collected these vast sums of money, some 4 per cent more of GNP than in previous years.
The Chancellor has, for example, raised stamp duty—I take these increases not in any particular logical sequence but as they occur to me—and fuel duties; the marriage allowance was reduced and then abolished; mortgage tax relief has been abolished, causing great hardship to many who are buying their homes; the tax relief on life insurance has gone, which has had an extremely uncomfortable, adverse effect on pensions. After this Budget, a family on reasonably modest earnings could end up being £669 per year worse off.
I turn to productivity. Here again, the noble Lord, Lord Haskel, quoted figures with which I find it impossible to agree. Productivity increased by 3.7 per cent under the Conservatives; it has increased by 2.9 per cent under the Labour Government.
§ Lord Haskel
My Lords, I thank the noble Lord for giving way. The point I was making is that the difference between productivity in Britain and productivity among our competitors is, on various measures, between 10 and 20 per cent. If we improve our productivity and introduce more growth into the economy, that is how we shall improve our standard of living.
§ Lord Boardman
My Lords, I am sure that places can be found where productivity is much higher. But comparing like with like, given the degree of sophistication of the available technology, one must compare growth of 3.7 per cent under a Conservative 895 government with 2.9 per cent under the present Government. I raise the point only because the noble Lord raised it in a way that was not entirely fair.
As regards the savings ratio, before the Conservatives lost office the rate of saving was over 6 per cent. Labour's prediction is that the rate will be 2.5 per cent for the year 2001. Those figures are given by Ernst & Young, a highly respected firm of accountants.
The total tax increase under Labour is now said to be the equivalent of 10p on the basic rate right across the board. It comes to about £28 billion, and the rise is the fastest in Europe. For the first time, tax in this country has exceeded the level of that in Germany.
The right reverend Prelate the Bishop of Hereford is not in his place; however, I must refer briefly to VAT on church repairs, a matter that he rightly raised. Originally, the Chancellor said that no VAT would be payable. He found that he was wrong. Europe has said that it will re-examine the matter in 2003. I understand from the Budget that the possibility of zero rating might arise. In the meantime, the Government have said that they will top up the present 5 per cent and give a grant to the Churches, which I very much welcome.
The Chancellor has stated that education and health will each receive about £1 billion. The average person in the street, when asked what the Chancellor is doing for education and health, will say that he is spending £2 billion. We know that the Chancellor has a "triple" approach; when we look at the small print that amount is seen to be spread over three years. The amount that will be spent on education and health each year is nothing like that—the figure will be £380 million for education and £290 million for health.
As I said, one of the things that I find most difficult to understand is the way in which the Chancellor and everyone in government have completely ignored the sum of almost £20 billion pounds in unanticipated SPECTRUM receipts. I should be grateful to know how that bonus is being presented. Surely that windfall must have a dramatic effect on future budgeting. I shall be glad to hear some comment other than the information that is tucked away in the small print in a Budget document.
§ 5.54 p.m.
§ Lord Stewartby
My Lords, perhaps I may refer briefly to the overall judgment in the Budget. Last week's Budget included the ratification of public expenditure projections for the next few years which had been announced in the Autumn Statement. But, as my noble friend said, it also laid down additional expenditure in the areas of the National Health Service and education.
I am concerned that the Budget gives a stimulus to an economy that is already rather stretched. Consumer demand has been strong; the savings ratio is low; the labour market is increasingly tight; and the current account is in significant deficit. Behind all that, the world economic outlook is increasingly uncertain.
896 As a result of the Budget, tax is to be slightly reduced; but public expenditure is to be substantially increased over a number of years. GDP is expected to grow: the central estimate is that growth will be 2.5 per cent over the next year or two. Yet public expenditure is scheduled to increase by more than 4 per cent in the coming year, and by more than 3 per cent in the year after that.
It is much easier to expand public expenditure than to constrain it. It must be remembered that public sector finances are highly geared to changes in the level of the economy. When the economy is buoyant, governments obtain rising revenue as companies pay more corporation tax; people pay a higher proportion of their incomes in tax as those incomes increase and, with more people in work, that again increases the tax take. An expenditure tax such as VAT will be buoyant with the economy itself.
At the same time, in those favourable conditions, welfare payments are naturally reduced and that produces a sharp improvement in government finances, as we have seen in the past few years. The difficulty is that if the economy then weakens, there is likely to be a reversal of the process and all the items that go with it; namely, there will be a loss of tax revenues and an increase in public expenditure on welfare and support services.
The danger is that the Chancellor is banking on a continuation of favourable economic performance but has made his expenditure plans on the assumption that they can move ahead of the rate of growth in the economy, even as the economy now stands. Therefore, any unexpected adverse developments or any shocks to the system could cause problems, leading either to the need to constrain public expenditure again or to raise taxes, or both. It is inherently risky to commit a government to public expenditure over a period of years at a rate exceeding the expected growth rate of the economy.
If there is a large surplus in government finances, it may appear at first sight perfectly safe and sensible to increase expenditure and to reduce taxes. Up to a point that is true. However, it must be remembered that the outlook can change fundamentally, and quickly.
I do not in any sense want to be a prophet of doom, but we must take account of a number of factors which have appeared recently and which cast some uncertainty, even over the economic projections on which the Budget is based. The two largest economies in the world have problems of their own. They are different kinds of problems. In the United States, there is severe retrenchment in the so-called new economy. That has had a significant impact on certain areas of the US economy, but it has also made an impact on business and consumer confidence in the US. Japan has been struggling for several years. It seems increasingly clear that that country is politically and culturally incapable of taking the measures to bring about the structural change that is necessary.
Only an optimist would say that the UK and continental Europe can remain entirely isolated and insulated from those factors. There is an increasing 897 risk that economic conditions in this country will perhaps be a little less favourable—I hope only a little—than they were expected to be until recently. The sudden shake-out in the stock market is something of a warning.
Stock markets are not the most reliable of economic indicators, but they have tended in recent years to give signals about growth or slow-down which have been borne out in practice. The scale of the present setback in the stock market is, therefore, something to which we need to attend. Companies that are giving profit warnings are, in effect, saying that they will have less money to pay to the Government in corporation tax; that they are likely to have to cut back on their levels of staffing; and that, therefore, they are likely to be less enterprising. That will have an impact on the real economy. I do not want to overstate the position, but the scale of the setback in financial markets has been sufficient to give us a warning that it would be unwise to ignore.
Then there are unexpected shocks. During the past few days in this House we have been discussing the impact of the foot and mouth outbreak. Obviously, that is primarily a problem for rural areas and for the agricultural industry. Perhaps I may refer to the experience of my home village in the south of Scotland—although in view of what was said earlier I scarcely dare mention it. The local tea shop has had to close, the garage is experiencing difficulties, the village shop has lost its passing trade and the hotel/pub is struggling. Those experiences are localised and, perhaps, still quite contained problems at the moment in certain parts of the country. However, they can have a wider impact, especially when one considers them in conjunction with the fact that agriculture is now in a very dangerous situation.
I said earlier that I did not want to be a prophet of doom; and certainly do not want to imply that an adverse economic outlook over the next two years is the only possibility. However, such matters sometimes arise when one is not expecting them. That is why I am concerned that the Chancellor of the Exchequer has made commitments to increase expenditure over the coming years at levels ahead of even his own projections of economic growth.
§ 6.3 p.m.
§ Lord Islwyn
My Lords, I join other noble Lords in the thanks that they expressed to the noble Lord for initiating this most important debate. However, as several other speakers have pointed out, it is more about the Budget than about the report of the International Monetary Fund which voiced only the mildest of criticisms of the Government's policies.
The Chancellor of the Exchequer reminds me of a sort of latter-day Martin Luther. He is saying, "Here I stand, I can do no other". His text is, "No return to boom and bust". It has been prudence all the way but not without purpose, as his recent Budget has shown. The Chancellor has recognised that an artificially boosted economy, often to try to win a general election, invariably leads to an economic squeeze, high 898 interest rates, repossession of properties, redundancies and factory closures. But Gordon Brown has also recognised that the essential ingredient for a successful economy is investment.
