As we come to the last day of the Budget Debate it is interesting to examine what has happened since my right hon. Friend the Chancellor of the Exchequer announced his Budget last Tuesday. As ever, the Opposition announced the end of the world as we know it, and in the debates so far my right hon. Friend has been criticised by the Opposition for taking so long, for example, to abolish the national insurance surcharge—yes, national insurance surcharge, which was the Labour party's special tax on labour.
There was criticism too, of the extension of VAT to fish and chips. No one likes to be charged tax where tax was not previously charged, but I wonder whether the hon. Member for Grimsby (Mr. Mitchell) did not go a little over the top in making the following statement the highlight of his speech:
In imposing VAT on take-away food, the Chancellor has made a monstrous attack on working people."—[Official Report,13 March 1984, Vol. 56, c. 329.]
That line of windy rhetoric was taken to greater length and with greater flatulence by the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). I should say that I am very grateful to the right hon. Gentleman for sending me a note apologising for the fact that he cannot be here this afternoon because of an attack of gastric 'flu.
Out of charity, one should forget that most forgettable speech last Tuesday by the Leader of the Opposition. It perfectly illuminated what Professor Henriques, a onetime tutor of the right hon. Gentleman, meant when he said in The Times of 5 March that the right hon. Gentleman could always,
write 10 pages about nothing but didn't find it easy to write two pages about anything.
There has been criticism that the tax burden of those paying most tax has been eased too much and the burden of those paying least tax has been eased too little, but that completely ignores my right hon. Friend's achievement in raising the tax thresholds by much more than his critics, or indeed his friends, expected.
The serious issue is not VAT on fish and chips, but the economy and prospects for industry and commerce in the light of the Budget. I suspect that the right hon. Member for Bethnal Green and Stepney (Mr. Shore) will take a downbeat view of these things—he usually does—but, none the less, we should look a little wider than Opposition spokesmen did.
What has happened in the real world since my right hon. Friend spoke last week? Let me first refer to some actual events. Interest rates have fallen by about 1 per cent. to their lowest for nearly six years, and building societies have cut the mortgage interest rate by 1 per cent. I take it that the right hon. Gentleman and his hon. Friends do not object to that, although they may have reservations about the rise in the Financial Times industrial ordinary share index to its record level of 894·3 by Friday night. That was up by 5·9 per cent. from last Monday. The all-share index was up by 5 per cent.; the industrial group—I emphasise this, and Opposition Members should listen—was up by 6 per cent.; and the financial group was up by 0·2 per cent. Capital goods shares were up by 4·2 per cent., and, to be sure, banks were down by 2·9 per cent. But, then, the case that I intend to deploy is not that the Budget was better for banks than for industry. I suspect that that is what the right hon. Gentleman may believe, but he will be hard put to make the case in defiance of the facts.
We could instead look at a few share prices. For example, in manufacturing industry, TI was up 10·7 per cent., ICI 6·2 per cent., GEC 11·8 per cent., Courtaulds 9·2 per cent., Marks and Spencer 13 per cent. and Lucas 5·9 per cent. Perhaps the stock market takes an optimistic view.
Opposition Members may think that that is a subtle plot by the City to push down the shares of the banks and insurance companies and to push up those of manufacturing industry. Alternatively, they may think that they understand all these things so much better than investors. Let us then consider the statements of some of the top executives of major companies. I admit that they are not absolutely unanimous, but the vote of confidence in my right hon. Friend's judgment is overwhelming.
GKN, for example, thought that the moment of paying mainstream corporation tax might be advanced a year or two but that the rate would be down by 5 to 10 per cent. The finance director of MFI furniture group said:
It is a very good Budget for MFI
BICC, which came out of one stockbroker's computer as one of the hardest hit companies, found that its finance director, John Martin, reckons that the effect would be "neutral or even positive." Trevor Holdsworth, chairman of Guest, Keen and Nettlefold said:
None of the allowance changes would affect capital investment plans.
The deputy director of GEC said that the Budget was "family neutral for business." John Harvey Jones of Imperial Chemical Industries said that the effects of the Budget
are unhelpful for ICI because they will increase our tax bill.
Fortunately, ICI investors did not altogether agree with him, and promptly put his shares up very sharply.
The stimulus of the Budget has, in addition, to be taken together with what has been happening over the past year. As a result of the policies pursued over the last few years, we are now leading Europe out of recession. Our growth in GDP in 1983, and our expected growth in 1984, is the highest of all the European Community partners—a position to which we are not accustomed, least of all under Labour Governments. In the first three quarters of 1983 GDP was about 3 per cent. higher than in the same period in 1982, and the combination of 3 per cent. growth and 5 per cent. inflation is the best economic performance seen in this country since the 1960s. It looks as though it will continue.
The right hon. Member for Bethnal Green and Stepney may say, "He would say that, would he not?", but what do those notably sentimental people, the Swiss bankers, say? They take advertising space to say, "Invest now," and tell us that
Great Britain, one of the world's leading industrial nations, has become attractive again as an investment country".
Why cannot the right hon. Gentleman be as optimistic about Britain as the Swiss bankers? It is encouraging, because the recovery is now broadening out.
I was wondering whether it had occurred to the right hon. Gentleman that the interest of the Swiss in investment in Britain might be associated closely with the fact that the investment allowances and incentives which his right hon. Friend is about to abolish will apply here for another two years. That, I take it, is the major reason for such investment.
The Swiss bankers have for many months been taking the view to which I referred. They have been advocating investment in Britain while the right hon. Member for Bethnal Green and Stepney has been telling people that it is not worth investing because the prospects are so gloomy. It is a relief to see such optimism in Switzerland, as opposed to the right hon. Gentleman's pessimism.
The recovery is spreading out. The CBI industrial trends inquiry continues to point to improved buoyancy and output and to a further broadening of the recovery to intermediate and capital goods' producers. That is not achieved by artificially stoking up demand or by creating expenditure from money that has not been earned. I disagreed with the hon. Member for Birmingham, Hodge Hill (Mr. Davis) when he said:
Public expenditure and manufacturing investment are the twin engines of growth."—[ Official Report,14 March 1984; Vol. 56, c. 477.]
If that were true, we should have had the fastest growth rate in the world for many years. The improvement has been achieved through greater efficiency and competitiveness. Output per man-hour in manufacturing is 12·5 per cent. above its previous highest level in the second quarter of 1979 and has been growing at an average of 5 per cent. during the last three years.
Let us set aside the averages and consider the record of individual sectors. Between 1979 and 1983, steel output per man went up by 68 per cent. in Britain and by 7 per cent. in the European Community. What a different story it would have been for BSC and Britain had that been achieved say a decade earlier, between 1969 and 1973.
The figures are right; there is no "if' about that. We had vast over-investment in the past and we had a great deal of leeway to make up in terms of productivity after the years—for example, of the Beswick review—which were a disaster for the steel industry.
In motor manufacturing, output per man in Britain is up by by 34 per cent. In British Aerospace—relieved from nationalisation—sales per employee are up by 26 per cent. in real terms. The result of this improved performance is beginning to be reflected in company profits, which were 30 per cent. higher in the fourth quarter of 1983 than they were a year earlier.
Profits are important. Investment which does not create wealth or which, in ordinary industrial and commercial terms, does not make profits, is abortive or wasteful. To improve our industrial and commercial performance and create the wealth we need, we must reduce costs, remove distortions in the economy and provide an environment in which drive, effort and determination are rewarded. The Budget does all of those.
Does the right hon. Gentleman agree, however, that investment in many industries is very long term and that if there is not a quick return, private companies are often loth to invest, which makes Government investment necessary?
It is obvious that the hon. Gentleman has North sea oil in mind when he says that companies are reluctant to make long-term investments. They often make such investments, however, but at the end of the day the purpose of investment is profit, and if profits are taxed at 52 per cent. there is little reason to go in for long-term investments.
I agree with the hon. Lady. It was stupid to tax at that level, and it is time that it was stopped.
I am glad that there has been such a warm welcome for the Chancellor's announcement of the abolition of the national insurance surcharge from October this year. Our stated objective was to abolish it within the lifetime of this Parliament. We have done it at the first opportunity in the first Budget of this Parliament.
The right hon. Member for Sparkbrook observed last Wednesday that the right hon. Member for Bethnal Green and Stepney demanded the end of NIS in last year's Budget debate. Good for him. What a pity he imposed it in the first place. The final stage in its abolition—from 1 per cent. now—will be worth £850 million to private sector business in a full year. That is some measure of the burden over the years. It should not be forgotten that when we came to office the NIS stood at 3½ per cent. Its abolition will mean that we have on this count alone returned to industry £3 billion a year to reduce costs and encourage employment.
The Labour party often talks about low interest rates, but one economic commentator has suggested that the abolition of the 1 per cent. is equivalent, in terms of benefit to business, to a three percentage point reduction in interest rates. In other words, when we came to office the NIS was imposing a burden equivalent to an excess of about 10 per cent. on interest rates in those terms. That is the burden that we have taken from industry.
The halving of stamp duty on share transactions will give a welcome boost to the international competitiveness of London as a financial centre and an earner of foreign currency. The 2 per cent. stamp duty compared unfavourably with the rates of our European Community partners, and more particularly with those in the United States. Partly as a result, we have seen the growth of dealing in New York in British shares and we have seen the Stock Exchange's share of international business diminish over recent years. I think that the right hon. Member for Bethnal Green and Stepney, even if not all his party, believes it important for London to remain a competitive financial market. So he at least would be concerned that investors were finding it cheaper to deal in British securities in New York through the ADR device rather than direct on the Stock Exchange.
The stamp duty reduction, together with the forthcoming abolition of minimum commissions, should lead to substantially reduced dealing costs and restore London's competitiveness and its foreign exchange earnings.
There is little doubt that the economy will also grow further if we remove other distortions. What is done in this Budget builds on the steps that have gone before. We have removed controls—on pay, on prices and on exchange transactions—which so stifled initiative, created industrial strife and diverted attention from tackling Britain's problems. So we are moving to a clearer and simpler system of corporation tax, entirely in keeping with that approach.
Investment in manufacturing in the United Kingdom has been associated with far smaller additions to output than has been the case in other major industrialised countries, and there is a good deal of evidence showing that investment has often been over-sized, over-sophisticated and under-utilised.
The reform of the corporate tax system will provide an incentive to improve the effectiveness of investment. It will encourage enterprise and risk taking, it will increase rewards for the successful, and will encourage the creation of wealth. Perhaps above all, it will remove distortions. In the words of Sir James Cleminson,
companies which are making heavy capital investments will have to look very carefully at the return on those investments."
That is no bad thing.
The lower rates of corporation tax have been warmly welcomed by business. In two years' time industry will be paying corporation tax at 35 per cent.—a reduction of one third in the current rate—and the small companies' rate of corporation tax will fall immediately to 30 per cent., the same level as the basic rate of income tax. So, by encouraging investment in those activities with the highest pre-tax returns, the return on investment will rise—that is, our wealth creation performance will improve. The Budget will also lift a further major distortion from investment. Every undertaking has to consist of both capital and labour.
The hon. Gentleman should not have prefaced his question by, "In so far as the Secretary of State supports the Budget." I do support the Budget, and it is supported by almost every economic commentator who has put pen to paper. The Budget will improve prospects for employment beyond what they otherwise would have been. However, the Budget is not the sole determinant of levels of employment and unemployment.
The Budget will undoubtedly help to reduce unemployment levels below those which at they would otherwise have been. If the hon. Gentleman is asking me to forecast levels of unemployment, I shall no more do that as Secretary of State for Trade and Industry than I did as Secretary of State for Employment. If I were to be tempted to make a forecast, I might be a bit more accurate than the right hon. Member for Sparkbrook when he forecast the rate of inflation. Last May he said:
Despite all claims that inflation has been conquered, there is no doubt that inflation will be in double figures by the end of the year"—
that was last year—
if this Government remains in office.
I think that it would be as well if the hon. Member for Workington (Mr. Campbell-Savours) did not go in for too many forecasts.
There is little doubt that discriminatory tax rates through the system of tax allowances have encouraged inefficient investment. The large tax concessions given to favoured investment, whether successful or not, reduced the cost of that investment by up to 52 per cent., and more when financed through borrowing. They relieved industrialists of the costs of inefficiency or failure, but they had to be paid for by the tax bills of those who were more successful. The system can no longer be justified. In contrast, the new system is equitable. Business men will be left to take their decisions on economic and industrial factors and not, as they often did in the past, by thinking about where the tax breaks lay.
Any discriminating and distorting system will confer benefit on some. The longer it persists, the more investment will be distorted to fit distortion. The old system of capital allowances, which was built up over the years, was highly discriminatory. I do not pretend that everyone will gain from the proposed changes, and I accept that those who do not gain will squeal, but the other elements of the reform—phased withdrawal on the one side and tax cuts on the other—are balanced.
I accept that the Budget has been structured to try to increase investment and steer it in the right direction. I accept also that we have often been discriminatory in a distorting sense. However, what does my right hon. Friend say about private companies such as Barratts, which have undertaken major inner-city improvements in rundown, bad housing areas, and which will now have to face large VAT bills as a result of one of the proposed changes of my right hon. Friend the Chancellor of the Exchequer? Will the proposal have a bad effect on inner-city rehousing development that is undertaken by the private sector?
It is right to emphasise that where the work is done for local authorities they will be able to to reclaim the VAT and there will be no change in the outcome. My hon. Friend is correct to say that there will be VAT payable on private sector operations. However, in a Budget that is broadly neutral, such as this one, it is inevitable that there will be losers and gainers. We must consider the overall balance, which is undoubtedly one of gain. That has been the response of the majority of investors and managers.
What incentive could there be for risk taking when the state gobbled up over half of the profits of success and when the cost of failure was minimised by the tax system? I am sure than when the right hon. Member for Bethnal Green and Stepney was Secretary of State for Trade he had the embarrassment of explaining to foreign would-be investors that they should not be put off by over-high rates of tax on company profits because they would never make any profits on which to pay tax. That was the only argument that he and I could use when we were encouraging investment in Britain.
There is a consistent link, too, between reducing capital allowances and abolishing the NIS. We want to remove distortions to the character of investment, and we want to leave those decisions in the hands of the investor, guided by the prospect of returns, not by the prospect of tax relief.
Inevitably, all these matters will be changed in the light of the Budget. Greater optimism will no doubt cause people to rethink their plans, and the shape of investment will change in many cases. What is far more important is that the investment that is made should be profitable and show a good return.
The bias that was imposed in the past by the structure of corporation tax and national insurance surcharge, which we inherited, was discriminatory against labour. How odd it is that the Labour party should tax labour and subsidise capital and leave it to us, the capitalists, to put things right. The balance of the two must vary according to the commercial need for the lowest unit cost of production. We should not persist with a tax system broadly based upon the assumption that there is a shortage of labour.
I am conscious that the transition, beneficial though it is, will impose some strain, and I am particularly concerned to avoid transitional problems for projects in development and special development areas, in recognition of the problems that those regions face. Therefore, there will be transitional arrangements and they will follow the transitional changes in style that I announced in December in respect of regional development grants.
Both these reforms share a purpose. In our treatment of capital investment overall, and of regional investment, our aim will be the same—to improve the productivity of investment and to end the distortion caused by favouring capital over labour.
There are some, such as the right hon. Member for Sparkbrook, who are already claiming that industry will not respond to the incentives now being offered to it. I think that those critics are wrong. In the short term, the effect is more likely to pull forward investment that had been delayed as companies take advantage of the higher, but diminishing, level of capital allowances to investment and the prospect then of a higher run of profits beyond. I am heartened by the evidence of those who should know best—those who run companies. I find it illuminating, for example, to compare the views of the theoreticians with those of practical men. The theory suggested that BICC would be hard hit by the ending of the first-year allowances, but, as the financial director of the company has made clear, the effects of the changes will not be harmful, and, as we move forward out of recession, the advantage of lower tax rates becomes ever greater.
There is one further but essential form of distortion that the Budget tackles. Not the least important of the announcements by my right hon. Friend the Chancellor was his statement that the tax changes would lead to a reduction of at least 1,000 in the number of tax-gatherers. That figure of 1,000 fewer tax gatherers means perhaps as many as 10,000 fewer tax accountants concerned with minimising tax reduction. It means hundreds of thousands fewer man-hours spent on the arcane and non-productive pursuit of the means of avoiding tax. It means that that energy and those skills can now be transferred from sterile conflict to more useful tasks.
I put first the more advantageous tax treatment of share options granted to individual employees, which will charge the gains from share options to capital gains tax rather than to income tax. The capital gains tax charge will be effective on the disposal of the shares, not at the time of the exercise of the option. That is a great advantage. I know that Labour Members do not like wider share ownership. For them, state ownership is the best option, ownership by corporations and institutions the second best, and ownership by the public is to be detested. I believe that they are profoundly wrong. This measure could have a larger and longer-lasting effect on performance than the direct reduction of costs in industry. It will provide a means of encouraging vigour and initiative, which business desperately needs.
Secondly, the Budget continues the Government's long list of measures to encourage and foster the small firms sector. Small firms will benefit from the immediate reduction in the small companies rate of corporation tax to 30 per cent.—the same rate as for standard income tax—from the raising of the VAT threshold, from the reductions in the rates of capital transfer tax and from the abolition of investment income surcharge.
The third sector where we wish to reward enterprise and success and encourage risk-taking is research and development. Research and development lie behind product development and have never been so important to growth and the creation of new jobs. The tax reforms in this Budget encourage investment in research and development, just as they encourage investment in productive capital. With higher after-tax profits resulting from the tax reforms, companies will be able to devote additional resources to research and development and to innovation.
In recognition of the particular importance of capital expenditure in this sector, the 100 per cent. first-year scientific research allowances on capital expenditure for qualifying research and development remains, subject to the review of allowances for mines, oil wells and mineral rights. Therefore, such investment will get the bun and the halfpenny too—the capital allowances and the lower tax. My Department will also be continuing the significant sum that it allocates to work designed to ensure that companies and businesses keep abreast of the latest developments in technologies affecting their sectors.
It is a mark of the Government's determination to invest in the future rather than preserve the past that the spend of the Department of Trade and Industry has altered radically in the life of this Conservative Government. In 1978–79 scientific and technological assistance was 5 per cent. of the total expenditure of what is now the Department of Trade and Industry—some £106 million. In 1984–85 it will amount to 25 per cent. of my Department's expenditure—some £369 million. Support for industrial R and D has trebled in real terms since 1978–79. At the same time that we have managed to reduce total spend, we have devoted more money to innovation. So, I am glad to take this further by announcing a further shift in the deployment of my Department's expenditure.
I welcome the shift in the balance of support provided by my right hon. Friend's Department, but is he not worried about the continuing problems of skill shortages, which will emerge as the recovery develops? What action do his Department and other Departments plan to take as a follow-up to the excellent paper that he presented to National Economic Development Council recently?
My hon. Friend raises an important point, and one in which I played some part when I was at the Department of Employment, alongside my right hon. Friend the Secretary of State for Education and Science and the Manpower Services Commission. The changes announced in the development of the new technical and vocational education initiative and the shift in funding from support through the rate support grant to cash through the MSC for non-advanced further education in the colleges of further education are important steps. In addition, I have been discussing with the University Grants Committee, and with all others who are interested, ways in which we can ensure that there is an adequate supply of graduates in the most important sectors, notably in electronic engineering. All those things are being pulled steadily together.
I am glad to be able today to make a number of announcements about further expenditure, within the existing total, designed to ensure that industry uses efficient and advanced equipment, and takes steps to keep abreast of modern developments.
First, on advanced manufacturing technology the initial allocation of £35 million to the flexible manufacturing systems scheme, announced in 1982, is close to being committed. There is continuing heavy demand, so I am pleased to announce the allocation of a further £20 million for advanced manufacturing technology.
Secondly, design and quality are increasingly recognised as vitally important links between the company's productive capacity and the market that it serves, so, I will extend the design advisory service funded consultancy scheme so that smaller companies can benefit from it. Details of this extension and other initiatives to increase the awareness of benefits of good design will be incorporated in a design policy statement which my hon. Friend the Under-Secretary of State will publish shortly.