At the previous general election, and since, the Prime Minister pointed out that the future is, "Education, education, education". How right he is. The Chancellor has responded by announcing that education spending is to rise by 5 per cent a year above inflation. That should strengthen our education system, and help to improve skill levels. This analysis was endorsed, not criticised, by the IMF. As my noble friend Lord Tomlinson pointed out, there are policies to promote innovation, research and development, competition and entrepreneurship, which will contribute to raising productivity. The Chancellor is seeking the pathway for the achievement of economic success, so that we can compete effectively with our trading rivals in the markets of the world.
Any responsible government have to be concerned about the health of the nation, and must make provision through state funding for an efficient and adequately financed National Health Service. The vision of Aneurin Bevan, the creator of this great service, was immense. When the noble Baroness, Lady Thatcher, was Prime Minister she made the famous statement that the NHS was safe in their hands. I do not know how many people believed her, but some while ago I spotted some figures in one of our daily national newspapers which showed that Italy spent 11 per cent of its GDP on health. Our comparable figure was given as 5.8 per cent. I do not suppose that those figures are now strictly accurate, but they certainly gave me food for thought at the time.
Nevertheless—and very wisely—the Chancellor has now authorised health expenditure to rise by 5.7 per cent above inflation each year. I am a supporter of traditional family life—of two-parent families—but the basic need for any family is to have a roof over its head. The important issue of mortgages comes to the forefront here. To his great credit, the Chancellor has adopted policies that have ensured that mortgage payments are averaging £1,200 a year less than was the case under the previous administration. What a boon this must be to families.
Another vital factor is inflation. We now have the lowest figure in this respect for 30 years. The executive summary of the IMF report states:The UK is experiencing the longest period of sustained, non-inflationary output growth".With inflation at such a low level, I ask the pensioners of this country: is this not the best possible way to keep the value of your pension, rather than see it eaten away by inflation? Likewise, from next month., all pensioners will receive either the £5 single increase or the £8 increase for a couple. In addition, we have the winter fuel allowance, and there are now free television licences for those aged over 75 years.
Other measures were included in the Budget to help less-well-off pensioners. There was also an expanding lop tax rate, and a promise of a pensioner's credit in 899 the next Parliament to help low-income and middle-income pensioners. Nevertheless, I am not starry-eyed in regard to the Chancellor's proposals for pensioners. I believe that we should return to increases based on inflation and on average earnings, which was sadly taken away in the first period of the Thatcher government.
I turn to the most basic issue of all, employment. The noble Lord, Lord Taverne, in his usual way eulogised the glories of the European Union. However, I read this week that German unemployment now stands at 9.3 per cent, while our unemployment is approximately half that figure. I recall that Germany has joined the euro. There must be a message there somewhere.
The great work of John Maynard Keynes, The Theory of Employment, was essentially about unemployment. For me, unemployment has always been like a tap left running; that is, a waste of economic resources. The Chancellor should be applauded for the fact that unemployment is now below 1 million—the lowest figure for over 25 years; 1 million more people are in work than in 1997 when the Conservatives left office. Over 25,000 young people have been helped into work through the New Deal. Youth unemployment has fallen by more than 75 per cent and long-term unemployment has been halved.
What worse start in life can there be for a young person than to be out of work? Unemployment is the worst scourge of all. I recall that under the previous government at one stage the unemployment figure reached 3 million. If the Opposition were returned to power, they would soon revert to their old failed policies. The result could be catastrophic for our country. Their 18 years of power can be summed up in that little catch-phrase of a decade or so ago, "private affluence and public squalor". The present Chancellor is doing a first-class job. He has a wonderful record of success. He deserves the grateful thanks of the nation.
§ 6.12 p.m.
§ Lord Hodgson of Astley Abbotts
My Lords, I too begin by thanking my noble friend for giving us the opportunity to discuss this important matter. However, if one is 19th on the speakers' list in a debate of this nature it is perhaps inevitable that many of one's points will already have been made by other noble Lords, no doubt in a far more felicitous manner. I have no wish to weary the House with repetition at this hour.
Like my noble friend Lord Sheppard of Didgemere, I wish to focus on the "how" of taxation as opposed to the "why". It is another area where the Government have "spun" rather than delivered. If that means that I focus on the micro rather than the macro, I make no apology. I comfort myself with the thought that it is at the micro level that our fellow citizens have to live and work.
Until four years ago there was a long-established system for levying tax on private individuals who fell outside the PAYE system. Noble Lords will recall that 900 the system had three stages. Information on the individual's tax return had to be submitted by the end of January in respect of the preceding tax year. The Revenue then calculated the tax owed and levied a demand. Finally, in due course, no doubt after some arm-wrestling, the tax was agreed and paid. The contract—if I may use that word—between the Government and the taxpayer was that the taxpayer had one single legal obligation; that is, to submit the correct information on his or her tax return by the due date. The Inland Revenue had the obligation to make the tax calculation and the faster it did so, the faster it could claim the tax.
However, four years ago that whole system was changed with the introduction of self-assessment. Not surprisingly, the basis of the contract between the taxpayer and government changed too. Now, the taxpayer has not only to provide the information; he or she also has to calculate the tax. That saves the Inland Revenue hours of work without at the same time prejudicing its right to reach down and take an individual's tax return for checking. Moreover, the taxpayer not only has to calculate the tax, he or she has to pay it by 31st January each year or face interest or other penalties. Further, he or she has to make—
§ Lord Haskel
My Lords, I thank the noble Lord for giving way. If one does one's own tax return and sends it in by the end of October, the Revenue will work out one's tax. One does not have to do it oneself.
§ Lord Hodgson of Astley Abbotts
My Lords, the relevant date is not the end of October; it is 30th September. That is fine if one does not have overseas earnings or, for example, complicated earnings resulting from membership of Lloyd's. A substantial number of taxpayers simply cannot submit a tax return by that date.
Furthermore, the new system provides for an interim payment to be paid by 31st July each year. That has done wonders for the Government's cash flow in regard to both quantum and timing. The noble Lord, Lord Taverne, said that we on these Benches were reluctant to refer to Kenneth Clarke. I refer him to a speech of Kenneth Clarke on the Budget made yesterday in another place in which he said that the amount of money that flowed from self-assessment exceeded the wildest dreams of the Inland Revenue when it planned the introduction of that policy.
What does the taxpayer get out of this new contract? It was promised that the self-assessment system would be, and would remain, simple so that a sensible man or woman could complete the tax return without being an accountant or having a degree in astrophysics. At the beginning that proved to be the case. But now, while the Government have rigorously enforced their advantages—less work for the Revenue and improved cash flow—they have reneged on the benefit promised to the taxpayer. As the Chancellor has introduced scheme after scheme, wrinkle after wrinkle and initiative after initiative, the self-assessment system has become unintelligible.
901 I wish to introduce the Minister to the following little gem: Form SA151, the tax calculation guide for the year ended 5th April 2000. It is 29 pages long. I shall not detain the House by quoting extensively from it. However, I shall give two simple examples from it. Page 13 is headed:
§ "STAGE 6: NOW WORK OUT THE INCOME TAX DUE".
§ I should say to the right reverend Prelate the Bishop of Hereford that it does not state that one has to smile while one is doing this. Page 13 contains 31 boxes. If the Minister thinks that I have chosen a page to suit my argument, I should point out that page 12 contains 46 boxes. That totals 77 boxes on two pages out of a 29-page tax return. The notes on each page are equally unintelligible. It appears that the Revenue accepts that they are unintelligible as it suggests that if one is experiencing difficulty with the form one should contact one's Inland Revenue office for further advice. However, this is supposed to be a self-assessment system, not an Inland Revenue assessment system. Telephoning an Inland Revenue office is not an exercise for those who are faint of heart. Lengthy telephone queuing and the absence of relevant officials are just two of the challenges to be encountered. In short, I defy any man or woman on the top of the Clapham Omnibus now to self-assess his or her tax correctly.
§ Some will say that self-assessment does not affect many people. However, I understand that self-assessment affects something in excess of 3 million taxpayers. That number will include the cream of our business, artistic and academic talent. Is this a good way to encourage talent? Is this a good way to reward success? It is not as if that is the only example. As my noble friend mentioned in his opening remarks, the Inland Revenue is now being pursued in the High Court by a group of consultants with regard to the impact of the IR35 rules. As my noble friend said, these rules are primarily aimed at consultants in the information technology field. This country needs those skilled people desperately if we are to maintain our position in that key industry. They are very mobile people with transportable skills. Of all the industries that claim to be global—and many do—IT truly is.
§ Last week's Daily Mail carried a facsimile of a 40-page form that pensioners had to fill in to claim extra benefit. Taxpayers are in danger of sinking in a mass of unintelligible paper as a consequence of the Government's obsession with command and control and their belief that they can and should interfere everywhere. If we are to compete on the world stage, we need not only to minimise the tax burden, but to give taxpayers a clear, simple and credible system for tax collection. I am delighted to support my noble friend today.
§ 6.21 p.m.
§ Lord Brooke of Alverthorpe
My Lords, I join in the congratulations offered to the noble Lord, Lord Strathclyde. for his innovation in introducing this debate. There have long been complaints that we do not deal with the Budget adequately. I am pleased that he has had the courage to table the Motion. I hope that 902 my party will take note of some of the views that have been expressed and that perhaps we might stimulate such a debate in future. If not, I hope that the Conservatives will repeat what they have done this year.
The debate is a welcome opportunity to underline the Budget's key messages on what has been happening to the British economy. It gives us great pleasure to know that, as the noble Lord, Lord Stevens, who has left the Chamber, said, we now enjoy the lowest inflation for 30 years, the lowest long-term interest rates for 35 years, more people in work than ever before and the lowest unemployment since 1975. Importantly for a country of home owners and aspirant home owners, mortgages are on average £1,200 a year lower than under the previous Government. We keep our fingers crossed about the prospects for further reductions in interest rates.
All that comes against a background of the Government inheriting some underlying advantageous factors—I concede that—but also an unacceptably high level of national debt. As my noble friend Lord Tomlinson said, it stood at 44 per cent of national income. Happily, that will be reduced to 30.3 per cent in the coming year, with a net cash debt repayment of £34 billion. As the Chancellor emphasised, that is more debt repaid in one year than the total debt repaid by all the previous British Governments of the past 50 years. That is a fact.
Debt interest payments next year will be £1.5 billion lower than forecast in the pre-Budget report and substantially lower than expected in last year's Budget. In total, debt interest payments will be £3.5 billion lower than this year.
§ Lord Boardman
My Lords, does the noble Lord agree that those lower debt repayments are due to the unanticipated sale of one company?
§ Lord Brooke of Alverthorpe
My Lords, the decision to auction the licences was anticipated and planned Government policy. Taken together with the £4 billion annual reduction in social security costs achieved through lower unemployment and 1 million more people in work under Labour since 1997, that gives a marvellous opportunity to release resources for the country's priorities. Those are the facts. Cutting debt and unemployment and achieving higher growth and earnings have yielded higher tax receipts and the chance for balanced investment in Britain's future.
I was the General Secretary of the Inland Revenue staff federation for a number of years and was in post at the time when the government supported by the noble Lord, Lord Hodgson, came forward with plans for introducing self-assessment. It had nothing to do with the Labour Government. It was planned by the previous government.
§ Lord Hodgson of Astley Abbotts
My Lords, I made it clear that the contract has been changed. The contract was that certain things would be done by the taxpayer, in return for which he would have a simple system. This Government have enforced the tax 903 collection aspect of the contract, but they have not honoured their side of the bargain, which was to keep the self-assessment system simple.
§ Lord Brooke of Alverthorpe
My Lords, I shall continue with the point that I was making. I was on the inside at the time. The idea was devised as a simple tax assessment system, but the more that the Inland Revenue—not the government, which was a Conservative government—worked on it, the more they realised that they could not continue to call it that, because it would inevitably become increasingly complex.
I return to my major point of higher yields from tax receipts because of growth and more people in employment, as well as higher personal incomes. We have choices as to how to deal with the surplus. The money can be invested in our neglected infrastructure and public services, or it could disappear in general tax cuts above the not ungenerous targeted tax cuts that the Chancellor has proposed. That is the choice that I hope that the electorate will have in the near future. People will be free to make their own judgment on whether there have been unacceptable rises in personal or business taxation and whether they want more public service investment, not just in education, health, police and the Armed Forces, but also in transport and the environment. Sir Alastair Morton's report yesterday, showed what a state our transport system is in.
As voters reach their decisions, we will want to ensure that they are aware of the Government's record of success, which I have just described. They should also know that, in the words of Ed Crooks, economics editor of the FT, last Thursday:The modest tax cuts announced by Gordon Brown yesterday confirm that Britain remains a low tax country compared with most of the rest of Europe—if relatively highly taxed compared with Japan and the United States".Crooks provided graphs of taxes around the world—tax revenues, the highest income tax rates and the main corporate tax rates. As the noble Lord, Lord Haskel, said, Britain comes out as one of the lowest on all counts. Our main corporate tax rate of 30 per cent is the lowest among industrialised countries. The Government have also cut small company tax from 23p in the pound to 20p and introduced a lop starting rate for small to medium-sized enterprises.
The average corporation tax bill of a small company has been reduced by nearly a quarter since 1997. The capital gains tax taper has been increased, thereby reducing CGT to 10 per cent after four years, as the noble Baroness, Lady Hogg, so kindly acknowledged. Last week the Chancellor announced further proposals for tax reliefs for business—for research and development, for intellectual property and goodwill, for start-up businesses, for disadvantaged communities and many more. The UK fiscal regime for small businesses does not have the excessive negative influence that the Conservatives allege. It can be supportive and can incentivise. If that is not the case, why have 170,000 new small businesses been set 904 up since 1997? Why had the stock of foreign direct investment in the UK risen to more than £311 billion by the end of last year? That is a clear demonstration that the UK continues to be the first choice for inward investment in Europe.
Where is the evidence of decline or contraction, of which we have heard so much this evening? It is certainly not in the IMF reports. Last year, the IMF was concerned that the growth in the economy could lead to a pick-up in inflation. But, in fact, that was not borne out. Now we have this year's IMF reports. My colleagues on these Benches and the noble Lord, Lord Oakeshott of Seagrove Bay, on the Liberal Democrat Benches, have dealt more than adequately with the more recent alleged warnings of the IMF.
In sum, the case has not been made for the noble Lord's Motion, other than perhaps with regard to personal taxes. And that is questionable, given the very low interest rates from which so many people in this country have benefited, particularly through mortgage repayments. When that is taken into account, the position changes significantly.
As I said earlier, the voters will pass judgment on whether or not the increases have been reasonable. They will also pass judgment on the other issues which are of central importance to them; namely, public investment, children, mothers, families and poverty. The latter was not even mentioned by the noble Lord, Lord Strathclyde, when he moved the Motion. When noble Lords opposite come to respond, perhaps they will give equal prominence to those points.
§ 6.31 p.m.
§ Lord Northbrook
My Lords, despite headline tax cuts, such as the reduction in the basic rate of income tax from 23p to 22p last April, under this Government overall taxes have increased. The Treasury's own figures show a rising tax burden—that is, net taxes and social security contributions as a percentage of GDP—over the course of this Parliament. According to its figures, which since November 1999 have generally been adjusted upwards, the tax burden has increased by a full 2.2 per cent. That rises to 2.7 per cent if the working families' tax credit is included as a spending increase rather than a tax cut.
In its report on the 2000 Budget, the Treasury Select Committee called for a special investigation into the Treasury's decision to count money paid out under the working families' tax credit as negative tax rather than higher public spending. It also took the Chancellor to task for using confusing figures to measure the tax burden and for basing his claim to have been fiscally prudent on relative rather than absolute tax and spending numbers.
The Office for National Statistics has also produced figures on the tax burden which are very much in line with the Treasury's numbers. They show that the tax burden rose from 35.5 to 38.4 per cent between the second quarter of 1997 and the third quarter of 2000. That is an increase of £28 billion or, as my noble friend Lord Strathclyde said, the equivalent of 10p on income tax.
905 Until March 2000, Ministers refused to admit that taxes were rising. But finally in that month the Government admitted that the burden of taxation had risen. The Prime Minister's official spokesman, Alastair Campbell, stated that that was the case. Figures published by the OECD in 1999 show that, compared with the rest of Europe, Britain has the fastest-rising tax burden (taxes as a percentage of GDP) and that, for the first time in a generation, now pays more tax than Germany.
How have those tax increases taken place? The Government decided that it would be far easier to operate by stealth—by jacking up indirect taxes and reducing allowances—than by altering the basic and higher rates of tax. For example, in July 1997, as the noble Lord, Lord Oakeshott of Seagrove Bay, among others, mentioned, the abolition of ACT robbed pension funds of a figure estimated to be in the region of £5 billion a year, rising to £6 billion next year.