Thirdly, the original £25 million expenditure on software products is almost fully committed. I have, therefore, decided to continue the scheme and to provide further funding of £12 million to carry it through to mid-1985.
My fourth item is expenditure on information technology centres, or ITECs. Following the great success of the ITEC programme which the Prime Minister announced in July 1981, I have decided to increase the number of centres that will in future benefit from my Department's financial support from 150 to 175.
Fifthly, I intend to make special provision to encourage the use of technologically advanced equipment by small and medium-sized firms in the clothing, footwear, knitting and textile industries. These are important industries, accounting for about 10 per cent. of manufacturing employment, with exports last year in excess of £2 billion. They have been affected by intense competition—[Interruption.] The hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) seems to think that there is something inconsistent between prudent and profitable investment in high technology—[Interruption.] The hon. Gentleman seems to think that I am against profitable investment. He must have had both ears firmly closed while his mouth was so widely open. The hon. Gentleman is being more stupid than usual.
The textile and clothing industries, affected by intense competition, need the ability to invest in technically advanced machinery, and that ability has been eroded by the recession. The recession has particularly hit the small and medium-sized firms, although there are many outstanding examples of improved profitability in the industry. I therefore intend to provide £20 million, under section 8 of the Industrial Development Act 1982, for a scheme to operate along broadly the same lines as the successful small engineering firms investment schemes. In other words, there will be a list of technologically advanced equipment of a type that is used in those industries, and for which small and medium-sized firms in the industries will be eligible for an investment grant, probably of up to 20 per cent.
This scheme—and some of the others that I have previously announced—will still have to be discussed with the European Commission. I am not, therefore, in a position at this stage to give further details of the textile scheme. However, I can tell the House that, as part of the design advisory consultancy scheme, I am making a special allocation of £1·5 million over three years, to allow a further 100 companies a year in these industries to use the scheme. Some special arrangements to encourage design in the industry are also being announced today.
I turn from a scheme that is aimed at assisting specific industries to a general scheme. A major factor in industry's ability to innovate—and hence in its future prosperity—is its use of electronics. The importance of microelectronics was recognised in the original microelectronics industry support programme, launched in 1978. Its £55 million funds are now fully committed, and I expect the total investment encouraged by the scheme to be about £270 million. For the remainder of the 1980s, it is estimated that the United Kingdom micro-electronics industry needs to spend over £1 billion on the development and production of integrated circuits alone if it is to maintain a growth rate in line with worldwide trends.
There will therefore be a new micro-electronics industry support programme MISP 2—to provide £120 million of Government support up to 1990. Grants will be available for projects aimed primarily at the development, production and use of micro-electronic components. That will complement the Alvey and Esprit programmes, which are concerned with long-term collaborative research across a broader spectrum of information technology. The MISP 2 will help to ensure that the results of the longer-term research programmes will be carried through into commercial products.
These six extensions of our existing policy of support for research and development are part and parcel of our general approach to rewarding initiative and innovation. They are the specifics to be set within the general framework which the Chancellor announced.
The Government have now created the conditions for a more efficient and dynamic business sector in which there is the opportunity for both individuals and companies to strive, to seek, to gain and to be rewarded. This is a Budget for enterprise. It is a Budget for risk taking. It is a Budget for jobs. It is all those things, because it is a Budget for business, and, whatever criticisms may come from the ranks of those who are opposed to enterprise and effort, it is already clear that it is a Budget that is widely welcomed by our wealth creators—even if it is not yet understood by those who constantly criticise every success and constantly hope for further failures.
It used to be said that a Budget that looked good in the spring generally looked pretty awful in the autumn, and vice versa. Such has been the acceleration of our affairs in recent years that it is now truer to say that what looks good on Budget day generally looks different the following Monday, when the Budget debate is brought to a conclusion.
The Chancellor of the Exchequer certainly had his round of applause towards the end of last week, but Sunday saw a considerable shift of sentiment, and I have no doubt that that shift will continue during the course of today and, indeed, during the rest of the year. The Chancellor may yet learn, modest man that he is, that ingenuity in Budget-making, with a strong bias towards the wealthy and the City, is no lasting substitute for diagnosis and prescription of our national ills. A Stock Exchange boom—I say this to the Secretary of State for Trade and Industry—is, unhappily, entirely consistent with a plateau or a recession in the real economy. Moreover, the crumbs of comfort that he outlined in the last 15 minutes of his speech, which were greedily snatched up and which will make good reading in the papers, should be seen in the context of a trade and industry budget which has suffered more severe curtailment during the past year than any other Government programme for the year 1984–85 and the years ahead.
Does the right hon. Gentleman know why that budget has suffered such a remarkable cut? It is because the performance of our nationalised industries has so greatly improved that we are now spending vastly less money on the support of loss-making activities than when the right hon. Gentleman held office.
I do not think so. Much more important is the fact that many of our industries, which I agree were previously supported, have either had to close their capacity or have temporarily been rescued by being sold off to the private sector, where they now have a temporary and insecure base.
I am sorry. Cable and Wireless certainly has been sold. I thought for a moment that the right hon. Gentleman had referred to British Telecom. Cable and Wireless received no subsidies from the Government during the whole of its existence as a public enterprise. It does not feature in the calculation. The right hon. Gentleman has announced to the House carefully judged stimulants which are equal to 0·0003 per cent. of gross domestic product. That is the stimulus that the Secretary of State for Trade and Industry has given to the British economy.
A number of labels have been attached to this Budget, including that—the most ludicrous of them all—supplied by the Chancellor himself when he called it a Budget for new jobs. That was reiterated by the Secretary of State in his concluding remarks, more modestly, as "a Budget for jobs". However, among his many self-written labels there is one that is entirely fair, and that is the Chancellor's description of his Budget as a Budget for a Parliament. Indeed, that is what it is. Just as the medium-term financial strategy, of which the Chancellor himself was the principal author, set the stage for the massive deflation and rising unemployment of the last Parliament, when it was first published in March 1980, so this Budget, with its medium-term commitments to tax reductions, has largely set the scene for both the contraction of public expenditure over the next few years and for the continued and accelerated forced sale of public sector assets. I do not know whether there are any local wets left in the present post-general election Cabinet, but any such people should know that their position has been pre-empted by the 1984 Budget.
The Budget's broad effects, as the Chancellor described them, are neutral, but he has committed himself and his colleagues to a specific programme of corporation tax reductions for the next three years. The years 1984–85 and 1985–86 will be periods when reductions of corporation tax will be substantially, although not completely, offset by the reduction in capital allowances. I believe that the net cost in 1985–86 will be £450 million. The phasing out of capital allowances will then be complete, although in 1986–87 the main rate of corporation tax will fall again to 35 per cent. It will be interesting to have the Chancellor's estimate of the cost to the Exchequer of corporation tax reductions in that year. Without the offsets of capital allowances, it cannot—I shall give way to the Chancellor of the Exchequer if I am wrong—be much short of about £1¾ billion.
We have been told that the Chancellor aims to reduce personal income tax, and I have no doubt that he gives that aim a high priority. North sea oil taxation is already at its peak, having risen from virtually nothing when the present Government took office to £10 billion this year, and in the years ahead it is forecast to start gently falling to a level of £9 billion at the end of the period covered by the Red Book.
The Chancellor has committed himself also to raising at least £8 billion from the sale of publicly owned industries. Those calculations are part of the arithmetic not only of this Budget, but of the expenditure and taxation sums that the Chancellor has presented for the medium term.
It will be interesting to see what happens if and when the Secretary of State for Defence, the Secretary of State for Social Services, the Secretary of State for Trade and Industry or the Secretary of State for the Environment comes to the next Public Expenditure Survey Committee to ask for more money for departmental needs. They will be told that they cannot have that money and that the Government are already committed by the Chancellor, not only in principle but in the terms of the forthcoming Finance Bill, to a phased programme of reductions in taxation covering the greater part of this Parliament. They shall be told also that the Chancellor's prestige and the Government's reputation in the City depend on the faithful fulfilment of the two commitments in the medium-term financial strategy—the fulfilment of the money supply targets and the reduction of the public sector borrowing requirement. They shall be committed not just to the £7 billion-odd—the 2¼ per cent. of GDP—laid down for this year but to the further reduction to 1¾ per cent. of GDP, which is foretold for 1987–88 and beyond. Unless those Ministers accept those commitments and GDP grows at at least 2 per cent. per annum, a hideous burden of increased taxation must be imposed or there will be even deeper public expenditure cuts.
The Chancellor's Cabinet colleagues have been taken in the 1984 Budget for a far more serious ride than they were last July, a few weeks after the general election, when the Chancellor cut £1 billion off public expenditure. This is a major bounce and it will continue bouncing for the whole of this Parliament. In that sense, this is indeed a Budget for a Parliament.
It would be absurd if we left the judgment of this Budget to the City columnists and Stock Exchange dealers. The major tests we should apply are threefold. First, will the Budget improve the competitiveness of the United Kingdom economy? Will that competitiveness be expressed in our greater ability to prosper in trade with other nations and thus sustain a favourable balance of payments? Secondly, will the Budget lead to a sustained growth of output? Thirdly, will it make an impact upon the appallingly wasteful and socially disastrous total of 3½ million unemployed, including 1 million young people—the most energetic of our people—under 25?
Before turning to the measures in the Budget and considering them against those three tests, I remind the House of what has happened in the past four years under the Chancellor's predecessor and colleague and, to some extent, pupil—the right hon. and learned Member for Surrey, East (Sir G. Howe), who is now the Secretary of State for Foreign and Commonwealth Affairs. Our overseas trade has, of course, benefited from the massive output and export of North sea oil. This has enabled us to show substantial balance of payments surpluses in each of the past three years—surpluses of more than £6,500 million in 1981, £5,600 million in 1982 and £2,500 million in 1983. The House should note the deceleration that occurred in those three years. While exports in the volume and value of North sea oil have risen year by year, the size of our overall trade surplus has been steadily declining. This year, it is expected that the surplus will decline further, or, as the Red Book puts it,
the current account is expected to remain in moderate surplus in 1984 and the first half of 1985.
What happens after that, according to the Red Book, is probably best left unsaid.
The happy period of overall surplus is coming to an end, and this will prove to be the Achilles' heel of the whole of the Government's strategy. Even with the surplus of the past three years, the deficit in our non-oil trade has been growing massively. Last year, for the first time in our history as a trading nation, we imported more manufactured goods than we exported. The decline has been terrifying—from a manufacturing trade surplus in 1981 of £4,800 milllion to a deficit in 1983 of £2,100 million. In two years, there has been a turnaround of about £7,000 million in our manufacturing trade with the rest of the world. In the same period, our trade in oil has increased from a surplus of £3 billion to a surplus of more than £7 billion. Even the biggest dumbhead in the Cabinet must understand that the difference between exporting manufactured goods, with all the employment generation involved, and the export of rapidly exhausting oil supplies, with virtually no value added labour content, is massive. That difference is certainly not to our benefit.
On a number of occasions, the right hon. Gentleman has waxed eloquent on this issue. He must have thought about this matter deeply. What does he think would have been the appropriate level of surplus on our balance of payments during that period? He must have thought this matter out.
Our surpluses should have been maintained at a much higher rate. Not only would we have greatly enhanced our reserves but we would have completed the removal of our indebtedness to international and other institutions. For the first time, we would have accumulated major reserves. Those reserves are perilously small compared with the value of our overseas trade.
In the first four years of the Conservative Government, we had not a growth of output, but a decline—a decline in GDP and a massive decline in industrial output as a whole and, even more markedly, in manufacturing output. In just four years, we have had an increase in unemployment from 1·25 million to—I take account of the two changes in definition in the past year—a total of between 3¼million and 3½ million.
Against that background, we must turn to the Budget strategy to ascertain whether it contains proposals that will radically change the British economy's performance in the three crucial areas of trade, output and employment.
First and foremost, and, so far, surprisingly little discussed during the Budget debate, is the continued commitment in quantitative terms to the medium-term financial strategy. It is that which determines the price of money, interest rates and the exchange rate which together form the principal cost and burden upon British industry.
No passage in the Chancellor's speech sounded less convincing last Tuesday than his imprecations to the gods of money supply. What a pantheon they now form, not just M3 or M1 or PSL1 or PSL2 but little M0 and, should we say, mighty M0 as well. In the real world the worship of such deities produces cruel effects. For the past year or more we in Britain have had the highest real interest rates—the price of money over the rate of inflation—at any time this century.
It is a devastating imposition upon industrial costs. If all that the right hon. Gentleman and his friends can say against that is that they removed the last 1 per cent. of national insurance surcharge, they are not looking seriously at the cost burdens on the economy today. What makes this year's reiteration of belief in the medium-term financial strategy so remarkable at the beginning of this Parliament is the systematic demolition of the theory of money supply in the paper published by the Bank of England and written by Professor David Hendry in January. It cannot be laughed away because most of the crazy theory that underlies the Government's monetary and economic policies derived from the authority of Professor Milton Friedman's magnum opus "Monetary Trends in the United States and the United Kingdom: 1867–1975". That purported to give a factual and historical basis to the academic theories of the Chicago school.
It seems to me having read through Professor Hendry's careful analysis—he is not even Keynesian—that the western world has been subjected to a hoax as gigantic as that perpetrated earlier this century with the discovery of Piltdown man.
The empirical data crumbles at the touch of serious and rigorous econometric analysis. Yet that, of course, is the whole doctrine upon which the Chancellor seeks to run the British economy during the next four years. Money supply policies, together with high interest and exchange rates, have had, and will continue to have, the most devastating effects on our balance of payments, our industrial output and the level of our employment.
It is no good the Chancellor saying that industrial productivity increased last year by 6 per cent., as it increased the previous year by 6 per cent. In itself, that is of course welcome news, but if that increase in productivity is not merely offset but is swamped by the decline in international competitiveness, because of the over-valuation of the pound, we do not gain competitiveness in our struggle with others for world markets; we lose it.
I have the authority of the Secretary of State for Trade and Industry in asserting that compared with May 1979—after a collapse of competitiveness at the worst in which we lost nearly 50 per cent. in the spring and early summer of 1980—we are still at least 17 per cent. less competitive compared with our overseas rivals than we were four and half years ago when the Government were formed.
The Chancellor's solution for that is greater wage restraint and pricing ourselves back into jobs, but the truth is that although the annual level of wage and salary increases has been reduced to about 7 to 8 per cent., even if it were to be reduced still further it would not match and would certainly not better the record of the West Germans, the Japanese and the Americans, who are our principal rivals in overseas markets. There is not much to be gained there.
As for the doctrine of pay cuts in real terms, which is what the Chancellor and the Secretary of State for Trade and Industry want, they should be reminded that those cuts generally take place in those parts of domestic service—local authority and hospital staffs—where there is no international competitiveness, and where the effect of further reductions in real incomes is simply to reduce the volume of demand in the economy. If their theory about low wages were correct, Calcutta and Bombay would be the most prosperous cities in the world.
What has the Chancellor brought that is new to the present and so far dismal outlook for the British economy? The answer is, I suppose, the changes in the system of capital and company taxation which took up so large a part of his speech last Tuesday.
Like the CBI and most of British manufacturing industry, I believe that the Chancellor has made a major misjudgment. We have a system——
I shall come to that—or did have, of generous investment incentives in the form of initial allowances and investment grants. The Chancellor is right to point out that, despite that system, our performance over the past 10 or 15 years has not been as good as that of many of our competitors. Nevertheless, if he had gone back a few more years he would have noticed that the percentage of GDP that has gone into capital investment, as well as the growth rate, has undoubtedly increased since the mid-1960s when that new regime was first introduced.
The Chancellor has not considered the likely consequences of the present system being abandoned. I should have thought that the first victims would be the high technology, heavy investment industries for which the Secretary of State for Trade and Industry has a responsibility. Does he think that British Aerospace, Rolls-Royce, British Shipbuilders, British Telecommunications and information technology will be assisted by the scrapping, within two years, of their initial investment allowances? My fear is that the more generous tax systems available abroad will encourage still further exports of British capital, and investment overseas.
After all, it is not lack of money—how often they have said that and how could it be with £11 billion of British capital exported this past year—that has been holding back investment. What is difficult to understand is the underlying motive for the Chancellor's decision on the, structure of corporation taxes. The simple argument that the existing investment allowances encourage investment-intensive rather than labour-intensive industry is, I believe, a false antithesis. In the manufacturing sector it is difficult to find any major industry, existing or developing, in which there is a realistic choice between the installation of the most up-to-date and sophisticated capital equipment and a relatively small, directly-employed labour force, with, of course, a substantial back-up of technicians to service the machines, and old-fashioned equipment manned by a much larger labour force. It is not a real choice. Perhaps the Secretary of State can illustrate, from his knowledge of the car industry, which of those two models for the present and the future is likely to produce the most efficient and internationally competitive British car industry. Surely that argument is not one in which the Chancellor says that he believes.
What is more probable is that the Chancellor has persuaded himself that manufacturing is bound to decline and become only a minor part of the total output of the British economy. In the service industries, capital investment, although important, does not have the same overriding importance as it has in the greater part of manufacturing. I must warn the Chancellor, however, that the impact of modern technology will not avoid the service industries. If he thinks differently, let him have a word with his friends who run the great banks in the City and who are all busily introducing advanced information technology in all their branches.
No, Sir. The real danger is that we shall suffer a continuing and accelerating decline in our manufacturing,
and that the service economy, which in the last resort must be built around domestic manufacturing, will also suffer. As Sir Terence Beckett put it in an article that appeared in the Birmingham Post—Birmingham, that industrial desert, that monument to Conservative past policy—on 5 March, only a few days before the Budget:
Manufacturing is vital to our well being and long-term prosperity. Indeed, without it, many of the service industries, including some of those which are now developing around the heart of England, would not be able to exist. The two are complementary and interdependent.
I think that he is right. In short, if we do not manufacture from a large manufacturing base, we shall not need services such as either the handling and transportation of raw materials to the factory or the movement from factory to warehouse and shop, with all the intermediate banking and other services that are involved.
The prospects for the construction industry are not exactly bright. I shall be grateful if the Minister who winds up will make it absolutely plain in what way the local authorities are to be recompensed for the additional 15 per cent. VAT on modernisation and other work. If I understood him correctly, the Secretary of State suggested in his speech that the local authorities would be compensated. If they are not to be compensated, the additional 15 per cent. will fall with extra strength and force upon them. In the private sector, that additional 15 per cent. will be imposed upon the improvement and modernisation of all sorts of buildings, including housing. In an industry as flat as the building and construction industry, that is criminal and absurd.
This is a Budget that benefits only one sector of the economy—the retail and wholesale suppliers. However, there never was a problem with them. We have an efficient retailing and wholesaling sector that has never sought and never needed the inducement of capital allowances. The only trouble is that they are just as likely to sell foreign goods as British goods, and to do so equally efficiently.
When I consider all that has happened in the past four years and that the next four are in the hands of the same architect of our economic and industrial ruin, I confess to a feeling of the utmost trepidation about our future. The great bonus and opportunity of North sea oil will have been squandered by the end of this decade. There is now not enough money in the International Monetary Fund to rescue a British economy deprived of that very output of North sea oil that has been so sadly squandered in the past five years. It is intolerable to think that a great industrial nation and a highly creative and ingenious people are being led year after year by the advocates of a clapped-out, Right-wing, pseudo-intellectual philosophy that has brought disaster wherever it has been tried.
I close with these words:
running a modem economy with a substantial margin of spare capacity is wasteful of man and machine, prevents any real growth in productivity and leads to unnecessary high costs, to the detriment of our exports. Even more serious in the long run is the impact upon capital investment and hence on economic growth. Industrialists are not such fools as to place new orders for plant and machinery unless they can see the possibility of their existing equipment working to full capacity. A sizeable margin of unused resources is nothing more than positive incentive not to modernise and not to invest, with all that that implies.
Those are the words of a younger, saner and wiser man, a Mr. Nigel Lawson, city editor of the Sunday Telegraph,
22 years ago. I am told that in every fat man there is a lean man seeking to escape. Let us hope that that delivery will not be long postponed.