However. because the measure was difficult to understand, few pensioners made a fuss about it. Only now has it become apparent that those operating some pension schemes will have to ask for increased contributions from members. Most companies are asking for a 10 per cent increase, but Tesco recently asked for 15 per cent. Otherwise, businesses may not be able to afford to pay their workers' pensions.
Stamp duty has been picked on as an easy way to raise money. The highest rate has increased from 1 to 4 per cent in gradual stages since 1997. Fuel duty escalators have been raised well above the rate of inflation—in the case of unleaded petrol, from 36.8p per litre to 46.82p between November 1996 and March 2001.
With regard to direct taxes, the hiking of national insurance rates is a key example. When this Government came to power, the upper earnings limit on which national insurance was chargeable stood at £23,660 per year. That figure has been increased gradually to £29,900—a rise of 26 per cent. The most recent rise in this Budget was 7.5 per cent—almost three times the rate of inflation. It has been estimated by accountants that that change will mean that up to 1 million people earning more than £30,000 a year will pay approximately an extra £200 per year, raising £200 million for the Treasury. That type of stealth tax will affect people such as top nurses and senior teachers. The Shadow Chancellor stated that at least 9,000 policemen, 23,000 teachers, over 20,000 NHS workers and other hard-working, middle-income workers will have to pay more national insurance every week.
Exactly the same has happened to Class 4. contributions for the self-employed. However, there is a further twist. In 1996–97, Class 4 contributions were set at 6 per cent on profits or gains between £6,860 and £23,660. As a result, the maximum levy was £1,008. The upper limit has also now increased to £29,900. Last year, the lower limit went down to £4,385. I do not have a figure for this year. The final bad news is that the Class 4 rate increased to 7 per cent during that period. Therefore, the maximum annual Class 4 rate is now £1,786—an increase of 77 per cent since 1997.
906 Another way in which the Government have been able to gather tax by stealth is by cutting allowances. Mortgage tax relief was restricted; then it was abolished in March 1999. The married couples allowance has been abolished for those born after 1935.
The House of Commons Library has published figures which show that a typical working family is more than £600 a year net worse off after all Labour's tax and benefit changes. Of that figure, £400 comes from the loss of dividend credits, £326 from the abolition of MIRAS, and £300 from getting rid of the married couples allowance. The Chancellor believes that his tax increases have hit only the super-rich. The example to which I have just referred assumes that a man has an income of approximately £25,000 and his wife £18,000. It shows that ordinary, hard-working people are being hit.
Moving on to business taxation, we hear much the same story as we do in relation to personal tax. We welcome the cuts in corporation tax which have taken place since 1997, as we do the cut in basic rates of income tax. However, we do not welcome the raft of extra taxes and costs to businesses.
Recently, the CBI estimated that the cost to businesses of the red tape and taxes introduced by Labour since May 1997 is £32.3 billion. That includes taxes of £5 billion a year and £12.3 billion in red tape over the present Parliament. Those taxes include the windfall tax on utilities; record levels of fuel duty (the highest in the EU); the abolition of tax credits on dividends, as previously mentioned; changes in the timing of corporation tax payments; increased taxes on company cars; and the climate change levy, which alone will bring in £1 billion a year to the Government.
The impact has been particularly severe on small and medium-sized businesses, as confirmed by recent figures from the Institute of Chartered Accountants. The figures show that the cost to micro and small businesses of complying with new legislation more than doubled between 1999 and 2000. For micro businesses, the average cost of implementing new legislation rose from £1,700 in 1999 to £3,600 in 2000. For small businesses, the cost rose from £4,700 to more than £8,000.
The following regulatory, administrative and tax-collecting areas are also costing companies money. First, the annual administrative costs of the Working Time Directive are estimated to be £2.3 billion. Secondly, the working families' tax credit, which employers must administer on behalf of the Government, has set-up costs of £100 million and a further £240 million per year in ongoing costs. Thirdly, while the Conservative Party has accepted the policy of the national minimum wage and therefore its financial costs, there will still be an administrative burden of £674 million. Fourthly, the student loan repayment scheme is the other main payroll burden that the Labour Party has introduced for employers to administer. It has an annual cost of £359 million.
What is the Conservative Party's response? We wish to follow the example of the United States and of many other European countries and to cut taxes where we 907 can. Those tax cuts would be funded by sensible reductions in public expenditure. We will not cut the Government's spending totals for health, schools, the police, defence and transport. We can find £8 billion of savings, the major part of which would involve cutting back on government bureaucracy, with a saving of £1.8 billion. The other major components of the total are: social security cost reductions, with a saving of £2.5 billion; DETR cost savings of £1 billion; and endowing universities, which would save £1.3 billion. Those spending reductions would be used to finance tax cuts. Our aim is to target the cuts to hard-working families, pensioners and businesses.
Importantly, those tax-cutting policies are linked to public spending savings and can be made irrespective of measures in the latest Budget. The Conservative Party is not planning to cut public spending. We wish to restrain the rise in public spending to within the growth rate of the economy as a whole.
The Chancellor of the Exchequer claims to have two fiscal rules. The first, the sustainable investment rule, states that,other things being equal, a reduction in the public sector debt to below 40 per cent of GDP over the economic cycle is desirable".The qualification, "other things being equal", means that the rule is far from rigorous. The second fiscal rule is the so-called golden rule. That states that over the economic cycle, the Government should borrow only to invest. The Shadow Chancellor reported in a speech recently that privately the IMF has been highly critical of the golden rule. According to the Financial Times of 13th February, IMF economists have for some time questioned the rule, arguing that it does not sufficiently restrain government spending. An IMF paper critical of the golden rule was drafted last year but never published.
In summary, the Government's current strong financial position is to a considerable extent the result of the higher level of taxation that has been imposed since they came to power. The danger, were they to get a second term, is that if the economy weakened to below 2.5 per cent growth for a long period, the Government would still be stuck with expenditure commitments that would wash away the surplus. The IMF's warning about the dangers of the planned record levels of public expenditure may come back to haunt the Government.
§ 6.42 p.m.
§ Lord Newby
My Lords, I should like to follow the example of the noble Lord, Lord Desai, and begin by explaining the extent to which we on these Benches agree with the noble Lord, Lord Strathclyde.
First, we certainly agree that it is extremely valuable to have such a debate in the immediate aftermath of the Budget. We are grateful to the Conservatives for using one of their debate days for that purpose, but we hope that next year their example will be followed by the Government. This important subject should be dealt with in government time, not that allocated to one of the opposition parties.
908 Secondly, we obviously agree that taxation has risen during the Government's lifetime, although, if one excludes this year's windfall revenues from the sale of the telecoms licences, the proportion of taxation to GDP, at 38 per cent, is hardly at an historically high level for this country or particularly high when compared with our nearest neighbours across the Channel.
Thirdly, I agree with the noble Baroness, Lady Hogg, who said that the Government might have done better had they acknowledged at an earlier stage that the effects of their fiscal policy would be to raise taxes. Instead, they pretended for a couple of years that the opposite would result. In our view, such activity tends to reduce the credibility of the Government and of the political class as a whole.
Fourthly, we agree that there has been a lack of transparency in some of the tax changes. At least, tax changes and tax increases have been introduced that are not understood by, although they affect, large numbers of people. The removal of the dividend tax credit for pension funds is the classic example. There was a sense that the Chancellor of the Exchequer was looking for taxes that he could raise that would barely be noticed and that he did not want to introduce headline tax rises, although that would at least have the merit of being immediately understandable.
Finally, we agree that the increasing complexity of the tax system is a burden that it would be better to reduce. The noble and learned Lord, Lord Howe, and the noble Lords, Lord Stevens of Ludgate and Lord Hodgson, referred to that. As we saw in our recent debate on the Capital Allowances Bill, we hope that your Lordships' House might have a part to play in that regard in future.
That, I am afraid, is it; those are my areas of agreement with the noble Lord, Lord Strathclyde. The tenor of his speech was that there was something seriously wrong with the levels of tax and of expenditure. A feeling emanated from his speech rather than a raft of specific proposals, but that tenor was undoubtedly there. The implication was that either tax or expenditure should be cut. The noble Lord, Lord Blackwell, was more specific. He said that in many cases, expenditure was an unnecessary bad. Unfortunately, he did not explain that or give examples of an unnecessary bad, although we got the general message. That attitude from the Conservative Front Bench is surprising because expenditure on health, education and pensioners under this Government as a proportion of GDP is less than it was during the Major years. The Conservatives make a mistake. They seem to think that John Major got it wrong, although they no doubt supported his approach at the time. Their other comment on expenditure—William Hague said this in another place—is that the Conservatives would meet the Labour Party's health and education plans. In the main areas of expenditure, the Conservatives are not planning to make cuts at all; they plan to maintain the levels that the Government have set.
909 The Conservatives have produced plans to save approximately £8 billion. They were referred to by the noble Lord, Lord Northbrook. I am sure that the noble Lord, Lord Saatchi, will set them out in more detail. I hope that he will not object if I get my retaliation in first, before he speaks; the timetabling of our debate means that I have no other option. The problem with the £8 billion figure is that, when it is examined in detail, the proposed cuts are found to be either dubious or downright bogus. I shall give just two examples. The largest saving involves a £1.8 billion reduction in the cost of running the Civil Service. Staff numbers in the Civil Service are already falling dramatically and its real cost is also falling. Furthermore, the majority of staff in the Civil Service who remain are either collecting taxes—presumably, the Conservatives are in favour of that—or are in departments in which the Conservatives have pledged not to cut expenditure. The idea that there are huge billion-pound expenditure cuts to be made in the Civil Service seems to us to be highly implausible.
Other proposals relating to the £8 billion figure are extraordinary. Apparently, a saving of £200 million would be made because the Conservatives do not propose to set up regional assemblies. The Government may or may not be in favour of setting up regional assemblies, but it is clear that they will not be set up within the planning period that is covered by the public expenditure plans. There is not £200 million to save in those plans in the first place. The truth is that the Conservatives will either have to cut expenditure on core public services or keep taxes at their current levels. They cannot have their tax cake and eat it.
I turn to the Government. As my Liberal Democrat colleagues have already explained, we can just about forgive the Chancellor of the Exchequer for trumpeting the strong position of the economy and of public finances. He has been operating in relatively benign times but one can hardly blame him for handling a good card well. However, the Government face two major uncertainties, which several noble Lords have discussed this evening.
The first relates to the outlook for future growth. We know, from every passing day, that the economy in the USA is weakening quite rapidly. The economy in Japan is equally depressed. This has serious implications for us in terms of trade and investment. Although some economists writing about the proportion of trade to the USA or Japan suggest this is relatively small, I am not so sure. For example, we see in terms of investment that Motorola has decided to cut 7,000 jobs. It is almost certain that some of those job cuts will fall in the UK.
When growth falls—if it does—the Chancellor will have a difficult choice to make between cutting expenditure, raising taxes or increasing borrowing. At that point we shall have a real chance to assess the Chancellor's true worth in difficult times.
The longer term uncertainty relates to the level of public expenditure and public services. Total departmental expenditure is planned to rise by 8 per cent per annum in money terms over the period 1999 910 to 2004. This is the boom that has followed the bust of the first two years of the Labour Government. It is not sustainable over the long term. We do not know what the Government's long-term vision for tax and expenditure is. Do they believe that by 2004 we will reach the promised land in terms of quality of public services, and that public expenditure will plateau at 2004 real levels? Or shall we continue to attempt to reach European levels of expenditure—for example, on health as promised by the Prime Minister? The Government will have to make a choice in the long term between public expenditure and tax cuts— a choice as real for Labour as for the Conservatives. The Government to date have been curiously resistant to either making this choice or arguing for it.
As my noble friend Lord Taverne made clear, we on these Benches are unambiguous in believing that a civilised and productive society is more likely to be achieved under a European than an American model. I was interested to hear the noble Lord, Lord Stevens, say that we should go down the US route but protesting that we have to protect the weak and poor. I wonder whether he really believes that the US model adequately supports the weak and poor in the US—I certainly do not.
All noble Lords will be relieved to hear that I do not intend to read the full text of the Liberal Democrat alternative budget. However, having criticised everyone else, it is only fair to set out some of the main points in it. First, we are committed to having no stealth taxes. If we are to persuade people to be cheerful taxpayers, they need to know exactly where any changes in taxation are going to be spent.
Secondly, the tax changes that we propose are all hypothecated; to provide help for the poorest and better public services; to provide long-term care for the elderly; to provide more doctors, nurses, teachers and policemen. We explain how we will raise the taxes to do it. For example, we say we think we will need a 50 per cent tax rate on the highest earners.
Thirdly, we will review the Barnett formula. This has been a slightly contentious issue within the Liberal Democrats, not least among some of our Scottish colleagues. It is very difficult in reality to argue against expenditure based on need.
Fourthly, as my noble friend Lord Taverne said, we are committed to join the euro and to set an exchange rate target to enable us to do it. In these ways we believe we can build and win the argument for a fair level of taxation that provides high quality services for all, encourages investment in people and physical capital and provides a sustainable basis for economic growth and social progress. To echo the noble Lord, Lord Islwyn—here we stand, we can do no other.
§ 6.54 p.m.
§ Lord Saatchi
My Lords, it is a great honour for me to wind up for our Benches on this debate because it has been stimulated by the Leader of the Opposition, my noble friend Lord Strathclyde, and because of the distinguished speeches we have heard from key members of the House this afternoon. I hope that any 911 observer of this debate would agree that the House of Lords has a real contribution to make in the financial area. I hope that we can return to that on another day.
The noble Lord, Lord Harris of High Cross, said that he came today both to bury and to praise the Chancellor. I am here strictly on burial duty. The theme of the burial service was provided to me by the noble Lord, Lord Woolmer, because he said it was basically a question of trust. I begin on that theme by taking the words of the Chancellor in his Budget Statement:the direct tax burden for the average family falls … [to] the lowest level for 30 years".—[Official Report, Commons, 7/3/01; col. 307.]That statement—failing as it does to draw the distinction between direct and indirect taxes—is an insult to the intelligence of the public. It is to treat the public like morons.
The truth emerges in a document published at almost the same time as the Chancellor was speaking—the Red Book. The figures shown in Table C10, page 195 have been referred to by other noble Lords. The Government's own figures document the increase in the tax burden under them from 35.2 to 37.7 per cent. To find the full truth of what has happened with taxation under this Government one has to turn to the last page of the notes to the accounts for the full story. It is the hiding place for creative accountants throughout the ages. The noble Lord, Lord Barnett, purported to give my noble friend Lord Strathclyde a lecture in corporate finance. If I may return the compliment, what one finds in this note on the last page is that these public accounts do not conform with generally accepted accounting principles. My noble friend Lady Hogg has also pointed that out. If they did conform with generally accepted accounting principles, Table C10 would be inaccurate because it would understate the tax burden by 0.5 per cent. It is 38.2 per cent—the full 3 per cent increase under this Government.
In the light of that, would one say that what follows is a fair description of the Chancellor of whom we have been talking this afternoon?Gordon Brown is too fond of obfuscation. [He] has reduced budget transparency to a new low. Important tax changes have been omitted from the speech. Statistics have rarely been quoted on a consistent basis. The Budget documentation has been filled with political point-scoring rather than factual analysis. There has been a continued tendency to classify the collection of revenue as anything other than taxation.That is the view of the editor of the Financial Times. We should look with an objective eye at the allegedly great triumph of this Government, the so-called strong public finances, the fiscal surplus.
The Government say regularly that they are presiding over strong public finances. The noble Lord, Lord Barnett, described this as a very sound and strong economy. From where do those strong finances come? They appear on page 188 of the Red Book at Table C4, where one sees a £16 billion surplus for this year. From where did the £16 billion surplus come? Was it perhaps—as the noble Lord, Lord Brooke, said 912 it was—from the strong economy? It is not that because trend growth of GDP is only 2.25 per cent, half as fast as America and slower than Euroland. Does it come from high inflation? It does not because that is only 2.5 per cent. Does it come from the better off people in the country paying more tax on their higher earnings? It is not that because earnings have only grown by 2.3 per cent.
I hope that the Minister will not say that the surplus arose from the higher tax receipts from the formerly unemployed. I believe that the Treasury will shortly be producing figures to refute that. No; it is because out of this modestly growing economy, one item is miraculously growing much more rapidly. That figure cannot be found in the Red Book, of course, but the IFS worked it out for us.