The right hon. Member for Bethnal Green and Stepney (Mr. Shore) worked himself up into a considerable lather on the alleged monetarism of the Government, citing the introduction of the Chancellor's speech, in which he let us know the infinite variety of symbols that have now been invented—some guides, some indicators and some targets, and many that have been thrown away.
I do not draw the same conclusion that the right hon. Gentleman does. I draw the conclusion that the monetarism of which he complains—the Friedman school—is dead. We are now seeing a wreath being laid across its grave, and that wreath consists of new flowers that are invented by the Chancellor and others each time they make a speech. The results never equal the targets, the indicators or the guidelines, so it is necessary to invent new ones. The inventing of symbols to represent what has happened instead of what one said would happen, what one thought would happen or what one wanted to happen is a great consolation. We should take pleasure from the fact that monetarism is so obviously dead. The emphasis is now on the public sector borrowing requirement, to which I shall refer.
I shall deal with the Chancellor's speech in three main sections. The first is what he achieved in circumstances and parameters that he set for himself. The second is whether the parameters that he set himself were correct. The third is what I should like a radical reforming Chancellor, which my right hon. Friend wishes to be, to achieve in the remaining life of this Parliament.
My right hon. Friend said that he had the objective of reducing the overall burden of taxation to what it was when we left office in 1974. That is a worthy objective, and I hope that he reaches it. I have the gravest doubts whether he can do so for as long as unemployment is at the present level and without a considerable increase in the growth of the economy, but it is a worthy objective to return to the lower level of taxation that we had when we left office in 1974.
The Chancellor's achievements within the parameters of a neutral Budget that he set himself are remarkable. It is difficult to think what more he could have done, and it is difficult to think of any Chancellor who, within those limits, has achieved so much, most of which is desirable, although I shall make general comments on some items.
What the Chancellor has also done, as we have been reminded, is to set out a programme for corporation tax for the remainder of this Parliament. I can see why he has done that. He wants to give confidence to industry at the same time as removing capital allowances. However, he is undertaking obligations of a sort that no other Chancellor has undertaken in the past. That may be necessary in these circumstances, but circumstances change. In the course of four years there may be an entirely new phase of the cyclical arrangements in the world, economically speaking. My right hon. Friend may have to take action to deal with that. Some of us would not be prepared to see the value judgments that are normally made each year in regard to expenditure on services being disregarded because the Chancellor says that he must stick to what he said about corporation tax. We might find that what he would then need to do both to the Health Service and education would be unacceptable.
If one looks to the future, one must recognise that the immense technical developments that are now being made by the medical profession are bound to require not the same expenditure in real terms but more expenditure in real terms if we are to take advantage of medical advance. Secondly, our education service is inadequate for the modern world, particularly in the universities, and particularly in respect of the new technology that is developing. It is inadequate compared with Japan, the United States and the smaller European countries. Therefore, if we are to make the progress that my right hon. Friend wants, he must not allow himself to be put in the position in which he will have to damage either education or health in the interests of maintaining the figures that he has laid down for corporation tax for the next four years.
We welcome the abolition of the national insurance surcharge. My only doubt is whether it will lead to an increase in jobs. I think that employers will wish to keep the funds that they save. I hope that they will use them for investment. I do not think that there will be an increase in the number of jobs because of the change that the Chancellor has made, although it is absolutely right and I have urged that it should be made.
On the industrial side, VAT on extensions to buildings concerns me. The matter of what local authorities do can be dealt with, but the impact on the construction industry will not be offset by the change in corporation tax. The Chancellor could take deliberate action to improve the prospects for the construction industry in the coming years. It badly needs that encouragement. Nor will the reduction of stamp duty on new construction recompense builders for what they will lose as a result of the removal of VAT on alterations to houses, and so on.
I understand the Chancellor's position of the imposition of VAT at the ports but there has been some misunderstanding. Some think that VAT will be imposed at the ports and that that will mean delays. As I understand it, there will be 30 days in which the VAT can be paid. Therefore, that avoids the argument about congestion at the ports and the comparison in Europe with the borders. We desperately need to open up the European Community to be a common market and we shall be able to do that if the summit at Brussels is successful. It is vital to get away from VAT at the borders. Unfortunately, the Chancellor's change has been misunderstood in Europe and in Brussels where it is seen as retrogressive. He has attempted to overcome that by saying that he will not implement it until later this year, but I doubt whether that will be time enough. However, it means a £1·2 billion change in cash flow for the Chancellor. I hope that, when the time comes, the other members of the Community will be prepared to adopt our present system. I hope that the Chancellor will not be deterred by the loss of £1·2 billion cash flow from going along with the rest of the Community. [Interruption.] I am delighted to hear the Chancellor say that it is allowed for in Budget calculations. It is natural that there are many who will say that he now has the £ 1·.2 billion, so why go back to the old system, I hope that he will not be deterred in that way.
I have two doubts about the composite rate for banks. It will save the Treasury manpower but it will mean extra manpower for the banks. That is yet another example of Government moving the burden on to other organisations—in this case, service organisations. Underneath it there is the unfairness to those who are not paying interest and who will suffer under this arrangement. The Chancellor said that they can go into national savings but that is not the same as having a bank account. It will militate against those who have worked for 20 years to try to persuade the unions to accept wages through cheques. It will undoubtedly be a deterrent in that respect. It is not a matter of tax, but the fact that the people who would not be liable to tax would have to pay tax if they received their wages by cheque. That is a deterrent to an extension of a scheme that most people believe is highly desirable.
The extension of VAT to take-away food has created further anomalies. The real question is whether next time the Chancellor should clear up the whole matter and remove the remaining anomalies.
The abolition of investment income surcharge is desirable but, as the Chancellor knows full well from all the discussions that he had in the second half of the 1960s, the real problem comes from the distribution of wealth in Britain. It is a basic problem. As he said, this is a tax on income which comes from savings. That is true, but not current savings, and we well know that it is an income that comes from previous savings in which the recipient may have had no part whatever. That is a basic problem, although the removal of the surcharge is right.
I am rather sad about the removal of the 30-day overseas arrangement for the 25 per cent. reduction because it goes mostly to people who spend their lives travelling to obtain export orders for Britain. There are not many who deliberately stay away 28 days or 30 days to obtain this advantage. Indeed, most of those that I meet on the airways of the world are only too anxious to get back to their families from their job of trying to obtain export orders. It means that firms will have to pay their salesman more to make up for it. I see that the seamen have also made the point that they are away from Britain for long periods and will suffer the loss of this advantage. Therefore, the shipowners will undoubtedly have to pay additional amounts to seamen to make up for it. The measure benefits the Chancellor but puts an additional burden on the firms. Above all, we should recognise the major part that salesmen play in the life of Britain. They have never had the status and esteem that they deserve.
I should have liked to see the 90-day rule for foreigners coming into Britain abolished. It was introduced by a Labour Chancellor of the Exchequer and I have always thought that it was a squalid business that those who come to Britain, often bringing great wealth, have to count the days and, if they want to return to see their grandchildren, they have to go to Europe in order to be away for 14 days before they can do so. That is unworthy of Britain. I hope that the Chancellor will take a look at that when he is removing further anomalies and undesirable aspects of taxation in his next Budget.
The commentators and analysts agree that the Budget moves towards service and away from manufacturers. That is undesirable. My right hon. Friend the Secretary of State for Trade and Industry just now made much of the point that allowances have led to unjustified and inefficient investment. Yet he then congratulated himself and the Chancellor on the fact that in the next two years many people from overseas will rush into Britain with investments, which is a good thing. He is saying that inefficient and useless investment will be greatly increased for the next two years. I do not accept that it is useless and inefficient investment. Indeed, the extent to which the United States and so many of the states in the United States have adopted the capital allowance procedures that we have developed in Britain is interesting. They have done so in order to attract more investment into states and the United States in general.
My right hon. Friend is perhaps being a little unfair in the way in which he encapsulated my view. Foreign as well as domestic investors, seeing the opportunity to have, as I put it, both the bun and the halfpenny—the opportunity to obtain tax allowances and the opportunity to pay lower tax upon the profits which will stem from them—will bring investment forward. But I hope that it will be profitable investment and that will be encouraged by the lower corporation tax rate.
Logically, the Secretary of State and the Chancellor should have removed those at once because they are inefficient and lead to bad investment. That is the theme. In fact, the theme is not justifiable. One cannot say that investment in Britain over the past 30 years has been inefficient, wasteful and useless to that degree. One cannot argue that because one can see where it has gone. One can argue about how much should have gone into ICI and the great chemical plants up in the north-east and so on, but there is no doubt that it has done a great deal to encourage investment in Britain. The question is whether the abolition and the substitution or reduction in corporate tax will lead to just as adequate an investment as we have had in the past. That is obviously a big question.
We hear a great deal about outdated and outmoded industries. That is a concept that we ought to examine with great care. We have passed through a variety of phases. We have passed through the phase of mergers and conglomerates. Then we passed through the phase that everything small is beautiful. Now we are passing through the phase in which services are the one thing that matters. My right hon. Friend has just had something to say about that. We discovered that mergers often led to large concerns that could not properly be managed. We then found that conglomerates led to such a variety of organisations that no management was able to control them. We then learnt, in the past two years, how difficult it is for small companies not only to start but to continue, because the rate of bankruptcies in small companies has been extraordinarily high. It is equally wrong for people to say now that we will live in an era of services. We cannot just live on a diet of microchips and home computers. When we are all just taking in each other's washing, who will do something that will pay for our essential imports?
What are these outdated industries? Is it really a question that the plant and equipment and management that we have in them are outmoded and outdated? That is the crucial question. The general understanding is that industries can be left to go to the wall and that in future we shall live on a diet of microchips and home computers. Is steel an outdated industry? Is shipbuilding an outdated industry? Is car-making an outdated industry? Is engineering an outdated industry? Of course not. We can see what is happening in shipbuilding, steel, coal and engineering in countries that have up-to-date plant and first-rate management. There, those industries are far from outdated; they are essential industries. They are essential to this country too. They are vital industries, if only from the point of view of defence—which is important enough.
I am arguing the point as fiercely as I can, because the general impression is given all too often that we are moving into a period when everything is to be done for services. The Secretary of State for Trade and Industry has just made a number of announcements, many concerned with benefits for services. I agree with them——
Yes, all right.
The first half of the Secretary of State's speech was an excellent exposition of the theme that there must be absolutely no interference with the natural workings of any economy, and that therefore we must remove all anomalies and desist from any attempt to guide or steer anything. The second half of his speech was taken up with an admirable list of the current awards to be made on his own arbitrary judgment, with the aim of encouraging specific areas.
There is a slight contradiction there, although it may not be as great as has been suggested. Will my right hon. Friend therefore agree that the Government are trying to influence the direction of the economy today very specifically by handing out considerable amounts of money, and that they cannot therefore use that argument as far as the tax system is concerned? Governments guide the economy in the way that they think right. One asks only that they should guide it in the right direction.
I turn to the issue of personal taxation. I should like the Chancellor to consider in future whether an increase in children's allowances is in many cases preferable to a simple increase of the single or married person's allowance. They can sometimes be combined. An increase in children's allowances avoids the problem of higher income groups making lower income groups feel that they have been unfairly treated.
Are the Chancellor's parameters right? I do not believe that it was necessary for him to have a neutral Budget when the supply of available labour is so great and there is so much to be done. He could have gone further, and I hoped that he would do so.
There has been an emphasis on the public sector borrowing requirement. This is becoming just as dominant a factor in Government thinking as the money supply was in 1979, and, in my view, the stress laid on it is not justified. The great fear is that if one in any way alters the public sector borrowing requirement there is bound to be inflation. That is not acceptable. It has been proven historically that there is no direct relationship between the public sector borrowing requirement and the rate of inflation. Today, a large part of the economy is unused. Should not the Chancellor try to bring it into operation? I think that he would have been justified in doing so. He could have done it selectively, thus minimising the risk of inflation.
The Budget must be set in the context of the world situation. There are those who believe that if we do nothing we shall be pulled out of the depression. I do not accept that. Hitherto, Europe has expected the United States to pull it out of depression. That will no longer happen. At the moment, the United States has a moderate boom. It is based on an enormous Keynesian budget deficit of $200 billion, and Friedmanite high interest rates which, under the tax system, the United States investor can avoid. The impact on Europe, including the United Kingdom, of those high interest rates has been catastrophic and continues to be damaging.
The United States economy is also fragile in that it has a very large trade deficit of some $60 billion or $70 billion, which is disguised at the moment by the capital flow from Europe and from Japan into the United States brought about by the high interest rates. The situation suits Japan because it enables that country to keep the yen at a low level. It can then compete and sell its products in the United States and Europe. However, high interest rates do not suit Europe. There is a continuous drain of our capital into the United States, either to take advantage of the higher, interest rates or for permanent investment in plant and machinery at a better return. The situation is damaging and fragile. If in future the dollar, having appreciated, begins to fall, the Federal Reserve will be faced with the question of pushing interest rates up again, and that will have a still worse effect on us and on Europe. What would the Chancellor do in that situation? It would increase unemployment in this country and damage our own economic position. To commit ourselves for a four-year period is to take on a very big commitment indeed.
The situation in the United States is fragile, and so our position is fragile, too. Who is benefiting from the boom in the United States? Europe has not benefited. The countries of the Pacific basin have benefited—Japan, South Korea, Taiwan, Hong Kong, Singapore, the Philippines and, to a certain extent, Malaysia and Thailand. In Hong Kong, Japan and Taiwan, the unemployment level is under 2·5 per cent., and it is those countries which are exporting to the United States and also in part to Europe. The United States will not pull us out of our depression on this occasion. The Chancellor must consider again how much he should do, selectively, to improve our economy and further to improve our competitiveness.
What would a radical policy consist of? First, the Chancellor should be prepared to deal with unemployment. I do not believe that he should be afraid to do that. The cost of unemployment is now £15 billion. It must be sensible to provide part of that sum in the form of selective aid to industries chosen by the Government—arbitrarily, I agree, but on the best information—to provide jobs and increase production.
Secondly, the Chancellor should turn his attention to the tax credit system, in which we can combine social service benefits with tax payments. A great deal of work had been done on this possibility. The Chancellor himself took part in it at one time. The problem is timing. One does not wish to offend people, and one must make the changeover when the cost of the change is not too great. The Chancellor has mouthed a figure. I am aware of the figures that have been given in the past, and they would be higher today, but it is in social service benefits and personal taxation that one should look for radical change.
Thirdly, I hope that the Chancellor will at last persuade the Treasury to set out the Budget and the expenditure figures in the form of current account and capital account expenditure. That is vital to an understanding of what we are trying to do in the money markets of the world.
My right hon. Friend wags his head in contradiction. That encourages me to continue. On the previous Budget we had a surplus of at least £5 billion on current account expenditure. Many would say that it is much higher than that. The rest was capital account expenditure. No private firm expects to cover all its investment out of its current income. Very few will think of doing that. Therefore, the Government are entitled to show what they are doing on capital expenditure and where they are entitled to go in the market. It is only when that is clearly set out that we have any chance of getting people to realise that it is complete nonsense to talk about a balanced Budget when we have the public sector that we have, and are bound to have in large part in the future. Nobody will buy the coalmines, railways or many other aspects of the public sector. They must have their capital, and the Government are entitled to put it on to capital account.
I am glad that my right hon. Friend the Chancellor has given up talking about a balanced Budget and zero inflation—[HON. MEMBERS: "No, he has not."] I understood that he had. I always look on the best side of things. If he could get the Treasury to set out what is current account expenditure and what is capital investment, he could do great good as a radical Chancellor.
Britain should become a full member of the European monetary system. We have no real grounds for objecting to that now. Indeed, there is every argument why we should join. If the dollar becomes fragile and depreciates, we would be in the EMS revaluing upwards—which is a further basis for confidence. It is what Erhardt did with the German economy in the early 1950s and 1960s.
On the other hand, our oil supplies will begin to taper off. The Chancellor says that that will be in 1988, but others say that it will be in 1986, or even 1935. The Chancellor is taking account of what he thinks will be an increase in oil prices to the revenue. If that does not happen, and if there is a further downfall in reciprocal phasing, people will begin to doubt sterling again. It would be good to be supported by the remainder of the EMS. Those are two powerful arguments why, quite apart from showing that we intend to pull our weight in every respect, we should accept the full EMS.
A radical Chancellor should play a full part in the reform of the international institutions—not blocking such things as the seventh replacement of the IDA, but looking at the whole future of the international monetary and financial system. I do not see any future for overall world stablity unless the dollar, yen and European monetary systems are brought together under the umbrella of the International Monetary Fund. That is another reason why Britain should become a full member of the EMS. Some of us have been arguing for that for a long time as being the only ultimate solution.
I have set out a real programme for a radical Chancellor. He should try to achieve the five points: to use the Budget to deal with unemployment; to introduce the tax credit system; to ensure that the division between current account and capital account is clearly seen; to become a full member of the EMS; and to give the lead in reforming the international monetary system. If he achieves those aims, he will have achieved his ambition, which he set out for us so ably and clearly in his remarkable Budget speech last Tuesday.
It has been, on the whole, an entertaining Budget debate, as Budget debates go, not least by virtue of the last two speeches to which the House has listened. It was started in a dashing manner by the right hon. Member for Islwyn (Mr. Kinnock), who confided a confession to the effect that he had a soul—something that the House accepted, I think, with relative equanimity.
What was more striking was what the right hon. Gentleman had to say in criticism of the Government and their record on borrowing. His complaint about the management of the economy by the present Administration was that it had been done on credit. He said that
all the Government's
expenditure was financed by borrowing".—[Official Report, 13 March 1984; Vol. 56, c. 310.]
That is an extraordinary thing to hear from the Leader of the Opposition. Year after year the right hon. Member for Bethnal Green and Stepney (Mr. Shore) has told us that we have to "borrow, borrow, borrow"—I quote his words. Indeed, it was on the basis that it would be fearless in borrowing that the Labour party presented itself so unsuccessfully to the electorate at the last election as the party that would deal with unemployment. Now it is to be made a complaint against the present Administration that in their Budget they intend, apparently, to borrow.
It looks as though the Boston Tea Party, in which the Labour party has been jettisoning all the characteristic items of its policy, has not stopped short of its economic, fiscal and financial policy. Apparently, in future, for the Labour party borrowing is to be out—even if the European Economic Community is to be in.
However, a major question is raised on borrowing; and I am glad to have the opportunity to address it to the Chancellor of the Exchequer personally. The question is implicit in his Budget and in the Red Book forecast for future years. The right hon. Gentleman looks forward in the present year to a somewhat reduced borrowing compared with what was intended last year. But, of course, that was also the case a year ago. So we must always beware of accidents. When I refer to borrowing—and this may go some way towards meeting the sensibilities of the right hon. Member for Old Bexley and Sidcup (Mr. Heath)—I do not like referring to the whole public sector borrowing requirement, the PSBR. I regard the more relevant entity as the general Government borrowing requirement, the GGBR, because that is the borrowing requirement which in certain circumstances—I am being careful in view of the scathing attack just delivered on anything that could be described as monetarism—could have an inflationary effect.
Table 2.6 shows the intended future of the general Government borrowing requirement. This coming year it will be £8 billion, £7·5 billion the year after, then £8 billion, then £7 billion and then £7 billion. So, even allowing for two elements somewhat disguised in the table, the Chancellor looks forward to a fairly steady continuance of public borrowing at the present rate.
May I refer for a moment to those two delightful ingredients introduced into the tables? One is the expression of the borrowing requirement as a percentage of gross national product. That is admirable, provided one estimates the continued growth of the GNP sufficiently high. If that is pitched sufficiently high, it is obvious that the proportion of the borrowing requirement will fall delightfully year by year.
Not content with that, there is also the caveat—which I think was invented in a genial moment by the present Foreign Secretary—of what is called the "annual fiscal adjustment", explained by the observation that there may be "lower taxes or higher expenditure than is assumed" in the other figures—a very necessary precaution, but one which modifies the satisfaction that we derive from contemplating that steady, regular process—slightly downward on the whole—of the Government borrowing intentions in the years to come.