Government tax receipts are growing by 4.6 per cent a year; they have done so since the Government came to power. That compares with 1.8 per cent during the 18 years of Conservative government. That 4.6 per cent a year is double the rate of growth in the economy, and there lies the true economic miracle of this Government. Taxes growing twice as fast as GDP, twice as fast as inflation, twice as fast as people's earnings. How has that happened?
It happened because the Government took full advantage of the complexities of the tax system to which my noble and learned friend Lord Howe referred. First, there has been a staggering proliferation of tax rates; the number of basic rates has doubled from 15 to 38. Tolley's Standard Tax Manual—the bible of tax accountants—increased to 3,293 pages in three years. Other noble Lords referred to the complexity of the tax calculation guide, the size and complexity of the Finance Bill and so forth.
The result is that the Government, with all that apparatus, are now in a position where they first tax people on low incomes; they then means test their incomes to satisfy themselves that they are in need; they then offer them benefits to restore their income back to what it was before they paid the tax; and, finally, they tax the benefits. As a result, 56 per cent of pensioners are now means tested—a record—and any pensioner, as my noble friend Lord Hodgson said, who wishes to claim the Government's new minimum income guarantee has to complete a 40-page form. Is it any wonder that out of 500,000 eligible pensioners, only 82,000 have attempted the feat? Age Concern described it as,a massively complex system and endless form filling for pensioners".As the social security Minister, the noble Baroness, Lady Hollis, had to agree in response to a Question in your Lordships' House yesterday, people do not know that MIG (minimum income guarantee) is an income support benefit. What do the Government believe poor pensioners think MIG is? Perhaps a Russian aeroplane.
The result of all that complexity is what my noble and learned friend Lord Howe called the "mounting anxiety" about lack of transparency, also referred to today by the noble Lords, Lord Newby and Lord 913 Harris, and my noble friends Lord Blackwell, Lord Stevens and Lord Hodgson. The complaint is that there is too much scope for hidden tax increases. The Chancellor can and does increase tax without ever announcing a tax rise. People just wake up one morning and find themselves in a higher tax bracket, with the result that tax as a percentage of GDP invisibly creeps up.
We are in a position to solve the mystery of fiscal buoyancy to which I referred. According to a Written Answer in another place, £2.6 billion of the surplus comes from the underclaiming of complex credits and benefits and £5.7 billion, according to the Independent Financial Advisers Tax Action Group, comes from the underclaiming of complex tax allowances. If we add to that the £3.4 billion the Government admitted to underspending on health and education, we shall have found £11.6 billion of the £16 billion surplus. In other words, three-quarters of the surplus comes from the fact that the Government have over-claimed tax, underpaid benefits and underspent on health and education. The bottom line is that the growth of real household disposable income—the amount left to spend after tax and inflation—has slowed to a feeble 1.6 per cent during this Labour Government compared with an average 2.5 per cent under John Major's administration and 2.9 per cent under Margaret Thatcher.
After all that, do the Government have a surplus? Will it be for Britain, as it will be for the US, 5 trillion dollars over 10 years? No. We have heard a lot about the repayment of government debt. The noble Lord, Lord Tomlinson, was excited that the Chancellor had repaid £34 billion of debt. As he said, the Government were keeping debt under control. It is true that on Table C4, page 188, we find the repayment of the £34 billion to which the noble Lord, Lord Tomlinson, referred. But perhaps I can point out an extraordinary fact. In the year after the repayment of the £34 billion, the Government again start to borrow. These are the extra borrowings: £1 billion, £10 billion, £11 billion, £12 billion. I added those up and according to my maths, that comes to £34 billion. Mr Micawber himself would be amazed. So here we have a Chancellor who repaid £34 billion one day and borrowed it again the next. No wonder he put VAT on spectacles; it was so nobody could see what was actually going on!
I shall pass over the notes I had on the IMF, which would only involve swopping selective quotations from the report, and my noble friend Lord Strathclyde dealt with that. I close briefly by saying this. Would it not be more relaxing for the Benches opposite if the Government were more open? The noble Lord, Lord Newby, on the Liberal Democrat Benches, was open. Liberal Democrats differ profoundly from us, as the noble Lord, Lord Taverne, said. He said that Liberal Democrats believe in high taxes because they believe that that is the route to better public services. Conservative Benches are open; we believe in low tax. We believe in the parable of the good Samaritan. We believe that low tax means more freedom and choice for individuals; it means higher tax revenues in the long run.
914 But what do the Government believe in? They preach low tax, but they practice high tax. Oh what a tangled web it is; what anguish for all. Would it not be better to be more like the noble Lord, Lord Desai, who said, "Our party is not a party of lower taxation and I am proud of that"?
§ 7.7 p.m.
§ Lord McIntosh of Haringey
My Lords, the noble Lord, Lord Strathclyde, deserves to be congratulated twice: first, on following the example of the Labour Party in Opposition in choosing to use an Opposition debating day immediately after the Budget to debate the Budget. That is what we did ourselves and what we said they should do. We feel that it is the right thing to do. It is responsible Opposition.
Secondly, above all, the noble Lord is to be congratulated on his miraculous timing, to which the noble Lord, Lord Tomlinson, has already referred. Fancy having the debate on the day on which claimant unemployment goes below 1 million for the first time for 26 years—that from a party which, in 1979. fought an election campaign (the noble Lord, Lord Saatchi, will remember it well) which had a whole group of unemployed actors, most of them hiding their faces so their shame could not be seen by their friends, saying, "Labour Government is not working". Why was Labour Government not working, according to the noble Lord, Lord Saatchi? Because in the period 1975 to 1979 unemployment had risen from 1 million to 1.1 million. What happened after Labour Government did not work, according to the noble Lord, Lord Saatchi? The claimant count peaked at 3.09 million, a rate of 11 per cent, in July 1985 and reached 3 million again in December 1992. My noble friend Lord Islwyn had his figures exactly right on that.
What will the noble Lord, Lord Saatchi, advise the. Conservative Party to do in terms of posters for the coming election? Will it be the same people, perhaps with two-thirds of them cut off? Will it be an exposition of the figure that I gave? I wait with great fascination to see how the spin doctors of Smith Square deal with this minor problem. And I congratulate again the noble Lord, Lord Strathclyde, on his timing. Although he has followed my advice, bearing in mind the Budget and the quality of the response by the Opposition to the Budget, I would have thought as many as four times before leading with my chin in the way that the Opposition have done today.
It cannot be denied, and nobody has tried to deny, that the Budget was delivered against the background of a strong and stable economy. That cannot be taken for granted— although there were examples during the last American Presidential election of attempts to take it for granted— because that strong and stable economy results from decisions that we have taken since coming to office to avoid a return to the stop-go cycles of the past.
We gave the Bank of England operational independence; we put in place new fiscal rules and disciplines, about which I shall say more; we imposed 915 tough controls on borrowing and spending; and we returned public finances to a sustainable position. That means that we are now experiencing the lowest inflation for 30 years, the lowest long-term interest rates for 35 years, the lowest claimant unemployment since 1975, with more people in work than ever before, because claimant unemployment is not the only or even the best measure.
This Budget takes no risks with that hard-won economic stability. I believe that the noble Lord, Lord Taverne, would have liked us to take more risks earlier in this Parliament, but we did not. Having increased by 3 per cent last year, GDP is forecast to increase by 2¼ to 2¾ per cent in each of the next three years; inflation is forecast to be 2¼ per cent this time next year, and on target at 2½ per cent by the end of next year; and household finances are strong, net financial wealth having risen by 26 per cent since the spring of 1997.
The noble Lords, Lord Strathclyde, Lord Blackwell and Lord Boardman, referred to the saving ratio. They noted that the forecast has been revised downwards since the Pre-Budget Report. In part, the levels of confidence in the present economic climate of low inflation may have reduced the need for households to save for precautionary purposes. As consumer spending growth slows, as is widely expected, the ratio is forecast to rise to 4¾ per cent this year, 5 per cent next year and 5¼ per cent in 2002. Long term savings on pensions and ISAs are still robust—a more important consideration than many others. Lower net saving is not funding an unsustainable boom, as in the late 1980s. The savings ratio is important. However, the validity of our policies has been confirmed by the Bank of England's quarterly bulletin.
Public finances remain sound, and they meet the Government's two fiscal rules. The golden rule states that over the economic cycle the Government will borrow only to invest, not to fund current spending. The noble Lord, Lord Haskel, is quite right to suggest that the effect of that is that one can never entirely get rid of economic cycles; but we have succeeded in moving the cycle. On a cyclically-adjusted basis, the surplus on current budget remains positive throughout the forecast period. The average surplus since 1999–2000, which, on the Government's provisional judgment, is the start of the current cycle, also stays positive, remaining above 1 per cent of GDP over the next five years. So the Government are firmly on track to meet their first fiscal rule, even in the most cautious case.
The golden rule alone does not limit the amount of borrowing that the Government can undertake for investment. I was puzzled by the noble Lord, Lord Boardman's, gallant defence of a return to cash accounting. I do not believe that he meant it. However, it is important to limit the amount of government borrowing to a stable and prudent level. Excessive levels of borrowing cause debt to rapidly build up and add to the burden of debt interest payments.
916 The second fiscal rule—the sustainable investment rule—states that public sector net borrowing as a proportion of GDP will be held over the economic cycle at a stable and prudent level. Other things being equal, net debt will be maintained below 40 per cent of GDP over the economic cycle. The ratio of public sector net debt to GDP has been reduced from 44 per cent in 1997 to 31.8 per cent this year. It is forecast to further fall to 30.3 per cent in the coming year and remain at about 30 per cent in the following four years. I can confirm that my noble friend Lord Woolmer was right in giving comparable figures.
In every one of the next five years, adjusting for the economic cycle, the Budget locks in the tough fiscal stance set out in both Budget 2000 and the Pre-Budget Report. That is an important point to remember when we come to consider the IMF judgments. Because of that, the Government have been able to repay the debt. The noble Lord, Lord Boardman, is right that a significant part of this year's debt repayment has been the spectrum receipts. However, it is important to note that the spectrum receipts have been used to repay debt, not for current expenditure. As a result of the repayment of debt, debt interest payments are lower. They are forecast to be £3.5 billion lower in the coming year. That money will be available for schools, hospitals and other spending priorities. Because we have succeeded in reducing unemployment and, therefore, reducing social security costs, additional resources of £4 billion per year are available for frontline public services.
Between 1979 and 1997—and I say this in the presence of the noble and learned Lord, Lord Howe—42p of every additional pound spent went to debt interest and social security. Now, the figure is only 16 per cent, leaving more than 80p of every additional pound to go direct to front-line public services. The noble and learned Lord, Lord Howe, said that the Chancellor was entitled to a modest degree of self-satisfaction for that. I believe that he is entitled to a good deal more than modest self-satisfaction, although he would be the last person to feel it or to show it.
The Motion that we are debating today includes references to the summary of the IMF board's discussion of the IMF staff report on the UK's 2000 Article IV consultation, from which the noble Lord, Lord Taverne, and many others have presented selective quotations. I shall not read out the entire report; that would be devastating. In their report and summary of the board's discussion, published on 28th February, the IMF directors praised the current UK expansion as,the longest period of sustained output and employment growth and low and stable inflation in more than 30 years".During a discussion on 23rd February, they said:Plans to increase public investment in infrastructure and human capital are justified in the light of the evidence".They noted that,even after taking into account recent spending decisions, the fiscal position remains sound and fully consistent with the authorities' medium-term fiscal framework".917 The Government entirely agree with the directors' conclusion that,additional fiscal stimulus would limit the room for further interest rate cuts".That is why last week's Budget did just that. It locked in the tough fiscal stance set out in both Budget 2000 and the Pre-Budget Report, which were the bases of the IMF's comments. Criticisms of a budget which purports to be based on IMF comments are, therefore, entirely misplaced. The Budget took no risks with either public finances or growth of inflation. It built on a platform of economic stability. It locked in the fiscal tightening, it met all the Government's fiscal rules and then allocated additional resources in a balanced way to invest in Britain's future.
I take seriously the comments made by the noble and learned Lord, Lord Howe, and the noble Lords, Lord Stewartby and Lord Newby, about the risks to the world economy, particularly in the United States and Japan. As they will know, the forecasts for growth in the world economy have already been revised downwards since the Pre-Budget Report to take into account the weaker than expected growth in the fourth quarter of last year. The forecast is in line with the views of external forecasters, including the IMF.
The UK uses a lower estimate of trend growth for forecasting public finances to act as a buffer against unexpected downturns. We still remain on track to continue to meet the fiscal rules, even in the cautious case, 'which is 1 per cent below the central case. Of course there are risks—no one can deny that—but it can legitimately be claimed that we recognise those risks and did so in the way we framed the forecast.
I turn to what is emotively called "the tax burden". We had a curious debate on the subject. The tax:GDP ratio is not dependent only on government measures; it is dependent on the strength of the economy. If the noble Lord, Lord Saatchi, believes that that is an admission, he is welcome to it. It is self-evident. As the noble Lords, Lord Blackwell and Lord Brooke, recognised—apparently the noble Lord, Lord Stevens, did not—if there are 28 million people in jobs and unemployment is at its lowest rate for 25 years, fewer people are on benefit and more people pay tax. Should we apologise for that? Should we apologise for the fact that tax receipts benefit from that? I see no reason to apologise for economic success.
The Institute for Fiscal Studies was quoted against us by the noble Lords, Lord Saatchi and Lord Harris. Perhaps I may quote back to the noble Lord, Lord Saatchi, what the institute stated:Budget measures announced during the 1992–97 Parliament meant that revenues by the end of that Parliament were £19.6 billion higher than in 1996–97 and an additional £7.4 billion higher in 2002 than they would have been in the absence of any Budget announcement".The Tories in fact put up taxes drastically.
The IFS Green Budget this year concluded that:If the Government implements all of the measures for consultation announced in November's PBR [which they did], there will have been no change in Government revenues resulting from Budget announcements over the Parliament".918 The tax:GDP ratio for the previous comparable year, 1999, was lower than in any other European country. This year, despite the strength of the economy, the increase in oil prices and record employment levels, the tax:GDP ratio will still be no higher than it was in half of the period in office of the noble Baroness, Lady Thatcher. Next year, the tax:GDP ratio will be £5 billion lower than the previous government 'were planning in their last Budget before the 1997 election.
I am not pleased with that comparison; it is the last year I shall be able to use it because the previous government's forecasts go no further. But as the noble and learned Lord, Lord Howe, and others applauded the previous government on the basis of their forecasts rather than on their achievements, I believe that it is therefore legitimate to quote their forecasts back to them.
Finally, in the light of the fact that Budget projections show a steadily falling tax:GDP ratio over the next three years, what are we to think about the attack on the tax burden? The tax burden is a crude measure. The same percentage could encompass policies of social justice or social injustice, proper provision for public services or what my noble friend Lord Islwyn rightly called private affluence and public squalor.
What matters to people in this country is not the macro measure but the fact that, compared with indexation, households will be on average £590 a year better off from measures introduced over the Parliament (£150 a year better off from this Budget and £240 a year better off from all the measures taking effect this year). Families with children will be on average £1,000 a year better off as a result of measures introduced over this Parliament as a whole. Finally, the direct tax burden on a single-earner family on average earnings with two children will be at its lowest level since 1972. I do not think that God loves me, but under those circumstances I am a cheerful taxpayer—"Canon Barnett" had it entirely right!
That is a record to be proud of. This is a timed debate but I shall give way to the noble Baroness.
§ Baroness Hogg
My Lords, I am grateful to the Minister. Was he including in those figures the effective increases in indirect taxes?
§ Lord McIntosh of Haringey
My Lord, yes, of course. I would have said "direct taxes" if I meant direct taxes.
I turn to business taxes, which took up much time on the Opposition Benches. Corporation tax receipts are expected to be £32.1 billion, which is £2.3 billion less than last year and £3.2 billion if one excludes corporation tax from North Sea revenues. It is well recognised that there have been greater cuts in corporation tax for small and medium-sized enterprises. The proportion of tax revenues which come from business—that is, all business taxes— is down from 31.4 per cent of tax revenues under the Conservatives to 30 per cent today. This is a government who cut taxes for business.
919 There has been so little attack on the Budget in practice that I have to cut out large chunks of my speech. I wanted to defend what we are doing about productivity but no one has attacked us on that.