I have one specific question that I wish to address to the Chancellor about the Government's borrowing intention for the year ahead, and I hope that he can find a moment to refer to it in his concluding speech. What form does he intend that borrowing to take?
There seem to be broadly two possibilities. One is that the Chancellor should seek to fund it by borrowing from the public; the other is that he should borrow from the banking system. They are the classic alternatives. I hope that he will tell the House his intentions regarding the balance between those two possible ways of meeting the general Government borrowing requirement.
The right hon. Gentleman will recall that the Select Committee on Procedure was bold enough recently—I am delighted to discern, not technically but actually, the right hon. Member for Worthing (Mr. Higgins), who presided over the Committee—to recommend that in future Governments should share with the public this little secret about how they meet their borrowing requirements—what proportion comes from the banking system and what proportion is being funded by savings or from elsewhere in the economy.
The question presents a puzzle, which I hope the Chancellor of the Exchequer will be able to resolve. It seems to me—I am sure that he will correct me if I am wrong—that unless a substantial part of that borrowing requirement is to be obtained from the banking system he will not be able to sustain his intended rate of inflation. Admittedly, in the Red Book, it is called, not inflation, but
the gross national product deflator
—certainly a much more respectable phrase, and one understands the preference for it on the part of those who compile these documents. However, it is in fact the inflation rate, and I have found the paragraph in the Red Book which admits that it is the inflation rate.
In the next three years the inflation rate, despite what the Chief Secretary in a rather bad-tempered rejoinder said last Wednesday at the Dispatch Box, is programmed to descend only gradually from 5 per cent. per annum to 4 per cent. per annum. I take special note of that. Not being, like the right hon. Member for Old Bexley and Sidcup, a lover of inflation for its own sake, I do think that there is some beauty in stability of money values, and that there is nothing inherently or theologically wrong with a nought inflation rate, a stable value of money.
However, that is not the prospect for which the Government plan. So how will the Government ensure that they do get the inflation rate they plan of 4·75 per cent. in the next financial year, 4·25 per cent. the year after and 4 per cent. the year after that? I must warn the Chancellor of the Exchequer that if he funds all his borrowing requirement by borrowing from the public he will have great difficulty in maintaining an inflation rate of 4 and 5 per cent. in the next three years.
I do not know how else he can do it. For I hope that the right hon. Gentleman will not take refuge in saying—as might occur to the right hon. Member for Islwyn—that it could be due to the expansion of bank credit, that he has foreseen how the surge of prosperity about which we hear from that Dispatch Box will evoke an excessive growth of bank credit. If there really is a surge in prosperity, presumably the increased money supply furnished by bank credit will be offset by that increase in production to which the Government so frequently assure us they are looking forward. At all events, I hope that the Chancellor of the Exchequer will clear up that puzzle.
I come to the other alternative, which I hope will be the major element in meeting the borrowing requirement, namely, borrowing from the public. There is a phrase, a manner of speaking, which is in all too common use, in relation to investing borrowed capital. It is that when we meet these expenditures by borrowing we are transferring a burden to those who will come after us. That is nonsense. No such thing is possible. What a delightful world it would be if we could make our children and grandchildren, yet unborn, provide resources for us in the present. It does not happen because it cannot happen. What happens is a transfer of currently available resources from one part of the economy to the other; but in the transfer of resources which takes place when expenditure is financed by borrowing, there is an essential difference between Government expenditure financed by Government borrowing and other expenditure financed by other borrowing—dare I use the word, private expenditure financed by private borrowing. The difference is this: when a private person or corporation finances an investment by borrowing, it undertakes the obligation, if it can, to service the loan by recirculating to those who made the saving or the successors of those who made it the fruits of that particular investment. In private investment and borrowing there is an indefeasible link between specific acts of saving and investment and the particular fruits of those investments.
It is quite different when the Government meet a marginal difference between their total spending and their total revenue by borrowing from the public. The consequence of that is a peculiar one, which, though it might be popular on the other side of the House, I do not believe can possibly be popular among those who sit on the Opposition Benches. It means that the Government of the day obtain command of resources upon condition of instituting a redistribution of income of a random character in years to come.
With every Government borrowing in the present, we create obligations to redistribute income in years to come. Admittedly, redistribution of income is part of ourprocess of social security. In principle we all accept it. We tax in order to redistribute income according to a pattern which we in the House decide. When, however, we persistently finance Government expenditure by borrowing, then provided there is not roaring inflation which cheats the lender almost as the loan is made we set up continuing and growing obligations to redistribute future national income in a manner about which there is no particular merit. For surely there is no particular merit in having a substantial and growing rentier class—an old-fashioned description of what I am talking about—to which year after year we redistribute a sum equal at present to one tenth of total public expenditure. That is what happens when we finance the margin of Government expenditure by borrowing.
There exists no link between what the Government do with what they borrow and the redistribution in future years of future income raised from future taxpayers to a class of persons whom we are incapable in the present of identifying or foreseeing. Therefore, whereas in the private sector borrowing is a rational and a fruitful basis for investment expenditure, it is a snare and a delusion in public finance, and sets up a system of redistribution which in his heart of hearts hardly any hon. Member could regard as just or rational, and which—the tables in the Red Book show this—at the moment is claiming 10 per cent. of the yield of taxation to feed it. The only reason why it is even as low as 10 per cent. is that we have gone through a period of such severe inflation as we do not intend—perhaps even the right hon. Member for Old Bexley and Sidcup would not wish—to live through again. Perhaps this therefore is the year of all years to treat seriously the objections to financing Government expenditure at the margin by borrowing.
It is no use pretending that one can distinguish and analyse Government expenditure into current and capital expenditure in the same sense as those words are used when they relate to a person or a private undertaking. All Government expenditure is current expenditure, because, so to speak, Government is all of us, and Government expenditure is the administration in the current year of part of the current resources available in the community.
The Government have taken credit, and are partly justified in doing so, for achieving the objective of honest money—honest money in the sense of money which passably retains its value over a substantial period. Despite the projection of 4 per cent. inflation during the next four years—in which I hope the Chancellor will be unsuccessful—it must be said that the Government have held to their objective and have made substantial progress towards it. Yet that is too narrow a conception of honest money. Honest money should also include honest taxation—honesty in the way in which resources are placed at the disposal of the Government. If inflation is a dishonest form of taxation, so also is the financing of Government expenditure by borrowing, because it has consequences which are not intended and would not be accepted if they could be foreseen.
I hope that in future the Government will broaden their concept of what is meant by honest money and honest finance, and that they will bring that concept to bear upon the analysis of Government expenditure and—for this ultimately is a decision of the Chancellor of the Exchequer and the Government—upon the way in which the Government's marginal requirement is met.
It is a pleasure to follow the right hon. Member for Down, South (Mr. Powell). As an ordinary Back-Bench Member, I find it intriguing to enter the battle of the Privy Councillors. I agree with the right hon. Member for Down, South that there is a difference between capital and revenue expenditure in the national accounts. However, if there is capital expenditure in an undertaking run by the Government, such as the utilities, and if there is a dividend from that expenditure, it is on all fours with an ordinary business.
The difficulty is that the servicing of Government debt is not restricted to the yield from those undertakings which the hon. Gentleman correctly and conventionally analyses as capital. Of course, if we tied the yield from the utilities to the service of the capital invested in them, it would be rational to classify them as capital undertakings, but when that is done, one finds that they have been denationalised.
I am most grateful for that explanation, as I am sure is the House. When my right hon. Friend the Chancellor of the Exchequer introduced his Budget he said that it was a continuation of our strategy since 1979. Last Thursday my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) accused my right hon. Friend of thinking that history started only in 1981. It did not; it started in 1979. At the risk of boring the House, may I say that the Government's record between 1979 and the general election last year was not all bad. They turned the economy round.
The Opposition seem to believe that when we took over everything in the garden was lovely, but hon. Members on both sides of the House know that in 1979 prices and unemployment were increasing and production was decreasing. Not only did we have huge overseas debts, but we had Clegg. For the Opposition to criticise this Budget, which is an imaginative one, bearing in mind their record between 1974 and 1979 and the mess in which they left the country in 1979, is not only arrogant but frivolous.
Although it may not be understood by Opposition Members, the people understand that the Budget helps those on lower incomes, and helps investment and business. The speech of the right hon. Member for Bethnal Green and Stepney (Mr. Shore) was as thin as was that of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). The Leader of the Opposition took 24 minutes to say nothing, but the House is used to that. It is absurd for the Opposition to think that one Budget can solve all our problems. In 1979 no one, including the financial pundits, realised the depth of the world recession. That was a great mistake in the West.
The fact that my right hon. Friend the Chancellor has increased the starting rate of tax by about 12·5 per cent. while inflation is still about 5·1 per cent. should be willingly accepted by all hon. Members, especially Opposition Members. They should rejoice in the fact, but, as far as we can see, the only thing that seems to please the Opposition is bad news. If anything good happens, they are not really interested.
I wish to kill the growing accusation that the Government are responsible for unemployment. Let us be fair about this—[Interruption.] It is all very well for Opposition Members to smile, but they should remember that the Labour Government were responsible for the rapid running down of many of our industries. Why was the dock industry run down? Why have there been strikes in the steel industry? The present miners' strike will undoubtedly hit the coal industry and create more unemployment.
Hon. Members have compared manufacturing industries with service industries. Of course, manufacturing industry has declined. As a result of competition from Taiwan, Hong Kong and Malaysia, shipbuilding and steel have declined. Their prices have not been sufficiently competitive. As my right hon. Friend the Secretary of State for Trade and Industry said today, steel output per man has increased tremendously during the past few years, but there is still a long way to go. Having said that, there is no reason to believe that the phasing-out of capital allowances for manufacturing means that the Government have given up on manufacturing industry. We cannot give up our manufacturing base, but we should be foolish to ignore the service industries. Manufacturing industries are mainly capital-intensive, whereas service industries are labour-intensive, and these days we must foster labour-intensive industries.
All hon. Members will welcome the 80,000 increase in employment as a step in the right direction, but no one claims that we have solved the problem. To listen to some speeches, one would believe that the Government were not worried about unemployment. We are spending £2 billion this year of taxpayers' money in retraining schemes to help the unemployed.
My right hon. Friend the Chancellor knows that many hon. Members regret the withdrawal of tax relief on life assurance premiums. In many cases, that is the one form of small saving undertaken by the ordinary person. After all, Conservative philosophy is to encourage people to stand on their own two feet. What better way of doing so than to have a small life assurance policy so that, in the event of her husband's death, the widow receives something?—[Interruption.] It is all very well the hon. Member for Birmingham, Perry Barr (Mr. Rooker) laughing. That may be funny to him, but it is not funny to someone who has, or wishes to take out, a life assurance policy.
I see the import of the thrust of my right hon. Friend's Budget, but I feel that he could have given much longer notice of the withdrawal of life assurance premium relief. After all, we have given a year's notice about the composite rates in banks so that people can readjust. This is another area where such notice could have been given, and I hope that my right hon. Friend's mind is not closed to it.
I am, however, delighted that this does not affect pensions, endowments and so on which help business, and I caution my right hon. Friend about doing anything about the tax treatment of occupational pensioners. If anything is done to jeopardise the occupational pension industry, more and more people on retirement may possibly be a drain on the taxpayer by going on supplementary benefit.
Everyone welcomes the moves on investment income surcharge. Opposition Members may think that this helps the rich, but more than half those who pay the surcharge are retired. They have saved the money during their working lives. It has been saved out of net income. Why, therefore, should they be further penalised? It is true that my right hon. Friend has forgone revenue of £360 million in a full year, but that must be balanced against the £1,990 million that has been allocated to the thresholds. That is a pretty fair balance.
I add my tribute to the work of our late friend, Maurice Macmillan, on share option schemes. Had he been here, I am sure that he would have welcomed the change that has at long last been announced. There has been some alleviation of development land tax. That is such a small revenue earner and time waster that my right hon. Friend could easily have abolished it. He will recollect that another of our colleagues, Sir Hugh Fraser, has, alas, also died. He and I were trying to persuade the Chancellor to cancel the DLT, which is merely an irritant. It should have been incorporated in capital gains tax like any other asset.
Everyone welcomes the reduction in stamp duty, but we still remain at a disadvantage compared with the Bourse and New York. The 1 per cent. reduction is a step in the right direction, but it should not be thought that we have overcome the serious competition that faces us.
I understand what my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) said about people working overseas. We must be careful not to make our tax regime so penal that such people would rather work in other parts of the Common Market. In future, I should like the Chancellor to look at increased allowances in the service industries, particularly for hotels and the leisure industry. These labour-intensive industries should be encouraged.
The abolition of national insurance surcharge is a welcome relief, and I am sure that all hon. Members will be delighted that we have got rid of it. I make a party point—Labour put it on and the Tories took it off. That always seems to be the way. Since the war, Labour have always put things on and the Tories have taken them off. I put it another way—Labour always borrows overseas and the Tories always pay it back.
I do not share the fear of my right hon. Friend the Member for Old Bexley and Sidcup about corporation tax. For too long business has not known from one year to the next what its commitment would be. The Chancellor has done business a service by saying, "We will progressively reduce corporation tax." Business men will now be able to plan ahead. Many of us have always said that year-to-year changes in the Budget have been undesirable, and I am glad that we shall now have some continuity.
One worry for business—my right hon. Friend referred to this in his Budget statement—is unitary tax. We should pay more attention to that. As the House knows, certain states in the USA are imposing it. I appreciate the constitutional difficulty between the Federal Government and the state Government, but on the other hand a unitary tax benefits no one. We do not want to start a tax war. When my right hon. Friend signs the fourth protocol to the double taxation convention, I hope that he will insert article 9.4, which abolishes unitary tax.
Under the double taxation convention, dividends are paid by British firms to United States citizens. Last year that amounted to £213 million. In addition, if petroleum revenue tax is paid in this country by an American company the American company can offset it against its American tax. Last year, that amounted to £1,163,000. Given those two negotiating points, we could easily get the United States Government to do something about unitary tax. I hope my right hon. Friend will accept my advance warning that we shall be tabling a new clause on unitary tax during our discussions on the Finance Bill.
I do not object to the taxation of gilt dealings by building societies, but there appears to be an element of retrospection. The building societies have been purchasing these gilts for some time in the knowledge that they were always tax exempt. Alas, the Revenue has decided otherwise, as it is perfectly entitled to do. However, my right hon. Friend should rethink this and acquisition building society gilt-edge only after 23 February.
We all welcome the reduction in interest rates since the Budget—1 per cent. in bank interest rates and 1 per cent. in building society rates.
I have one other word of warning for my right hon. Friend. Given the huge increase in cigarette taxation, we must be careful lest we come up against the law of diminishing returns.
As my right hon. Friend the Member for Old Bexley and Sidcup pointed out, the advance payment of VAT—30 days after goods are landed, rather than nine or 10 weeks afterwards—is to be welcomed because it will put our domestic manufacturers, particularly in the footwear industry, on all fours with their Italian and other counterparts. We must, however, remember that it is a one-off event; next year there will not be this £1,200 million windfall.
Next year we shall have a composite rate applying to the banks. I understand that there are about 5 million deposit accounts with the banks. It is difficult to evaluate, but the composite rate will, presumably, be 25 per cent., the same as applies to building societies. I could not understand the thinking of my right hon. Friend the Member for Old Bexley and Sidcup in saying that that will have an effect on the payment of wages by cheque. The person receiving wages by cheque is paying tax at 30 per cent. anyway, at least on some of his income. At present, he must return whatever bank deposit interest he receives and then pay 30 per cent. on it. He will now pay only 25 per cent. and will not necessarily have to return it. From that point of view, the wage earner receiving a cheque should not have any difficulty.
Next year there may be another windfall from the composite rate. At present, the tax from bank deposit interest is drawn at the end of the fiscal year. If that is the composite rate—depending on what the Treasury agrees with the banks, and it is my guess that the banks will have to pay it quarterly or half-yearly to the Exchequer—there may be £400 million to £500 million paid in advance tax next year. That will still leave £600 million to £700 million required to make up for the £1·2 billion from VAT on imports. Clearly that can come only from extra growth.
In his Budget statement—it also appears in the Red Book—the Chancellor has forecast what growth will be, and all the indicators show that he is probably not being over-optimistic. I do not believe that he is painting too rosy a picture of future growth. In addition, we must control public expenditure, and I have read carefully the figures in the Red Book relating to public expenditure.
Reference has been made to the huge deficit in the United States economy. I have just returned from Washington. The United States economy has a deficit of $200 billion, although there is a move to reduce it progressively to about $50 billion. I met Paul Volcker, chairman of the Federal Reserve Bank. We discussed how the British Government funded their borrowing requirements and I asked him how he funded his. I asked him whether he had any index-linked bonds, to which he replied, "Not on your life". I hope that the Chancellor will not continue with index-linked gilts because that is only building up a debt for our successors.
I could not understand the argument of the right hon. Member for Down, South when he said that public borrowing did not affect our children. Money borrowed by the Government today, thereby increasing the national debt, must affect our successors. After all, we as taxpayers are paying £15 billion a year for the interest on the debt. If we exaggerate the position and say that we will double the national debt, our children will then be paying £30 billion a year for that purpose.
I agree with the right hon. Gentleman, but that presupposes that our national income will double, and it may not. I am simply saying that, when borrowing money, one cannot avoid the logic either of paying back the capital or continuing to pay the interest on that money. Opposition Members and many of my hon. Friends urge the Government to increase public expenditure. I would do that on, for example, roads, sewers and so on, but only if the money was saved from revenue. It would be folly to increase our borrowing requirement at this stage.
The Opposition, and Labour Members in particular, seem to have a pathological hatred of anything to do with profit. They want investment but they do not like investors. Nor do they like interest and dividends. If we are to improve the lot of all our citizens, irrespective of their political persuasion, we must create the wealth to do it. This is a well-balanced Budget. The Chancellor is not advocating cosmetic solutions which will not last. The Budget sets out the strategy for this Parliament and I have no hesitation in supporting it.
The hon. Member for Croydon, South (Sir W. Clark) astonished me—I could not have been alone in that feeling—when he thought it necessary to warn the Chancellor that there might be a diminishing return following the extra duty on cigarettes. If less money were to be spent on cigarettes, that would be the best news that the National Health Service had had for years, and it would be good news for families and households throughout Britain.
The right hon. Member for Old Bexley and Sidcup (Mr. Heath) gave the Chancellor some good advice. Sadly, however, that advice—because of the archaic way in which we deal with Budgets—came too late. It would have been a better Budget if the Government had acted on the advice of the Armstrong committee, the Procedure Committee and the Select Committee on the Treasury and published with their autumn statement, as an annual procedure, a provisional outline Budget—a Green Budget, as it were—which could then be discussed inside and outside Parliament before the Chancellor made his decisions and filled in the sensitive items, such as excise taxes, in his actual March Budget. This Budget, with all its boldness, would have benefited greatly from prior consideration in that way. It would then have been based on proper consideration rather than on sudden and dramatic surprise.
There were four parts of the Budget statement during which the Chancellor relied on the momentum that he had so skilfully generated to skate at high speed over serious problems surrounding his proposals. The first bit of fast work came in the right hon. Gentleman's five-year strategy with its declared assumption that real GDP will grow at an average rate of 2·25 per cent. in each of the five years. That key figure is of central importance to the whole strategy, but nowhere—not in his speech, in the Green Book or in the Red Book—is that argued, let alone defended.
There must be careful and detailed calculations in existence behind that forecast of a 2·25 per cent. average growth rate. It is possible to compute from the various tables in the Red Book the different assumptions for each of the five years. For 1984·85, the Chancellor is assuming a growth of 3 per cent. That is the one year for which some evidence is adduced to support the growth assumption. For 1985–86, 2·4 per cent. seems to be assumed; for 1986–87, 1·9 per cent.; for 1987–88, 2·1 per cent.; and for 1988–89, 2 per cent. But none of the background is shared with the House, and we are left with a flat and unsupported assumption of a controversial figure for average growth.