§ Lord McIntosh of Haringey
My Lords, of course, I recognise that we have a long way to climb. The noble Lords, Lord Woolmer, Lord Taverne and Lord Haskel, made that point most effectively. But even if we take the labour productivity measure—I understand the point made by my noble friend Lord Desai about taking capital productivity—according to the latest data, year-on-year whole economy productivity growth was 2.6 per cent in the third quarter of last year; manufacturing productivity was up by 5.4 per cent to December 2000; and there are encouraging signs of increasing productivity growth. Many of the detailed provisions in the Budget, and in the Budget speech, addressed that point.
The noble Lord, Lord Sheppard of Didgemere, made an interesting speech to which I cannot respond because it is outside the scope of what has been covered. However, the Government are consulting on a new tax credit for community investment to encourage private investment in enterprises in disadvantaged communities. I know that that is close to his heart.
I must qualify part of what I said to the noble Baroness, Lady Hogg. The figures I gave were for personal tax. It is not a question of the difference between direct and indirect tax, as I think she suggested, but of personal tax as opposed to business tax. I hope that that was clear in what I said because I then moved on to the separate subject of personal tax.
None of these issues was criticised, but I shall pick up two points about the environment and transport. The noble Lords, Lord Strathclyde and Lord Northbrook, profoundly misunderstand the nature of the climate change levy, which they describe as being an additional burden. It is not an additional burden in fiscal terms; the climate change levy is neutral. It is balanced by the reductions in national insurance contributions.
As regards particular points which were raised in the debate, the right reverend Prelate the Bishop of Hereford would like the grants for repairs to listed places of worship to include also unlisted places of worship. We might consider listed buildings other than listed places of worship before we went on to unlisted places of worship. The right reverend Prelate is in danger of us giving him an inch and wanting a mile—
§ The Lord Bishop of Hereford
My Lords, I am grateful to the Minister for giving way. The request was directed at places which could be used for community purposes if work was done to convert 920 them. That is at the heart of the matter. I was not referring to other places of worship regardless of the factor of community use.
§ Lord McIntosh of Haringey
My Lords, that is an interesting suggestion and I believe that I addressed it in my response to the noble Lord, Lord Sheppard.
There was no significant criticism of what was stated in the Budget about employment opportunities and the success of the New Deal. If there had been criticism, I would have hastened to reply to it from a very comprehensive and overwhelmingly convincing brief. We are taking a whole range of measures to make work pay. I am a little disappointed that the noble Lord, Lord Harris of High Cross, describes it as fiddling to address social issues. What he regards as fiddling we believe to be a virtuous circle. We are doing something which is socially just, because it makes poor people better off and encourages them to go back to work. One then reaps the sensible economic reward in that, by the way, it increases tax revenues. We are told that there is something deplorable about that.
But the Budget goes much further to provide support for families with children and to help to tackle child poverty. I have heard no criticism this evening about the children's tax credit and the measures on maternity and paternity pay. They mean that over the Parliament as a whole, following the Budget the tax and benefit changes introduced will lift over 1.2 million children out of poverty. There has been no comment on that from the Opposition Benches, nor any recognition of that element of social justice and common decency.
What we have seen over too many years in this country has been chronic under-investment in schools, services, transport and law and order. The noble Lord, Lord Taverne, believes that we could have made an earlier start to put it right at the risk of the kinds of results experienced in Ireland. I do not share that judgment. One had not only so many years of under-investment but also the chaos in public finances inherited in 1997. I refer to the double debt of £28 billion of borrowing. It takes time to turn round a tanker of that kind.
We have taken a responsible approach to public finances which allows us to allocate substantial new money to key public services—£43 billion over three years—as part of the 2000 spending review. The money will start to come on stream from next month. In the Budget—I shall not repeat these figures because they have not been criticised—over the next three years over £2 billion will be focused on health, education and tackling drugs and drug-related crime.
The plans announced in last year's spending review and this year's Budget provide for sustained, and sustainable, high growth in the British people's priority services. From 2001 there will be a real annual average growth of 5.4 per cent for education, 5.6 per cent for UK health, 20 per cent for transport in England—14 per cent for the UK—and 4.2 per cent for the criminal justice system in England and Wales. The noble and learned Lord, Lord Howe, called that 921 extravagant; the noble Lord, Lord Blackwell, said that it was an "unnecessary bad". The Conservative Opposition have said that they will stick with these plans, but they cannot have it both ways.
In your Lordships' House there are radicals, or true Tories (if I may so describe them). The noble and learned Lord, Lord Howe, the noble Lords, Lord Stewartby and Lord Blackwell, and the noble Baroness, Lady Hogg, have joined together in forecasting doom about the future of the economy over the next few years. I have been doing this job for nearly four years. The opposition parties have been forecasting doom in each of those years but in none of them has the doom occurred. I respect the true Tories, including the noble Lord, Lord Harris. I do not know whether the nmble Lord likes that description. I believe that he is the Real IRA as compared with the Provisional IRA.
Look at the scale and nature of the attack on this Budget from the Official Opposition. They have not attacked any of the fundamental propositions which the Labour Party has placed before the country this year and in other years.
§ Lord Sheppard of Didgemere
My Lords, I do not know, whether I qualify as a true Tory. I am encouraged by the Minister's remarks. Do I understand that we shall not receive word until next month about real expenditure on the London Underground?
§ Lord McIntosh of Haringey
My Lords, the London Underground is a matter which depends not only on the Government but also on a number of other factors on which I do not believe that it would be appropriate for me to comment in the middle of ongoing negotiations. In the circumstances, how timid has been the attack of the Conservative Front Bench and how neutered its approach to public expenditure and taxation. It has been neutered because noble Lords opposite want to say that they will provide lower taxes and, at the same time, maintain public expenditure on what they know to be the priorities of the British people. They know that they cannot make those two objectives meet each other. Their pathetic attempts to defend what they describe as the gap of £8 billion—which would be at least twice that—make it clear that they have no answers to the economic problems which face this country.
§ 7.36 p.m.
§ Lord Strathclyde
My Lords, I thank all noble Lords who have spoken, particularly for their congratulations to me on initiating this debate. We have proved that to hold a debate as soon after the Budget as possible is an extremely worthwhile exercise. I very much hope that the next government, of whatever complexion, will adopt the suggestions made by the Liberal Democrats and ourselves in opposition: that there should be a debate in government time properly organised by the government to debate the Budget. When the Finance Bill is published at the same time perhaps we should adopt some of the suggestions 922 of my noble friend Lord Saatchi and have a separate debate on the complexities thrown up by that process and be able to table amendments so that the Chancellor of the Exchequer can take them more seriously.
§ Lord McIntosh of Haringey
My Lords, does the noble Lord suggest that that be before or after it goes into Committee in the House of Commons?
§ Lord Strathclyde
My Lords, the hope is that the Finance Bill will be published here soon after the Second Reading in the House of Commons. Therefore, it will come here in the form of a No. 2 Bill before it goes into Committee in the House of Commons and we shall be able to debate it.
§ Lord McIntosh of Haringey
My Lords, does the noble Lord suggest that we debate it in parallel, with amendments tabled in the Commons and in the Lords? Which would be the Bill to emerge?
§ Lord Strathclyde
My Lords, I should be happy to deal with a Finance Bill in the way that we deal with other Bills. However, governments would not like that because they would not get their legislation out by the end of July. Therefore, we arrived at the "Saatchi" scheme by which a No. 2 Bill would go through the House of Lords in parallel. At the end of that the Chancellor of the Exchequer would be offered a choice of amendments which, if accepted, would, I believe, vastly improve the quality of the legislation passed.
I should like briefly to make a purely non-political point. This debate demonstrates just how wide is the expertise and knowledge in this House on these matters, which is why governments should take the House of Lords more seriously when it comes to financial scrutiny. The debate has also demonstrated that tax is a dividing issue and will remain so in the weeks ahead when we come to the general election. The Liberal Democrats have promised more Taxation. In Scotland not only will there be more taxation: there is also a promise of less expenditure because the Barnett formula is to be reformed. I believe that the Government will still need to explain how they intend to fund the gap between the increase in public expenditure and the growth in the economy. That is something to which we shall return in the weeks ahead, and I for one shall enjoy that debate.
As is customary at this stage, I beg leave to withdraw the Motion standing in my name.
§ Motion for Papers, by leave, withdrawn.