As the House knows, most of the independent forecasters are forecasting between 1 and 2 per cent. growth for each of the next few years. If we are to take the Government's five-year strategy seriously, we must be told—I hope that something will be said about it in the Minister's reply—how their average has been reached. In any case, 2·25 per cent. per annum for each of five years on average is not enough to make any serious dent in the unemployment figure, and it is not what could be achieved by a really resolute approach to the selective expansion of our economy.
The Chancellor, a few minutes later in his speech, skated faster than ever over two important parts of the tax structure where he is proposing abolition of long-established arrangements. First, there is the total abolition of the investment income surcharge. To support his surrender of £350 million of annual revenue the Chancellor had only four brief sentences, which together might have justified a rise in the threshold—already fairly high, at £7,000 a year—for investment income surcharge.
The Chancellor said not a word about the very large investment incomes that arise from owning and using massive capital wealth, and the whole of very large investment from fortunes is to be freed from surcharge on the coat tails of the quite different case of worthy elderly people who retire on the proceeds of their small businesses. This sleight of hand would, of course, have been detected if there had been a Green Budget proposing the total abolition of investment income surcharge even on those with very large unearned incomes. This particular bit of fast skating gave rise to some true humbug later in the Chancellor's speech. As he approached his comments on the raising of the basic thresholds of income tax he used the words,
I have decided that, this year, the right course is to use every penny I have in hand … to lift the level of the basic tax thresholds, for the married and single alike.
But £350 million that he had in hand at the beginning of his Budget speech had already been bestowed upon those who get substantial investment incomes of over £7,000 a year.
Equally peremptory was the Chancellor's reasoning behind his drastic change in the capital allowances for corporation tax, for new plant, machinery and industrial buildings, on the strength of one short paragraph of unsupported assertions about the alleged unfortunate result of those allowances in the past. Neither the Chancellor's speech nor the Red Book—nor the Secretary of State for Trade and Industry this afternoon—has produced any of that evidence. The House will need to see—certainly during the Finance Bill debates—some of the evidence which is so confidently but vaguely referred to.
If there had been pre-Budget consideration of the whole structure of capital allowances for corporation tax, I—and I expect many other hon. Members—would not have defended the whole of the present structure, which is to some extent becoming out of date. But, like most accountants, I know very well indeed that, broadly speaking, those allowances—the accelerated depreciation—have made possible the launching of very successful pioneer concerns at considerable risk to the entrepreneurs responsible, which are now doing very well for their owners, their employees, and for the country's balance of payments.
In some cases it is the capital allowances that have been of crucial value in getting new processes into successful production, but we learnt from the Secretary of State this afternoon that the latest Conservative philosophy is that Whitehall knows best. The Government say, "Away with general capital allowances on matters where the taxpayer has himself decided to incur capital expenditure. Away with those allowances which are at the taxpayers' discretion. Let us instead have specific grants confined to particular items that Whitehall thinks are the fashion at the moment." They are the particular chosen favourites for Government assistance. That is an odd re-vamping of Conservative philosophy, and I imagine that it will give rise to a certain amount of concern on the Government Back Benches.
There were many ways of bringing up to date and moderating the capital allowances without such a drastic change which, I remind the House, is reducing the benefit of depreciation from one year full depreciation to a process that takes over nine years. The Chancellor's proposal is that plant should in future be depreciated at the rate of 25 per cent. on the reducing balance of the particular item of plant. That takes nine years to reduce the original value to one tenth of the original outlay. Therefore, this is a very drastic change, and in my opinion it would have been possible to modernise the allowances without going to those lengths.
It has already been pointed out by the right hon. Member for Bethnal Green and Stepney (Mr. Shore) that the Chancellor is going back on a solid dictum that he made some time ago as a journalist. But the right hon. Member for Bethnal Green and Stepney did not point out that the Chancellor also contradicted himself later in his Budget speech, for when he came to explain the fact that the allowances are being phased out over a period of years he took the opportunity to tell the House how tempting it will be to industrialists to bring forward projects that are often undertaken, according to the Chancellor, only for tax reasons. The Chancellor actually used the phrase
a prospect made all the more alluring for business since the profits earned will be taxed at the new lower rates".—[Official Report,12 March 1984; Vol. 56, c. 297–303.]
Is it consistent with the Chancellor's condemnation of the baleful influence of tax concessions on capital spending to say, "Yes, but the fact that I am phasing them
out means that I am giving business a great opportunity to get tax concessions by bringing its projects forward"? It will, I think, inevitably result in a rush of rather hastily considered projects in order to take advantage of the tax window while it is still open.
The fourth display of high-speed skating was on child benefit. The Chancellor committed his Government to using nearly £2 billion in a full year solely for lifting single and married income tax allowances for future years. There was not a word in the speech about the merits of the option of raising child benefit beyond the inflation index as a direct help to all poor families. There was merely a reference to the fact that the Secretary of State for Social Services would make an announcement later in the year. But if this House is to discuss intelligently and at all comprehensively the relief of poverty and lifting the burden of families in poverty, the merits of child benefit must be considered alongside the merits of tax allowances.
There is nothing in protocol to prevent the Chancellor of the Exchequer giving some sign of the Government's attitude to child benefit in parallel, perhaps, to the lifting of the income tax thresholds. All in all, as the Select Committee on the Treasury and Civil Service reported in the previous Parliament, there is far too little co-ordination between the Treasury and the Department of Health and Social Security when it comes to considering the combined impact of taxation and social security measures. There has never been a more glaring example of lack of coordination than in the present Budget, in which one of the main tools for relieving the problems of poor families was not even brought into discussion alongside the lifting of the income tax thresholds.
The hon. Gentleman describes the impact of taxation and social security measures as a matter for the Government. However, the Conservative Opposition considered the issue in 1977 and gave a categorical assurance that if they formed the next Government child benefit would he taken into account when they made tax reductions as it replaced tax allowances. The problem has arisen only since the Conservative Government were elected in 1979.
The hon. Gentleman has raised one of the many arguments that would have been deployed if the Chancellor had been willing to bring the issue into debate with the definite prospect of some notice being taken of our arguments. It is significant, given the lack of co-ordination between the Treasury and the DHSS, that the House and those outside are still deprived of anything in the shape of impact statements on how the Budget will affect a wide range of families of different sorts—for example, one-parent families, two-earner families and families with disabled members. We are still left with primitive tables that state how income tax changes and, if we are lucky, national insurance contribution changes will affect a mere four or five specimen families. The tables bear no relation to the actuality of life.
There is a miserable lack of evidence that the Government will move substantially this year on child benefit. Liberals believe that the weekly child benefit should be raised to at least £7·50 from the total sum that has been applied to the worthy purpose of lifting income tax thresholds.
As many much wiser than I have found, it is difficult to discern the precise strategy of this Budget. The Chancellor naturally feels the need to cover up his repentance for ever having advocated monetarism. In so doing, he has resorted to clouds of deflationary rhetoric. But taking into account the rising sales of public assets and the likelihood of the public sector borrowing requirement continuing to overrun, there are some signs of economic expansion by stealth. It is welcome that there should be some gradual move in that direction. However, there are enormous disadvantages in trying to expand the economy by stealth. First, it is not possible under cover to do anything like enough. Even with the assistance of the sales of public assets and the other devices that the Chancellor has introduced, he is far away from an adequate expansion of the economy.
Secondly, if the operation is taking place under cover, the last things that the Government can afford to perpetrate are useful, profitable, capital projects that will attract too much public attention. Therefore, we are lacking the £1 billion, at the very least, that should have been provided for making good the dilapidation of our public assets, which have been allowed to depreciate year after year under this Government.
By trying to keep the consumer boom going, the Government will do a great deal of good for importers but they will do very little to reduce unemployment, although I hope that the abolition of the NIS next autumn will have some effect. They will certainly do nothing to renovate our dilapidated country, and they will give little hope to the British people.
I hope that my right hon. Friend the Chancellor of the Exchequer will find an opportunity, not necessarily when he replies, to give the House the benefit of his view on the suggestion of a Green Budget in future, as proposed by the Select Committee on the Treasury and Civil Service in the previous Parliament and reiterated by the hon. Member for Colne Valley (Mr. Wainwright). Those of us who heard the powerful speech of the right hon. Member for Down, South (Mr. Powell) will hope that that, too, will be the subject of considered comment by the Chancellor in due course.
I thought that the advice that my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) gave to my right hon. Friend on flexibility was indeed sage. It must be right for Chancellors at all times to preserve their freedom of manoeuvre. No one knows, as my right hon. Friend for Old Bexley and Sidcup said, how the future will develop. None the less, it is the clear strategy and consistency of purpose of my right hon. Friend the Chancellor of the Exchequer that has earned the Budget the cheers that it undoubtedly deserves. It is undoubted that falling inflation, rising output and increasing investment are a winning series of factors for the economy. These are the current achievements about which we can all rejoice. They are practical goals, as my right hon. Friend the Chancellor said, to seek constantly to maintain.
Many of the proposals set out in the Budget statement have attracted praise—for example, modest tax increases and benefits for those who most need help. When those proposals are coupled with improved allowances, it is fair to say that the Budget is one for the people. The abolition of the national insurance surcharge will make a saving of £2·5 billion in costs for industry since the 1979 Conservative Administration was formed. If I may paraphrase that which was said at the Eatonswill by-election, each will sing the song that best he knows. Each person can praise the item in the Budget that gives him most pleasure. I rejoice in my right hon. Friend's deserved success and I hope that it will be the first of many that he will enjoy as Chancellor.
There are three items raised by my right hon. Friend's proposals and observations on which I shall make longer comment. The first item is the relief for savers and investors. It is good that we shall rid ourselves of the investment income surcharge. It is good, too, that we have continuing reforms of capital transfer tax and capital gains tax. It is good also that we shall relax the onerous taxes on share option schemes, and thereby will encourage a greater spread of share ownership. So far, so good. Further, it is good that the rate of stamp duty has been halved.
I look back to my own short time at the Treasury and it is extraordinary to reflect that it was in the 1963 Budget that we last reduced the rate of stamp duty from 2 per cent. to 1 per cent. I am slightly surprised, if I may say so, by the statements made by my right hon. Friend the Secretary of State for Trade and Industry. I did not want to interrupt him when he said, in the middle of his speech, how much the reduction of stamp duty would do to improve London's position as a financial centre.
That is not entirely true. It is a step in the right direction, but there is a considerable distance yet to travel. An investor who wishes to buy, say, £5,000 worth of shares would find himself paying dealing costs, exclusive of broker's commission, that will still be, even after my right hon. Friend's proposals, more than twice the amount that he would have to pay in Tokyo, eight or more times the amount paid in Amsterdam, three times the amount in Paris, 10 times that in West Germany and an infinite amount more than he would have to pay in New York, where there are no charges on share dealings, as I am sure the House will know. I hope that my right hon. Friend will ponder on these matters and that in his next Budget he will find it possible to go further and realise the objective that he expressed.
I greatly agree with my hon. Friend the Member for Croydon, South (Sir W. Clark), who said how much he regretted the decision to abolish tax relief on life assurance policies. Like him, I hope that this is a matter that the Treasury Ministers will reconsider. I must declare an interest. I do not have any commercial involvement with the life assurance industry today but I am proud to have pioneered the equity-linked life assurance contract in the United Kingdom, and to have invented that new form of life assurance, which is the fastest growing aspect of life assurance in the United Kingdom today and thereby, I hope, ensured that savers got a better service. I have spent my commercial life as founder or chairman of companies in this sector. I am proud, after all the scepticism when it was announced, that 27 years later this is perhaps the most attractive aspect of life assurance work in the United Kingdom.
My right hon. Friend's reasons for abolishing the tax concession is that doing this will help to encourage direct investment rather than investment through institutional channels. I must tell my right hon. Friend that that is not right. The idea that there will follow a sudden marked increase in personal direct investment is nonsense. If that is what one wants to encourage, the logic of my right hon. Friend's decision is that we should abolish all help to unit trusts, investment trusts or every form of corporate investment, including the newly established venture capital companies that have so much merit. The idea is preposterous.
It was then suggested that we have the objective of creating great tax neutrality as between one form of saving and another, but that proposition does not stand serious examination. There have been four types of saving that have been massively privileged over the years. The first is owner-occupied housing. Over the past 25 years, personal assets, taking inflation into account, in this sector have grown by about 260 per cent.—very good, say I. The second is pension funds, referred to again by my hon. Friend the Member for Croydon, South, where the comparative figure is a growth of 280 per cent. Then there is life assurance, where the growth is 80 per cent. Lastly, there are national savings, which are the most protected form of savings.
If there are distortions, it is the smallest of all distortions that the Chancellor is seeking to remove, and that is not fair. I believe in the property-owning democracy with all my heart. As the House knows, rather than just talk about this I have done my utmost to propose, to introduce and to develop practical methods to this end. We have to face the fact that there is a serious decline in direct personal investment in stocks and shares. The latest stock exchange survey shows that between 1963 and 1981 personal shareholdings as a category fell from 54 per cent. of the total to 28·2 per cent.
None the less, there has been a huge growth in indirect forms of investment, for example, in unit trusts, in which I have an interest. These have 2 million investors, with a total of invested funds of £11 billion, and insurance-linked funds as well. I hope that this is a direction that my right hon. Friend the Chancellor will think, on reconsideration, that it is right to encourage. It is probably better on the whole that most new investors entrust their hard-earned savings to trust managers to look after for them rather than attempt to do a management job themselves. The halfway house of unit trusts, investment trusts, unit-linked funds through insurance are a good introduction to saving, particularly when they are coupled with protection. As no great amount of money is involved, my right hon. Friend would be well advised to give his proposals new consideration.
My second matter, of tax reform, has already been mentioned by my right hon. Friend the Member for Old Bexley and Sidcup and the hon. Member for Colne Valley. The Chancellor's proposals for radical reform of company taxation are as brave as they are imaginative. I agree with what my right hon. Friend the Secretary of State for Trade and Industry said earlier. I applaud what he is proposing because it will assist in removing distortion in company affairs where considerations of tax efficiency have become too often more important than productivity of capital. I applaud, too, for all the jokes and the complaints that have been made and will be made about the spread of VAT, the continuing progress towards an expenditure-based rather than an income-based tax system. I must admit to being impatient for further progress in this.
I am even more impatient for root and branch reform of our tax system. For all that has been done in this Budget—for instance, the removal of 850,000 people from the incidence of tax—there is still a huge distance to travel. It cannot be too early to make a significant start. This is a difficult and complex matter, but it is inescapable. We cannot tolerate much longer a system of transfer payments the complexity of which is matched only by its extravagance and its harmful social effects.
The House is familiar with the so-called unemployment trap, where workers accepting jobs in some industries start paying income tax at 30 per cent. and lose means-tested benefits in consequence. My hon. Friend the Member for Norfolk, North (Mr. Howell) has been prominent in exposing the dilemma that many people feel over why they should bother to work. They wonder where the incentives and payments are. That is bad enough, but the overall reality is much worse. Our social security system has grown like Topsy. It is so complicated that it is not always understood by those who administer it, as successive Select Committees have reported. It does not always bring the most assistance to those most in need.
Equally, our income tax system is far too complicated—barnacled some of the sailors might say. I notice the tie that my right hon. Friend the Chancellor is wearing. The system can often be arbitrary and is certainly expensive to administer. I think that I was the first Chairman of a Select Committee inspecting public accounts to make the point that there are more people in the tax-gathering industry than there are in the Royal Navy. That remains the case, for all that we hope for further reduction.
Sooner or later, both tax and social security systems will have to be radically overhauled and probably amalgamated into a single system, as my right hon. Friend the Member for Old Bexley and Sidcup so sensibly reminded us. I hope that this Parliament, and this reforming Chancellor, will both have the credit for taking the action that we all know needs to be begun.
Thirdly, my right hon. Friend the Chancellor deserves the warmest credit for his initiative in publishing the Green Paper entitled "The Next 10 Years". This subject merits a debate on its own. It is a valuable beginning. Instead of going through the paper, I shall refer to the conclusion. The Treasury handout encapsulates the conclusion in this way:
The Green Paper concludes that the government and Parliament must reach their judgement about what public expenditure in total can be afforded then contain individual programmes within that total. If the public discussion of these important issues leads to a wider understanding of this fact the discussion will have served a useful purpose. We must establish a clear view of what can be afforded; set out spending plans accordingly; then stick to those plans.
I agree. That is the common sense of the situation.
However, there is another point of view, and I want to put it. It is well within compass, in my view, to expand our gross national product substantially. If we were able to do that, as my right hon. Friend the Chancellor well knows, Government expenditure as a proportion of gross national product would be lower, and we would begin again to talk, as we did some years ago, about the buoyancy of the revenue, with all the advantages that that brings, and last, but by no means least, we should have more people in work. I have said before in the House that I regard the present number of people out of work as being wholly unacceptable. It is unacceptable, and it should be unacceptable in this House.
My last recommendation is that my right hon. Friend should produce a programme for progressive national recovery. There are two principal ways to achieve that, which I recommend him to consider and, I hope, adopt. The first is substantially to increase the volume of capital investment in this nation. Heaven knows, it is urgently needed. The point was made originally by the Treasury Select Committee in the last Parliament, and it has been reiterated on both sides of the House. It would be so easy to do, and it need not be expensive.
Let me give an illustration of the way in which capital expenditure could be markedly increased. In my constituency of Taunton, we have waited for a new hospital ever since the end of the war. It has just started. Let us suppose that the capital cost of new hospitals no longer fell on the National Health Service and, instead, the work was farmed out to private contractors and hospitals were occupied on a rental basis. Why should we not find new methods of financing capital expenditure for items such as the Severn barrage, the Channel crossing, hospitals, schools, and so on? That would reduce the burden on the Government and on the taxpayer. Moreover, it would get things done. That is what I am anxious to see.
Secondly, I want something more done to assist smaller companies to grow. I know that there are more than 100 separate measures to encourage smaller companies in this country, and I applaud them all but, as my right hon. Friend the Member for Old Bexley and Sidcup said, let us consider the matter in more detail. Let us examine what has been happening to the United States economy. Between 1965 and 1984, the American population has grown considerably, but during that period the number of jobs increased by 45 per cent. In other words, 32 million new jobs were created, and the number of jobs is still rising.
I come now to the comparison. At present, there are 3 million fewer jobs in western Europe than there were in 1974. That is a shocking comparison. In the United States, nearly all job creation has been in small and medium-sized businesses, and practically all of it from entrepreneurial and innovative businesses. In this country, small businesses account for a smaller proportion of output and employment than in almost any other industrialised country. We should look very carefully—in particular, my right hon. Friend the Secretary of State for Trade and Industry should look carefully—at the reason for that. I shall give three statistics. Since 1962, the number of chemists in the United Kingdom has dropped from 14,000 to 10,000, and the leading chain of retail chemists now has more than 50 per cent. of the total market for over-the-counter drugs. The same is true of the grocery trade. The market share of independent grocers since 1961 has dropped from one half to under one quarter. In the retail shoe businesses, the chains now control nearly 60 per cent. of the market.
My point is this: I warmly welcome this Green Paper looking into the next 10 years. It must be right, as has already been said, for us to consider most closely what our national strategy should be for business, enterprise and work over the course of the next decade, before the oil begins seriously to run out. We have so little time to plan. We have so little time to build on the foundation that my right hon. Friend and his colleagues have begun to lay. I wish them every success because it is desperately important for them to succeed, and for them to direct their attention to these wider considerations.
I join the right hon. Member for Taunton (Mr. du Cann) in calling for a Green Budget. The arguments for secrecy have been largely dealt with, and I look forward to progress in that direction. I agree also with the right hon. Gentleman's strictures on the present level of unemployment. I wish that we had heard more on this subject from the Chancellor of the Exchequer.
When the Chancellor rose to present his Budget, he offered it to one of the most expectant Houses that we have seen for many years. In a sense, he had been preparing for it for the best part of 20 years—in his City and journalistic days, as well as in his work in this House as irritant, ideologist and, more recently, as puller of the strings of this Government's economic policies. So the thinking behind the changes has been maturing for a long time. If we wish to observe closely one aspect of his thinking, we need only turn to the first "Financial Statement and Budget Report" to see the way in which it has developed.
There was a time when monetarism, pure and uncomplicated, governed our nation's affairs, and sterling M3 administered it. The central economic direction of a great country was handed over to what I believe is called an alphanumeric creation. Indeed, M3 was to run the economy for us, and singlehandedly it would look after all our people. Rarely has image worship attained so lofty a role in the modern world. The trouble arose when this single authority proved inadequate. Then the search for alternatives began, and the respective merits of others started to be examined.
So we moved from M3 to the PSL twins to M1, and now we have arrived at the elevation of the MO. I do not believe that the Chancellor's search is yet over. He could make a good case for the £5 note as the main instrument of exchange in Britain today. Money supply could be indicated by the number of £5 notes in circulation. It is a measure of the money that people use and an indication of how, in the short term, they intend to use the purchasing power that they possess. Before anyone gets too enthusiastic about such a proposal, let me say that it is no less—although no more—of a nonsense than the other proposals that the Chancellor has made in these matters.
However, there is one hope for the future, and it is that Chancellors are more successful the more they learn on the job. Paul Volckers' great success in the United States has been that, as an erstwhile monetarist, he now accepts—and has so stated—that the relationship between money supply and inflation is an indeterminate one. It is because of his credentials only that he has been able to convince the finance and banking community of his soundness, while throwing overboard the useless ballast of Milton Friedman's monetary fatuities. There is a lesson here for the Chancellor, and the sooner he learns it, the sooner he stops looking for the magic monetary signal, the sooner he will commence the real task before him of creating prosperity.
The key to the Budget is the windfall of £1,200 million obtained from bringing forward the value added tax payments on imports. That is an admirable action, but, because of that pre-emption of tax, the Chancellor of the Exchequer has had that much extra money with which to play and that has enabled him to implement a redistributive Budget. The particular difficulty of a neutral but redistributive Budget is that some taxpayers gain but others lose. Those who lose shout the loudest. Fewer people lost in this Budget. Of course, the unemployed, the low-paid and the poor will lose, but in that respect this Budget is no different from others before it. In other categories of taxpayers there were, because of the earlier VAT payments on imports, fewer losers and more gainers.
I am not sure why the Chancellor is limiting this useful principle to imports. The Government introduced measures for the advance payment of oil taxation, so this is the second venture in the task of bringing forward taxation to pay for debts. Of course, these are only once-and-for-all payments, and the Chancellor will, no doubt, be using his ingenuity to extend that useful principle.
The Chancellor is engaged in selling off assets, but he might be considering other advance payments as well. What will be the next tax to receive that treatment? What about banks? The hon. Member for Croydon, South (Sir W. Clark) made a suggestion about advance payments of composite rates by the banks. What about betting and gaming duties? How does the advance payment of tax square with the duty deferment concession to the spirits and tobacco industries where extra time is given to pay duty and where only two years ago concessions were made to the spirits industry? It may be too much to expect consistency in these matters, but I believe that industry would be grateful for some statement, if only to know where the next similar action by the Chancellor will fall.
The Chancellor said in his Budget speech:
the tax reformer's path is a stoney one."—[Official Report, 13 March 1984; Vol. 56, c. 292.]
It is a stoney path, and the cheers of his colleagues should not blind him to the problems that lie ahead. Iain Macleod was not the first to point out that Budgets welcomed with cheers in the spring may be discredited by Third Reading in summer. However skilful the Chancellor's approach to taxation changes has been—they have a high IQ content—he is still faced with the problem that any removal of anomalies throws up fresh anomalies. The golden rule is that, for most people, the anomalies they know are preferred to those they do not know. Although there were anomalies between a restaurant and a take-away establishment, there will be greater and newer anomalies between a take-away shop and a sandwich bar that serves hot or cold pies according to the customers' preference.
Apart from those problems, additional problems are encountered by a tax reformer who attempts to sweep away much of the legislative undergrowth in the pursuit of tax simplification. The first problem is that simplification is the enemy of fairness. The House complicates tax legislation in the interests of equity between individuals. Hard cases presented to Parliament will mean ready amendments to the Finance Bill and, if successful, an increase in the size of the statute book. Secondly, any tax reform requires further legislation. We await with great interest the size of the Finance Bill, because new lessons for the business community will be provided, and they must be learned afresh. The pages of transitional provisions do not make that task any easier, as one moves from one set of enactments to another. More important in this Budget is the fact that the flattening of the foothills of what might be called the tax "indefensibles" leaves more exposed to view the mountains that remain.
Amid all the changes, the one peak of irrationality remains—mortgage relief is untouched, but in fact, because of last year's general election, has been increased. How can one build a sensible tax structure which purports to remove the distortions of expenditure when the biggest distortion stands as an isolated monument and a reproach to those who sought consistency but flinched from the clearest task?
The greatest distortions in taxation occur in the purchase of houses. The abolition of schedule A taxation started the process. Before then, there was not a realistic attempt to equate savings of all kinds wherever they might go. Today, with the abolition of schedule A, the benefits of exemption from the capital gains tax and the benefits obtained through mortgage relief even from the higher rates of income tax mean that the purchase of more and more expensive dwellings is the aim of many people. The Exchequer provides £2,700 million.
Just a moment. It is not sufficient that there is an incentive to home ownership. The incentive is to overhouse people through the strongest inducements that can be devised by any tax system.
Does the right hon. Gentleman agree that one of the most excellent things people can do is to house themselves? Does the right hon. Gentleman not think that the wish to house themselves is a proper incentive for people? Is that not just as important as giving council tenants a discount to buy their council house so that they have a pride in ownership? A person who owns his home tends to show pride in it, to spend money on it and to prosper. Is that not a good aim for anyone, Labour or Conservative?
That is why I asked the hon. Gentleman to delay his intervention. I said—perhaps the hon. Gentleman did not hear me—that it is not sufficient to have an incentive to home ownership. I agree that there should be an incentive to home ownership, but I disagree about the incentive to overhouse people by paying them to trade up. The higher rates of income tax are the greatest incentive to home ownership. There can be no justification for giving people relief from higher rates of tax. The attempt to limit those tax advantages or to set new ceilings to them should be the first task of any reforming Chancellor.
In recent decades, a number of Chancellors have been worried about the complication of our tax system and have been urged to follow the path of reform. I confess my fascination for the details of taxation, although that fascination is not shared by many people inside or outside the House. Although there is a continuing need for tax reform—I am a keen and enthusiastic supporter of any beneficial changes that might be devised—the test of the changes is not so much the ironing out of anomalies as the contribution they may make to the nation's prosperity, which is the first call upon the Chancellor's energies. In this foremost task, the Chancellor needs most to exercise his abilities and imagination.
Britain's prosperity has declined under this Administration when it has acquired revenues from oil, which, taking account of royalties and taxes, was £560 million in 1978–79 and will be about £10 billion this year. In this period, such an increase in wealth should have been most noticeable, but our national prosperity has declined in absolute terms and in comparison with that of our Western trading partners. The combination of great misfortunate and arrant mismanagement must be unique in the annals of any modern industrial country and must be the subject of much heart searching and bitter regret in the years and decades ahead.
The past is the past, but what about the future? Shortly, we shall reach the peak of our oil prosperity and soon its blessings will slowly start to be withdrawn. The Chancellor was sufficiently bold to paint the economic picture some years ahead but not sufficiently realistic to take account of the one economic question of that period that must tower above all others. How are we to earn our living in the harsher colder world of international competition without the warming environment provided by North sea oil?
How shall we counter the ferocity of competition from the countries of the Pacific basin which threaten to dominate even the industrial countries such as the United States, let alone the European countries, which are better prepared than we are to meet such competing economies? Unfortunately for us, the growth of a competing economy is like a mighty steamroller—powerful in its momentum, slow to gather speed and slow to run its course. It was therefore possible to predict with accuracy, and it was so predicted, the rise of Japan and now that of other Pacific basin countries. Their success at the expense of other older industrial countries is now known, and their further advance is not subject to uncertain forecast but will take place. That rivalry is more than just competition; it is an attempt at dominance in the crucial sectors of the advanced technological world in which even the United States is far from secure in the remaining years of this century. In the light of that, we need find some way to meet the challenge.
I believe that I can understand, or attempt an understanding of, the Chancellor of the Exchequer's position. It is that succeses should be reinforced wherever it might be and the days of general support for industry are over. All Conservative Governments have a bias in favour of the financial activities of the City of London, but this is the first Government to have so unprecedented and inexplicable a prejudice against manufacturing. Of course, the City has been successful, and if we were a nation of 5 million or 10 million people, we could earn a handsome living from catering for the world's financial needs, but we cannot provide prosperity for 55 million of our people in that way. Already, our financial sector forms a far larger part of our economy than that of any comparable country. It would be unwise to plan on the basis of continuing advances in that sector of the economy alone.
Congress in the United States is already debating the ending of the withholding of tax on bonds bought by overseas investors. That could have an important effect on the United Kingdom bond market. We cannot earn our living only from the City of London or only from the service industries, and not at all from taking in one another's washing, as has been mentioned earlier.
Goods are more readily traded internationally than services. We must sell abroad to pay our way and the basis of that—largely the export of goods—must be reestablished before our oil revenues decline and limit our capacity to pay for the rehabilitation of our declining industries. That is the major task before us; not the squandering of that money on imported consumer electronics and the payment of enforced idleness.
We need investment. I grant that the capital allowances have been frequently used for wrong investments, but it is up to Governments not just to close the leasing and other loopholes but to ensure that plant and machinery in British factories is equal to the best in the world. It is a false antithesis to think that labour can take the place of capital in modem Britain; that if no incentives are provided to invest in equipment, that money will be spent on labour. We need both.
A modern factory in Korea is fitted with the most modern equipment. Cheap labour does not mean that ancient machinery is used. It is equipped with the best that the industrialised world can produce. Their advantage is twofold. We cannot compete with their labour costs, but we can and must provide our industries with the advanced products on which to use our skills.
In the Green Paper "The Next Ten Years: Public Expenditure and Taxation into the 1990s", there is no mention of the major problems that lie ahead. It is a pity that a document dealing with a period so momentous in its importance—a period covering the decline of our oil wealth and the rise of the new industrialised countries—should have so stunted an imagination when considering the difficulties ahead.
I shall try to be brief. I wish to talk about the housing market and inner city policy. But first I latch on to one point mentioned by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), which is the investment and help that Government can give to declining industries. It is poignant, because I represent the centre of the British clothing industry, that I should pay a great tribute to my right hon. Friend the Secretary of State for Trade and Industry on the initiative that he has launched for the textile, clothing and footwear industries.
I find it extraordinary that so far not one speaker has recognised the existence of a £20 million initiative. I would have interjected at the time to welcome it if my right hon. Friend had not been moving briskly through his list of initiatives. It illustrates two important principles, one of which is that Government aid has used the broad brush approach, which has been indiscriminate in terms of capital assistance—it was where one put the plant that was important. If it was in the right place, one received the money regardless of the economic return. Secondly, such a policy did not pay enough attention to the type of growth sectors into which investment was going.
Today's initiative is selective to an industry. Secondly, it is not broadly regional. It is directed to the smaller firms which constitute the textile industry. As the Secretary of State said, it desperately needs help on the margins. The initiative is also greatly to be welcomed because for years many of us have argued with the clothing trade that what it lacked most were marketing and design skills. Two of the initiatives announced today are geared specifically to the design side, with the advisory service receiving an extra £1·5 million. It has widened the range of companies that can obtain that help. It is also to be welcomed that we can increasingly draw in the higher education services and offer more design scholarships and bursaries to encourage new, talented young people into the industry.
There is a certain irony or pragmatism in the Government setting up a register of clothing designers. I noticed that my right hon. Friend said that that was requested specifically by the industry. That is pragmatism, I suppose, but for many years I have argued that the Government should give grant aid to match industry's investment. If the industry is prepared to put up the bulk of the cost I am in favour, whatever the initiatives, of the Government giving the carrot—the extra little bit—to ensure that the initiative is worthwhile.
The Chancellor was congratulated by a number of commentators on moving away from macro-speeches to concentrate upon micro-issues. My main comment today is of a micro kind. I hope that the comment will be taken as constructive rather than critical. The subject I wish to discuss has received extraordinary little attention. I scanned the leaders in the newspapers the day after and on Sunday and not one of them focused upon the problems that might arise from the addition of VAT to house improvement and renovation. It received a passing mention in the property analysis of The Sunday Times, which said that it might not be worth while adding on a granny flat, but that was about all. I looked through all the Hansards. I believe that seven right hon. and hon. Members mentioned the same point, but I hope that it is not discourteous to say that it was almost in passing. The Financial Secretary to the Treasury dismissed the point by saying that it made it easier to tackle evasion in the difficult line between repairs and maintenance, and alterations. Then he said:
Seventy five per cent. of all the expenditure in the construction industry is still not affected by VAT because it is, of course, on new construction."—[Official Report, 15 March 1984; Vol. 56, c. 596.]
That is fine, except that the remaining 25 per cent. represents about £5 billion of expenditure. One of the odd comments came from the hon. Member for Liverpool, Walton (Mr. Heffer), although I notice that he has not taken part in any of the debates. He received coverage at the weekend by saying that that initiative would abolish 100,000 jobs. We all know that the hon. Gentleman does not have the most precise statistics. That was as much of a guess as one could get. However, my right hon. Friends on the Front Bench must recognise that by extending VAT in that way they will lower the level of economic activity specifically in the construction industry.
I shall develop that argument. It is amazing that Opposition Members have seized on the imposition of VAT on fish and chips rather than on building improvements. There is no comparison between the two, with regard to economic consequences. When he referred to the matter, typically the Leader of the Opposition got it wrong and seemed to believe that we were adding VAT to jobs done by the do-it-yourself man, when he is the man who has always paid VAT.
I shall consider the matter in three parts. First, I shall look at the individual and his attempts to renovate or convert a house. Secondly, I shall consider our general approach to inner city policy. Thirdly, I shall examine the impact on housing associations—I was once on the board of two.
I refer first to the individual. I have converted two small properties for my own use in my constituency. The individual is in a cleft stick. If he is obliged to find another £5,000 because of VAT, the consequence is that, as the bank is unlikely to extend his borrowing for that purpose, he will do a smaller conversion. Alternatively, many people, especially those doing up terraced houses -people we are trying to help—will not bother to do the work. They will be put off by the extra cost that they will face. Another consequence, as was said in one of the newspapers, is that there is a great risk of extending the black economy. Instead of borrowing £5,000 from the bank, many people will find a cheap chap who will give a lower estimate for the rebuilding or the alteration. There is not only a risk of the extension of the black economy but there could be great problems of cowboy development. Potentially, one runs the risk of depreciating the quality of the housing stock.
The very least that my right hon. and hon. Friends could do is raise the threshold of eligibility for improvement grants. I shall give a concrete example from Leeds. It took several months for the Treasury to see the light of day, although I grant that it did see the light. My hon. Friend the Minister for Housing and Construction pressed hard for some months on this point. The Customs and Excise decreed that schemes such as the Airey house renovation scheme that we operated in Leeds were subject to VAT. Individuals who thought that they had a 90 per cent. grant on a certain sum of money suddenly found that VAT would be added. Therefore, families not only had to find the 10 per cent., which they expected to pay, but because the VAT pushed the cost of the scheme above the threshold that made those people eligible for a grant, they had to find the extra cost above that threshold. Some had to find twice the amount of money that they would have paid otherwise. It is of paramount importance that, if we are not: to make nonsense of our improvement grant policy, we raise the eligibility threshold to take account of the extra cost of projects because of VAT.
One of the things that we are most proud of is that since 1979 the Department of the Environment has taken a major initiative on inner city development. It was taken by the then Secretary of State, now the Secretary of State for Defence. That policy has been pursued since then and backed up by some strong statements by the present Secretary of State for the Environment. When one considers what has been announced, it looks as if certain people in the Treasury, for the best of reasons, have not taken the repercussions of the VAT initiative into account. The right hon. Member for Ashton-under-Lyne is a good example of an old Treasury hand. He knows that it does things narrowly, and wants neat and tidy tax systems. There is a tax logic that says that one must widen the base of VAT, and here is a good place to do it. However, the Treasury has no real regard for the repercussions of the decision on other Government policies and priorities. I urge my right hon. Friends to think it through. We are in great danger of at least substantially denting a major incentive on inner city regeneration that hitherto we have been launched upon.
The answer that I expect to receive is that local authority expenditure for rehabilitation, such as the enveloping of terraces, is exempt from VAT. That also affects private builders who work for the local authority. However, there will be an overall decline in activity and we shall knock on the head one of the brightest of all the intitiatives that we have taken, which has never been taken before. It is to persuade private developers such as Barratt and Wimpey to bulk-buy areas of rundown cities such as Liverpool. The Myrtle gardens estate is a classic example. I invite hon. Members to see what can be done to revive a city. Blocks of flats that were to be demolished have been revamped. There is new design and there are new security provisions.
That was done by Barratt, with the help of the Government. Council tenants on protracted waiting lists, who had no chance of getting decent housing, have been rehoused. It has provided affordable accommodation to young couples, who can buy decent flats because they are at the right price. I cannot imagine how a private developer will be able to afford or have any interest in carrying out such a development in the inner city if we charge VAT on the several millions that it costs to do such developments. I hope that I am not wrong. If I am right, I hope that the Treasury and the Department of the Environment will examine seriously the repercussions.
I refer to the broad approach to our activity in the construction industry. The Customs and Excise Commissioners issued a notice on VAT. As anyone can see in constituencies with sizeable towns, two of the growth service industries that are expanding are kitchen fitters and double glazing companies. If ever there was a single blow that was destined to devastate those two industries, it was the notice issued by Customs and Excise about the imposition of VAT. Paragraph 3 states that it will be levied on the installation of double glazing.
One of the initiatives taken by Barratt, Wimpey and other big multiple builders—both the former and present Secretary of State have applauded it, as I am sure Conservative Members do—is better and sharper marketing to try to attract new people to the housing market. One of the things that such companies do is totally to fit and furnish houses with so-called white furniture—everything from kitchens to carpets, wall coverings, furniture, the lot. That is offered as a block buy to young couples. It has become an attractive market. However, we have now charged VAT on it. I do not know whether my hon. Friends appreciate that. Paragraph 6 states that such fittings other than kitchens in new buildings will be standard-rated. Therefore, there is the potential for damaging the level of activity in our major private sector housebuilding companies.
The effect of the Budget on housing associations worries me most. I fear that the measures have not been thought through. The full repercussions of the VAT imposition have not been considered, particularly on key sectors, and above all on the sector that is almost more Tory than any other, the housing association sector. We have backed housing associations for years.
It might interest hon. Members to know that the Housing Corporation has a cash limit of £687 million in the financial year 1984–85. Of that, only £50 million is allocated for new projects. That is obvious common sense. The housing business has a long-term commitment. Of that £687 million, £630 million is already committed. If it is to pay VAT on that, it will pay about £25 million to £29 million in the current financial year. In other words, the new projects have been halved. Therefore, either the Government are prepared to accept that lower level of activity in the housing association sector and the construction industry or it is imperative to extend the cash limit, for the Housing Corporation to take account of that extra commitment. If not, we will more than halve the new development that Britain's housing associations will be able to undertake this year, to say nothing of future commitments.
Again, one must ask what will be the overall consequences on demand. That question is particularly poignant because since 1979 the Government have encouraged housing associations to move into the inner cities. Fifty-eight per cent. of all the Housing Corporation money now goes into officially designated inner city areas to redevelop rundown housing. That is one of the Government's priorities. Another has recently been the development of the inner cities and their rehabilitation by the private building industry specifically by the housing associations. We have encouraged the housing associations in that area but the Budget will virtually screw up both those key initiatives.
I hope that I have been constructive rather than critical. As the right hon. Member for Down, South (Mr. Powell) said, the Budget was presented in a dashing manner and is genuinely creative and imaginative. Broadly speaking, I welcome it but I have tried to show the danger of denying incentives to housing renovation and to the private building industry, both of which, the Government are keen to promote, particularly in the inner cities. I have also suggested that the housing associations, a particularly Tory initiative, which embody the Tory philosophy, will be damaged. I hope that the Government will pay attention and respond to those points.
Hon. Members will be glad to know that I have no intention of embarking upon a long commentary on every aspect of the Budget. Indeed, as a humble ex-general practitioner, it ill-becomes me to try to comment too deeply on the expertise and extensive knowledge of those who have spoken. However, I have some simple views on some aspects of the Budget—this annual ritual.
The right hon. Member for Old Bexley and Sidcup (Mr. Heath) made the interesting suggestion that the Chancellor was aiming, not at an annual ritual, but perhaps at a quadrennial or even quinquennial one in the kind of review that he published about future years.
My fear is that the tax on tobacco brings in so much revenue to the Treasury that the Government will never be serious about discouraging cigarette smoking. That worries me intensely.
The Budget has created an aura of euphoria, particularly among some members of the Government and their supporters. That euphoria is now fading somewhat. The Budget's general provisions are a fairly competent con job. It was interesting to see it described in The Sunday Times yesterday as the wizard's Budget. Even before I saw that I noted that it had much in common with the Paul Daniels' magic show. It is skilful and ingenious, perhaps not so amusing, but certainly with a good deal of deception and sleight-of-hand.
The Chancellor has taken a wrong direction. He should have headed the ship towards one of the great lakes, a new great lake—the great lake of unemployment. If he had money to spend, and he did have a once-and-for-all windfall, it should have been used to create jobs. The Budget makes no contribution to the creation of employment, and that is a bitter disappointment to the 3·5 million jobless, and especially to the more than 1 million young people who are unemployed. They are frustrated and disillusioned, and no wonder.
The abolition of the investment income surcharge is perhaps a good gesture to a small group of people, but it is a wrong priority. The money that the Chancellor has to spend should have been put towards helping the poorest in the country and towards the control and solution of unemployment.
It has been said that this is a neutral Budget in some respects, with little or no change one way or the other. The reduction in corporation tax is not neutral. It helps some people, but again it is a wrong priority. It should benefit those businesses and industry which the country needs to stimulate investment to bring about more employment. On the other hand, it is the type of concession which will benefit the service industries more, and, indeed, some other industries, such as the ownership of property, which makes little contribution to the economy.
Hon. Members have referred to the imposition of 15 per cent. VAT on hot take-aways. That is a mean and petty imposition which hits working people. I do not agree that fish and chips are a luxury for working people, although they will become so with 15 per cent. VAT. The Chancellor will have some problems with the definition of what is hot and cold. Perhaps some people will argue about whether they will pay for their fish and chips, and in doing so their meal will get cold and they will not have to pay 15 per cent. VAT.
The right hon. Member for Old Bexley and Sidcup made a passing reference to the abolition of tax relief on days spent abroad. I must declare an interest, in that I am a medical adviser to the National Union of Seamen. This measure will hit British seafarers. It will hit others, but the typical foreign-going British seaman on average earnings will suffer a pay cut of about £5·40 per week this coming year and a further £5·40 per week next year.
However justifiable that measure may be in respect of highly paid business men, especially those who, in the Chancellor's own words, exploit their position by prolonging their overseas visits to gain a tax advantage, that is certainly not the case for the British seafarers. The business man has some control over the number and the duration of his trips abroad—no doubt made with the good purpose of gaining business for Britain—but the British seaman has no say in the matter. It is part of his job, and he must obey the shipping masters. I hope that the proposed change has been a mistake on the part of the Chancellor. I should like to hear that it was a mistake and that the necessary adjustment will be made to the Finance Bill.
I endorse the fairly widespread welcome that the Budget has received and congratulate my right hon. Friend the Chancellor on his imagination.
As the Member for a footwear constituency and chairman of the all-party footwear and leather industries group, I have received two pieces of good news—one last week and the other today. I welcome the change in the collection of VAT on imports. Many basic industries have been complaining about the difficulty of competing against foreign imports when the payment of VAT has been so delayed. I am sure that my constituents and the industry as a whole are delighted with the change.
Today there has been an announcement of further aid to the footwear industry as well as to the clothing and textile industries, on the lines of the scheme developed for the engineering industry. That is what the industry has been requesting in recent months. It does not want handouts. It wants the ability to modernise itself and to compete fairly with foreign producers.
In welcoming the Secretary of State's announcement, I must pay tribute to the tremendous amount of hard work that my hon. Friend the Minister responsible for small industries has done. I am sure that today's announcement owes much to his hard work.
In two areas that are of concern to me, the Budget proposals seem to run counter to the general trend of the Government's policies. We have been asked by Ministers, from the Prime Minister downwards, to consider how we are to cope with an increasingly aged population and, perhaps, a shrinking work force. The problem of how to maintain standards of living—let alone increase them—perturbs many who are looking forward to the next century.
The mainspring of our policy has been that we should encourage as many people as possible to support themselves, taking the burden off the state. The very basis of supplementary benefit at the moment is that one does not get any help if one has more than £3,500 in readily available assets. Built into the supplementary benefits system is the hope that as many people as possible will have more than £3,500 of assets, because if they do they will not need any help from the taxpayer.
Secondly, the burden of the cost of dying has escalated, yet the Government, like their predecessors, have done nothing effective about the death grant. We should encourage people, as far as possible, to save to meet the cost both of their retirement and of their burial. The sudden—if not entirely unexpected—removal of tax relief on all life assurance policies does not, therefore, run quite true with the Government's other social policies.
I declare an interest, in that I have been involved in insurance for many years. Unfortunately, my income from life assurance has not been enormous and I am currently divesting myself of this interest. I hope that the House will accept that I speak from experience rather than in the pursuit of my own interests.
Having tried to understand why people buy life policies, I feel justified in asking the Chancellor to reconsider this proposal. Why does a working man buy an endowment or whole life policy? First, it is a form of saving that he can understand. Secondly, if he takes out a with-profits policy he knows that—on face value at least—its value will increase. Thirdly, he also knows that payment will be certain.
In this area the thrust of the Budget was to try to equalise various forms of saving, but the Chancellor must ask himself whether the man who takes out a £5,000 life policy should be encouraged to embark on dealing in stocks and shares. Does the Chancellor even want to encourage that man to venture into all forms of investment trusts? In such areas there is always the danger that the value of the investment may fall. The man who is paying into his savings the small amount that he can afford wants to know that those savings will be there when he needs them. That is why life assurance has been exceedingly popular.
To take away the relief in one step will discourage that essential form of saving for one's old age or eventual demise. I appreciate that, through various highly sophisticated schemes, there has been a considerable amount of tax avoidance by those who pay income tax at a very high rate. However, the Chancellor could have stopped that by restricting the amount of tax relief on life policies, perhaps to the basic rate of income tax.
Secondly, the right hon. Gentleman could have limited the amount of relief that anyone could have at any one time, as is done with mortgage relief. In those ways the Chancellor could have done away with the worst abuses of the life assurance industry, while retaining for the ordinary man or woman the ability to save the modest amount that he or she wishes to save. Such an approach would have encouraged saving while removing abuses.
The House is following the hon. Gentleman's argument with interest and with some sympathy—particularly the point about the decision to abolish the totality of life assurance relief without seeking to amend the abuses. However, if the argument for so doing is to bring about a greater neutrality in the treatment of saving, what are the implications for the future of mortgage tax relief and, for that matter, tax relief on pension contributions?
I was about to mention those matters. Following the Budget, there is now a high degree of uneasiness among those who have entered into large mortgages only because of the current high level of tax relief. There is also concern over the future of pension funds, and that concern has been expressed this afternoon. It is important that my right hon. Friend the Chancellor should make it clear that he does not intend to interfere in those areas. If he does not do so, that uneasiness will develop into a considerable disquiet during the next few months.
My hon. Friend the Member for Leeds, North-West (Dr. Hampson) referred to the effect of VAT on building improvements. I shall restrict my remarks to the effect upon energy conservation. The Government rightly have an elaborate and expensive programme to encourage people to save as much fuel and energy as they can. Only recently my right hon. Friend the Secretary of State for Energy began a new campaign to encourage us to save a great deal more energy. He pointed out the enormous amount of money that could be saved.
I do not know whether the House is aware of this, but if someone needs a new window it costs exactly the same for a single pane window as for a double glazed window, because the double glazed window is outside the scope of VAT. The effect of imposing VAT on the energy conservation industry may be that more energy will be needed, because people will tend to buy the cheaper product.
During recent years one of the great successes in the growth of employment has been in that aspect of the construction industry. The industry is worried that the sudden announcement of the 1 June cut-off will lead to considerable unemployment. It has come at a time when the industry is becoming aware that it must ensure that its image is improved—not everybody loves double glazing salesmen. But there are a great number of highly respectable and efficient firms in the industry.
One such firm in my constituency wrote to me saying:
We have also invested a great deal of money in developing glass sealed units constructed with a metal coated energy glass which is designed to reflect heat back into the room and therefore conserve approximately 56 per cent. more heat than a standard sealed unit—has all this effort … been wasted?
The firm has asked a relevant question. If we want to encourage people to take the necessary steps to save energy, it is a little hard to slap on a tax that will discourage them. Other countries—for example, West Germany—encourage the householder to protect his home. I know that we offer a limited amount of grant for loft insulation, but other countries go a great deal further.
I wish to make one or two suggestions to my right hon. Friend the Chancellor. He must take on board the fact that the cut-off date of 1 June is far too sharp and sudden. The industry is cyclical and, therefore, the cut-off at the beginning of the summer—when its business is usually falling off—will mean a severe reduction in the work force in the autumn. A postponement of only three months would do much to ensure that the industry survives in its present form. Will my right hon. Friend also consult his right hon. Friend the Secretary of State for Energy so that we can more effectively plan for the energy conservation which, in our hearts, we know will be needed in the years ahead?
I have made those comments not in any way as a violent attack on the Budget, but because I believe that they follow on from the proposals put forward by my right hon. Friend. We are still awaiting the Finance Bill, and amendments will be tabled both on the Floor of the House and in Committee. I hope that the points that I have made, which echo some of those made by other hon. Members, will be borne in mind before the Bill passes into law.
Every Chancellor has to take a chance, and the House understands that. The present Chancellor has gambled more than most. Only time will tell whether he will get away with it. Given his Tory ideology, the right hon. Gentleman's basic aim is consistent—to alter the balance of the tax system so that the quality of corporate investment improves, hopefully improving the efficiency with which the market allocates resources.
In other words, the private sector is being asked to prove itself as a pacemaker. Yet the whole strategy remains, as it did before the Budget, dependent on fairly heroic assumptions about many aspects—the balance of payments, growth, the demand for jobs, the performance of the private sector, the public sector borrowing requirement and, finally, exchange rate. I wish to touch briefly upon each of those aspects. In that respect I intend to follow the commendable example of my hon. Friend the Member for East Kilbride (Dr. Miller).
Of course, the Chancellor has quite a lot going for him. A Chancellor can do a great deal with inflation down to 5 per cent. and internal growth comparing more favourably with that of most countries within the EC. But the truth is that underlying the encouraging medium-term prospects, the old, longer-term problems remain.
Although more competitive—I hope that my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) will not mind my taking this view, as it puts me in a slightly different position from him—the economy is now based on a shrunken manufacturing base that may hasten the return of the balance of payments constraint. Growth, therefore, is the key. But what if it does not transpire? The Chancellor will be stymied, with little change envisaged in the real levels of public spending, borrowing or taxation.
How can adequate growth be forthcoming when the Conservative Government continue to neglect devastated industrial areas such as Sheffield? What incentive is the Chancellor providing for the industrial renewal of Attercliffe when he announces the phasing out of first-year capital allowances for plant and machinery and intitial allowances for industrial buildings? I recall a question asked by a Conservative Member during the opening speech of the Secretary of State for Trade and Industry about the accelerating rate of technological change. What steps has the Chancellor taken to change the nature of the labour force and generate the right sort of ability in the right quantity if we are to avoid skill shortages when the upturn actually arrives?
What of the replacement now of the hundreds of jobs being lost at Hadfields in my constituency—in this month of March—and the many more hundreds of jobs at risk between now and June at GEC Traction—two hallowed names in industrial circles—as well as the many hundreds of jobs at risk at BSC? Yet the Chancellor devoted not a sentence to what was once the dominant theme of any Budget speech—demand management. Last year his predecessor gave the economy a covert, but quite significant fiscal stimulus. There was scarcely a kind mention for him on Tuesday. This year's policy is probably slightly restricted, although there are varying opinions. There is no hope for the unemployed, nor for the rejuvenation of the old industrial heartlands in the north.
The Chancellor sets much store by privatisation, the transfer of ownership from the public to the private sector. As long as privatisation is accompanied by increased competition, the economy will gain, concluded John Kay and Aubrey Silberston, writing in last week's Midland Bank Review. But there is a danger in their finding that the two objectives could come into conflict.
I asked the Prime Minister in the House on 21 February how she reconciled
the continuing assumption in last week's public expenditure White Paper of nearly 3 million unemployed, based on social security calculations, with the continuing constraints on public sector capital spending, excluding defence? What is the sense of depriving town halls of resources and neglecting housing and infrastructure investment when the relevant resources, including workers, are lying idle?
The Prime Minister replied that
the resources would then have to be taken out of the private sector, where they could well be effectively and productively employed, and put into the public sector."—[Official Report, 21 February 1984; Vol. 54, c. 692.]
The Prime Minister has made her choice and we now know that the Chancellor is making a similar choice. The Government are content to leave the relief of unemployment to the performance of private enterprise.
One of the Chancellor's biggest gambles is that by altering incentives he will spur demand indirectly and be allowed a further tightening of public spending. As we heard from my right hon. Friend the Member for Bethnal Green and Stepney, the PSBR has been distorted by proposed asset sales and the changed treatment of public sector deposits, and the £7·2 billion figure for 1984–85 has a one-off feel to it, bearing in mind that this year's figure of £10 billion is a substantial over-run. Assuming a similar error this year, the Government will need to borrow, and that will give rise to other problems.
The Chancellor spoke confidently of his plans for the next four years, but it is not yet certain whether world trade movements will not stop him in his tracks. The final threat to his strategy must come from the exchange rate. As the right hon. Member for Old Bexley and Sidcup (Mr. Heath) said, the present round of interest rate cutting must come into conflict with the United States' rates which, as ever, look set to rise.
The price of beer is up and the price of wine is down. Those words sum up the entire thrust of the Chancellor's first Budget. It breathes capitalist philosophy and is intended to rebuild a mid-Victorian capitalist system. The greatest beneficaries will be the business and financial communities. They profit doubly from this first instalment by the reduction in taxes on their personal incomes and, more significantly, by the cut in corporation tax, which the Chancellor says will be followed in the next couple of years by bigger cuts.
It is a business Budget, from which the poor will benefit, if at all, only in so far as the Budget contributes to a more general prosperity. The Chancellor, therefore, fails any test of social justice. His tax reforms do little or nothing for the lower-paid workers and nothing for the poor, the recipients of social welfare benefits and the unemployed. The poor, the unemployed and the one-parent families, the weakest, most deprived and vulnerable groups in society, must bear the cost of the Chancellor's handouts. Their continuing role is to bear the cost of the recession and the restructuring of industry. In my judgment, that is morally indefensible.
In company with the vast majority of people in this country, I give a warm welcome to the Budget, and I offer my congratulations to the Chancellor of the Exchequer. He has set out in a reforming way, and I look forward to the much better provisions that will come in future Budgets. The Budget is a launching pad for the sizeable reforms that he hopes to bring forward in the future.
I welcome especially the simplification that the Budget provides, and the abolition of the investment insurance surcharge, which will be a great encouragement to savers. My main welcome comes for the switch of emphasis that the Chancellor has placed on moving from direct to indirect taxation. That is absolutely right and is a long-term and fundamental reform that I fully support.
I have, however, two reservations. The calculations of the Budget are based on a 3 per cent. growth rate now and in the future. I am not sure whether we can expect that growth either in Britain or in the rest of the world. It may well be too optimistic, and there will be tremendous competition for whatever growth it is possible to generate.
My second doubt is that the Chancellor is banking on the fact that unemployment has levelled out and may possibly decline. I do not believe that that is so. If we calculate the figures on the same basis as that on which they were calculated in 1979, unemployment is not declining and consequently the cost of unemployment is rising rapidly. It would be sensible in future expenditure White Papers, in Green Papers or whatever we shall have, for the cost of unemployment and job creation to be shown together. They have risen rapidly recently from £2·3 billion in 1979 to over £8 billion last year. That increase was largely paid for by the revenues from North sea oil, which we cannot expect to go on rising indefinitely.
I welcome the Budget principally because of the changes that the Chancellor has made in personal taxation. What he has done is no more than a token of what he intends to do. The 12·5 per cent. increase in personal allowances is better than has been achieved in recent years, but it is not nearly enough to help to eradicate the poverty or unemployment traps.
I am not clear what the Chancellor means when he says that a married man's allowance is the highest in real terms since the war. I should like him to clarify that point. In 1950 a married man with two children paid no income tax. Today he pays income tax on anything he earns above £60 a week, even after the 12·5 per cent. increase in the allowance in the Budget. Bearing in mind that the national average wage is about £180 a week, this is unacceptable. We must remedy the position where we are taxing the low-paid so heavily with one hand and giving them benefits to make up for that heavy taxation with the other. All in all, people on low incomes are the new poor. They are poorer than practically anybody who depends on social security for support. We promised to index-link 100 per cent. social security payments, and we have done that and more. We have index-linked social security benefits to between 105 per cent. and 147 per cent. of what they were in 1979. How can we afford to do that? We are doing it at the expense of the low-paid. People who earn under the national average wage are paying £11 billion in tax. That is a third of the total income tax revenue. That, too, is unacceptable.
Furthermore, the answer to a question asking how much revenue would be lost if tax thresholds were raised for a married couple to two-thirds and for a single person to one-third of the national average wage was £15 billion. Therefore, if we want to solve the unemployment trap, we must think in much bigger figures than we have yet begun to contemplate.
I have brought the case of Mr. Hamilton Lowe to the attention of the House on several occasions, and I shall do so again. He works for a health authority. He is a public sector employee. The Chancellor must take note of what has happened to Mr. Hamilton Lowe in the past and how his Budget will affect Mr. Hamilton Lowe in future.
Mr. Hamilton Lowe was earning £76·02 in November 1982, and his take-home pay after taxation and welfare benefits including family income supplement was £81·39. During that year he was lucky to receive a 20 per cent. increase in pay—not everyone did as well—which increased his pay to £91·57. As a result of that increase, he was £2·63 a week worse off because of increased tax and loss of benefits. That is ludicrous in itself. If Mr. Hamilton Lowe were to resign from his job and join the unemployed, he would have a net weekly spending power of £82·67 and he and his wife could lawfully earn £4 a week extra, which would make them £12 a week better off if he were unemployed than he were working. He continues to work, as do many others. Mr. Hamilton Lowe is not exceptional. Between 4 million and 5 million people, some of whom earn less than he does, could fall into that category.
What will the Budget do for Mr. Hamilton Lowe? He is grateful for what the Chancellor has done, since he will be £2 a week better off than he was previously, which means that he will be only £10 worse off in May than if he were unemployed. I draw this to the House's attention simply to demonstrate the enormity of the problem. The Chancellor has done more in this direction than has any other Chancellor since the war, yet the problem is still with us and the "why work?" syndrome is as serious as it has ever been.
How can we ever get out of the mess?
That is one idea, but it would not be very successful. There is only one positive way out of the mess: it is not to rely on growth, but to cut waste in the public sector. We are wasting a huge amount of money, and the biggest waste of all is in local government. Why do we need 1 million more people in local government, costing on average £9,000 each a year in wages and associated costs? If we could get back to the figures for 1960, it would go a long way to solving the problem. In the entire public sector we are employing 2 million more people now than we did in 1960, and I do not believe that we are getting better results in education, for example, than we got then. We can solve the problem only if the Government get to grips with this matter and cut waste, extravagence and inefficiency in the public sector.
The Chancellor has shown that he is a radical Chancellor. I wish to encourage him to prove that he is very radical and can take the bold steps that must be taken if we are ever to solve the problems that confront the country at present, despite all that he has done in this Budget.
Those of us who are members of the Select Committee on the Treasury and Civil Service with the hon. Member for Norfolk, North (Mr. Howell) are well aware of the problems of Mr. Hamilton Lowe, who is a victim of the poverty trap. However, 1984 will be remembered not so much for Mr. Hamilton Lowe as for the year in which the monetarist theory was laid to waste, and the year in which its doctrines were upheld by no more than a few zealots and dingbats, although unfortunately for our country and our people among the idiosyncratic misfits who wish to see the monetarist theory put into practice are the Chancellor of the Exchequer and his ignorant and etiolated colleagues in the Treasury and the Cabinet.
In strict economic terms the Budget can best be described as a combination of born-again Adam Smith economics and demonic monetarism. There has been surprisingly little comment from the so-called experts about the awesome prospects for the future of our economy implicit in the medium-term financial strategy set out in the financial statement, and the ranges for monetary growth set out in table 2.2 of the statement. If we link the monetary target for 1984–85 and the monetary objectives for the years up to 1988–89 to the fiscally perverse proposal to reduce the PSBR and the Government deficit as a proportion of GDP in the years up to 1988–89, as set out in table 2.6, we have a picture, when the cyclical upturn ends, of an economy that will go into a further slump, industry that will fail to expand because of lack of demand, investment that will taper off, real incomes and take-home pay that will be lower than they should be, and unemployment that will inexorably rise.
There was a strange period during the Chancellor's Budget statement when he talked about the money supply. He referred to M3, M0 M1 PSL, M2, broad money, broad money redefined, narrow money and narrow money redefined. At that point we all thought that men in white coats were about to enter the Chamber and take him away. The last time that I witnessed a Minister going stark raving bonkers I raised the issue with my permanent secretary, Dame Evelyn Sharp, who told me, "Yes, I know that your Minister has lost a fuse, but what can we do?".
There are two reasons why the Chancellor is not now sitting on the floor alone in a room, looking at a brilliant white Dulux wall with his arms folded. The first reason is a tribute to his skill in refusing to set out wither the details or the consequences of the monetary targets in the financial statement. The second reason is a testimony to the lack of understanding or the munificent fatuity of some of the City operators on the Conservative Benches. It was extraordinary to watch, while the Budget unfolded, the reaction of those Conservative Members sitting just below the Gangway, who seem now to have disappeared. I did not blame them for dribbling out of the corners of their mouths as the Chancellor set out his proposals, then for salivating with expectant anticipation of better things to come and, finally, for slobbering uncontrollably as they began to realise that the Government were about to set at the top table fruits in such abundance that we were about to witness a positive orgy. Self-interest and malicious greed are perfectly understandable human qualities. They are the traditional Victorian virtues about which our tarnished Prime Minister speaks so often.
What worries me more is why they cheered when the Chancellor, in announcing his tax changes, made it plain to the House that he was looking to the rich and to the dead to create investment and enterprise. Students of economic history will know that neither enterprise nor investment has traditionally come from the rich, and the idea of necrophilia as a weapon in our economic salvation is entirely new to this Chancellor of the Exchequer.
My real concern today is to consider some of the origins of the monetarist fallacy, to ask what went wrong and to see whether there are any lessons for the future.
On 28 October 1983 a panel of experts assembled at the Bank of England. One participant defined monetarism as follows:
Money causes prices, money does not cause output, and nothing else causes prices or output".
However, it was a statement by Professor Milton Friedman in 1956 which excited people such as the Chancellor of the Exchequer and, I dare say, the right hon. Member for Down, South (Mr. Powell). At that time, Professor Friedman said:
there is perhaps no other empirical relation in economics that has been observed to recur so uniformly under so wide a variety of circumstances as the relation between substantial changes over short periods in the stock of money and in prices; the one is invariably linked with the other and is in the same direction; this uniformity is, I suspect, of the same order as many of the uniformities that form the basis of the physical sciences".
What an extraordinary statement, yet what impact it had!
Subsequent analysis has revealed that that statement is about as scientific as, and has a predictive value of the order of, the statement, "The ice-caps melt when the temperature falls." Yet that is the holy grail upon which successive Conservative Governments have damaged our economy, wrecked our industrial heritage and sown the seeds of permanent economic decline.
The monetarism as set out in that statement in 1956 first found attraction in the academic world, then the media picked it up, then the wider intellectual world took it over, then the policy makers came in, then the political parties, and finally Governments, until it became conventional establishment wisdom. In fact, it was as dominant as Keynes' general theory, but whereas there was massive success in that theory, calamity has occurred over the past 10 years because of the belief in that Friedman theory.
Yet I still do not believe that monetarism would ever have gained hold but for the oil crisis in 1973. Around the world we saw terrified bankers, officials and Governments stretching out desperately for something to hold on to, and the only thing that appeared to be present which they could grasp was monetarism. Even the Labour Government clutched at monetarist straws. Shortly after they did so, there was the most extraordinary version that anyone has ever heard of. A Mr. William Rees-Mogg, then editor of The Times—now Sir William and chairman of the Arts Council—produced a version of monetarism which said that inflation could be controlled by a combination of a belief in God and a return to the gold standard.
No one in this House should be surprised that that cranky, zany theory had at the time the general support of the present Chancellor of the Exchequer. I wonder whether in next year's Budget, instead of the financial statement in the Vote Office, we shall find 654 prayer books with a gold sovereign inside each.
My right bon'. Friend is absolutely right. Indeed, as he knows, I am developing one of the themes that he developed, as did my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore). We are right to concentrate on this aspect of the debate, because it contains very important lessons for the future.
Since 1979 successive Conservative Governments have gone for broke on monetarism, and the country has gone broke too. Yet the theory and practice now stand wholly discredited. In the book "The Origins of Monetarist Fallacy—The Legacy of Gold", Roger Bootle just three weeks ago told us that;
The concept of money supply is a meaningless anachronism.
Is Roger Bootle some kind of radical Socialist preaching anti-monetarist doctrines? Not exactly. He is the chief economist of Capel-Cure Myers. He went on to say;
No one is able satisfactorily to define the concept of 'the money supply', let alone identify it in practice".
He blames, and he is partly right, the legacy of gold and the confusion between commodity money and money as credit for some of the confusion that has arisen. He sensibly argues that policy should focus on price variables—interest rates, the structure of interest rates and exchange rates—and not on monetary aggregates.
I wish to develop this theme and argue that monetary aggregates must be seen, not as a cause of inflation, but as the result of a variety of financial processes and institutional and structural factors. Anyone who doubts that monetarist theory is anything other than arithmetic nonsense should look at the work of Mr. Christopher Johnson. Is he a radical Socialist projecting anti-monetarist theories? Not exactly. He is the group economic adviser of Lloyds bank. In his document "The Failure of Monetarism" he shows that the arithmetic of monetarist theory will not stand up in any respect.
Anyone who doubts that both the theory and practice of monetarism are sadly at fault should read the document to which my right hon. Friend the Member for Bethnal Green and Stepney referred—the report of the panel of Bank of England advisers which met on 28 October last year. That panel was attended by Sir Terence Burns, the chief economic adviser to the Chancellor. Sir Terence Burns had to listen to an economic drubbing of the theory that he supports and the misery that he has imposed on the country. Professor Arthur Brown, Professor Hendry and Mr. Ericcson of Nuffield college showed that not only is the monetarist doctrine threadbare, but that it is part of an economic confidence trick.
Professor Brown, after a fairly orthodox statisitical economic analysis, finally asked himself whether Friedman had made out a case which supports a simple quantity theory with money supply controlling prices. He replied, "In a word, no." Hendry and Ericcson went on to analyse all the factors set out in the book by Friedman and Schwartz entitled "Monetary Trends in the United Kingdom". They showed that every major assertion in that book was false. They showed that there was no empirical evidence to support monetarism and that the assertions of Friedman and Schwartz, far from supporting monetarist theory, could be used to discredit it. In fact, they concluded that the time had come to take "con" out of economics. In effect, it is now official from the Bank of England that in strict economic terms the Chancellor is a con man.
What about poor Professor Matthews from Clare college, Cambridge, who that day summed up the debate attended by the principal economists in the land who discussed the theory by which the country has been and will be governed? He had to ask, "Have we now reached the stage where we can be sure that monetarism is wrong?" He coughed and coughed and said, "It is not quite like that, it is just that we can now be sure that there is no empirical evidence to support monetarism."
That tempts me to wind up with an analogy. Let us suppose that next time the oil runs out there is an international economic crisis and I come along and say, "I can solve this crisis because I have discovered a new causal relationship. I have discovered that the level of economic activity is linked to the velocity of circulation of seven-sided 20p coins." If I understand correctly what happened when monetarism took hold, those Conservative Members who are absent today would rush over to me and say, "That is brilliant, marvellous and incredible, Sedgemore. How do you do it?" But surely there would come a time when some awkward so-and-so on the Conservative Benches—some wet—was prepared to speak out and ask "Where is your evidence?" When I replied, "I am awfully sorry, there is no evidence. Indeed, such evidence as I have disproves my theory," those Conservative Members would say, "What a twit" and they would be right.
The economic historians of the future will conclude that that is the only appropriate view of the irresponsible fiscal and monetary policies that the Chancellor has set out in this Budget. He has refused to deal with the real economy—with output, income and employment—and, because of that, we shall vote against the Government tonight.
I commend a Budget that shows both compassion and good sense. In terms of compassion, it gives help for those less able to help themselves, and we need only consider the war pensioners' invalidity benefit and the abolition of the iniquitous tax on savings income.
Consider the good economic sense of young couples going in for their first mortgages. The average house costs £28,500. Raising the threshold to £30,000 and halving the basic rate of stamp duty will mean that about 90 per cent. of young couples generally will not be taxed when purchasing their homes, and probably 100 per cent. of young couples in the north, part of which I represent.
The Budget will remove from companies the shackles that hold back their recruitment of further labour. I hope that the abolition of the national insurance surcharge—the Socialist tax on jobs—and the reduction of corporation tax will further boost employment prospects. I hope that it will lead to a less structured system of overtime, not a matter that has been debated in the House recently. The excessive levels of overtime now worked must be a matter for economic and moral worry in view of the rate of unemployment.
In the debates on the Budget Opposition Members have not, on the whole, discussed the details of the Budget. That has been left substantially to Conservative Members, and I shall refer to three areas of the Chancellor's speech: the service sector, construction and insurance. First, I shall deal with the service sector of the economy, and particularly tourism. This depends substantially on hotel accommodation and on a supply of new hotels coming forward. For years, the hotel industry received no help. Until Tuesday of last week, hotels enjoyed capital allowances of 20 per cent., while manufacturing industry received 75 per cent. Overnight, that support to one of Britain's growth industries was removed. For manufacturing industry, the allowance will be reduced to 50 per cent.—25 per cent. from 1985 and then to nil from 1 April 1986—so why not permit the same ratios to the hotel trade? Profitable investment is crucial to economic success.
The decision to abolish VAT zero-rating for building alterations could have two consequences, which we should aim to mitigate. First, private householders who wish to improve their property may risk employing cash-in-hand cowboys instead of law-abiding, tax-paying building firms. If we are to see the continuation of house improvements, arm in arm with major city refurbishment schemes for private residential purposes, the Government must ensure that bona fide VAT-registered building and specialist contractors are employed when grants for home improvement work are awarded by local authorities to the public.
Otherwise we shall see a growth in the shady practices of the black economy, with skilled building workers being condemned to the unemployment queue. I hope that the Chancellor will issue a circular to that effect, because if the work is lost, not only will the Treasury not secure the estimated £450 million in tax in a full year, but a body blow will have dealt to the painstaking, intensive work done by members of the Building Employers Federation and other respected bodies that have developed consumer guarantee schemes that are appealing to the ordinary household and properly effective in operation.
The second area of construction to which I wish to refer concerns the deferment of the implementation date of 1 June, which would enable contractors and clients to organise their finances and flow of work. It would avoid stopping some building work in its tracks, as my hon. Friend the Member for Wellingborough (Mr. Fry) pointed out. If we wish to continue applauding private housebuilders and contractors who go into unattractive council blocks and other sites and refurbish properties for sale for owner-occupation, I urge the Chancellor to look again at the commencement date of the tax.
The third strand of my speech deals with life assurance. Tax relief on life assurance is a concession that was first introduced by William Pitt the Younger in 1799 to help pay for the war in France. It was said to be a temporary tax, as was income tax, which was introduced in the same budget of that time.
Life assurance is an important part of the savings market. At the end of 1982 the total sum assured amounted to £209 billion, with gross annual premiums payable of £4·5 billion. That can be split into 80 million policies. In other words, it is an aspect of saving undertaken to the extent of one and a half policies per person in the United Kingdom. This is part of the wider participation in industry by a share-owning, property-owning democracy to which we on these Benches pay strong regard and which was referred to eloquently by my right hon. Friend the Member for Taunton (Mr. du Cann).
I am concerned about the change proposed for premiums on new policies. Reputable leaders in this sphere—such as Yorkshire General, which employs 700 people in the York area—estimate that the effect will be to reduce the number of investors by perhaps a half, with a consequential diminution in the funds invested. It will also probably lead to a reduction of between 100 and 200 in staff through natural wastage.
The experience in Australia, following the removal of tax relief on premiums there in the late 1970s, was that although there was a temporary fall in sales of between 5 per cent. and 10 per cent., that was soon made up. There was, of course, a switch from savings plans to protection, a pattern that we may see followed in Britain. In many ways, the Australian experience was worse than here, because they commenced with a higher level of relief and it was withdrawn both from existing and new policies. Their experience of an increased number of surrenders should not be repeated here.
While a typical £20,000 mortgage on a low-cost endowment basis will increase by about £5 month, that is far less than the average tax savings arising from the Budget. The reduction in mortgage interest rates will, in effect, mean an overall reduction in cost. However, I share some of the fears that my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) expressed in his speech on Thursday. Indeed, the Budget will almost certainly lead to more claims on the DHSS and to less total savings, particularly towards a home of one's own. Life assurance encourages regular savings and provision for the family.
If the Chancellor's aim is fiscal neutrality, I commend proper consultation with the financial institutions. These measures appear to the life assurance market to be too hurried. If the Treasury is determined to phase out tax relief on life assurance—which was reduced from 17·5 per cent. to 15 per cent. on 6 April 1981—I suggest that the relief be moved from 15 per cent. to 10 per cent. and extended to building societies on 10-year-plus savings.
I commend the Budget to the House and hope that the Chancellor will accept my suggestions.
I will not comment on all the points raised by the hon. Member for York (Mr. Gregory). I had thought that with his background in the wine industry he would have commented on the Chancellor's decision to follow the diktat of the EEC in adjusting the tax on wine and putting up the tax on beer and spirits.
With one aspect of the hon. Gentleman's speech I was in considerable agreement, and that was his reference to tax allowances on premiums for insurance purposes. The Chancellor has been extremely hasty in abolishing the remission of tax. There are difficulties in trying to anticipate the Finance Bill. I imagine that any amendment to the Finance Bill will be extremely difficult. Thus I am persuaded that we should have had some long-term discussion—albeit on the basis of a Green Budget or some other device—before this type of step was taken. It is all very well to remove a gain on the part of those who are investing considerable sums in order to get substantial benefits later in their lives or to bestow benefits when they die, but it is another matter to make those impositions on people who may be trying to get benefits of £2,000 or £3,000, as is the case with the vast majority of policy holders.
I declare an interest. I am sponsored by the Co-operative party, and the Co-operative Insurance Society is putting this type of argument to other hon. Members. The Chancellor should have had a longer look at the question. As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said, if this is really part of the Chancellor's strategy, there should be fear and trembling on the part of those who are making investments, albeit in owner-occupation. If it is in the Chancellor's mind to introduce fairness and equity and a neutral view of investment, owner-occupation should come into his consideration. That is not necessarily a view that I share, because there are considerable social benefits to be derived from home ownership, but there should be a limit on the types of concession that are given, and it should be considered in terms of assets valued at £35,000 or £40,000.
I shall disagree a little with some of the analyses made by some of my hon. Friends, in that I do not now believe that the Chancellor is a monetarist. He may have been a monetarist. He is one of those engaging personalities who may have been all things to all men at particular times, but he is now really the Prime Minister's hatchet man. When someone in a Department will not perform a function such as the sale of BNOC, the Chancellor is brought in to do the job.
The background to the Budget goes back to 1979. We can see the progression of Conservative policy emanating from that period. Of course, the Conservatives got on to the wrong track in regard to monetarism, but no one who looked for two minutes at monetarism would try to operate a sophisticated economy such as ours on the basis of its rather weird equations.
One of the basic difficulties is in defining what is money. We can all say that money is anything that will be taken in payment of a debt. I used to earn my living by lecturing in economics, but when defining economics to my students I was always cautious enough to say that it was common sense made difficult in order to give me a job.
The Chancellor is a very shrewd political economist. He has gone away from the new-fangled econometrics, and I do not think that he has paid any regard to the Treasury model in considering his Budget. If he had put his Budget through the Treasury model the computer would have fused. The Chancellor has a gut feeling and he has asked himself, "In what direction do I wish to push the economy?"
In my view, it is extremely dangerous for Labour Members not to take cognisance of the Chancellor's new approach and not to roll it forward three or four years. If we have three or four years with the present Chancellor, the position facing the Labour party at the next general election will be extremely dangerous. We shall find that the Chancellor has catered for the young, the healthy, the educated, and those who are at work. He will have said to himself, "I am not very concerned about the unemployed because I do not expect them to vote for me anyway. They may be 15 or 20 per cent. of the voters, but that will not worry me particularly." I think that that is what is in the Chancellor's mind. In a commendably short Budget speech there was only one mention of unemployment. The Chancellor said that the figure may be 3 million, but the truth is that it is much higher than 3 million. The Chancellor is not really caring for the unemployed and jobless.
My hon. Friend the Member for East Kilbride (Dr. Miller) mentioned the seamen. Here we have another example of the Chancellor deciding to remove a concession which was related to the rich without realising that thousands of seamen have to earn their living abroad. They are unable to determine voluntarily how many days they will spend abroad. I know that the National Union of Seamen has made representations on the matter. But here again there will be enormous difficulties in introducing a suitable amendment to exclude them or others like them from the provisions of the Finance Bill.
With regard to the investment implications, not many years ago we used to see pamphlets that were produced in order to try to educate the British entrepreneur about the niceties of investment appraisal—matters such as discounted cash flow techniques. Are all those things to go? The Chancellor produced in his Budget an argument about the removal of initial allowances. He referred to the benefits that would flow from adjustments in corporation tax. But there were no real figures to back his ideas and no calculations to show what an investment of £10 million, £20 million or £50 million would look like over the life of a particular asset.
I am not volunteering for membership of the Finance Bill Committee, but I imagine that its proceedings will be long and difficult. I hope that by the time it meets the Chancellor will have produced some indication of his feeling. But if we look narrowly at this aspect we may be misguided. We have to recognise the change in investment strategy, related again to regional policy. A White Paper on regional policy is due to be discussed, but the Chancellor has made changes in advance of people having a chance to comment on regional policy.
There is an enabling Bill in Committee dealing with changes in regional policy, and the Chancellor's attack on investment in manufacturing industry and on investment in general has to be seen against that background. We have to consider the changes that may take place in regard to the proportion of investment to GDP, which is still around 20 per cent. Other nations use some of the techniques that we are abandoning. Japan does not rely on our type of entrepreneurial decision-making in order to produce its investment. Its investment as a percentage of GDP is well in excess of 30 per cent., while we are still trundling along with 20 per cent.
In referring to the kernel of my speech I shall be somewhat at variance with my colleagues. We are in danger now of embarking on a new myth about the decline of north Sea oil revenues. It is a comforting myth for the Government to inculcate—that the oil revenues will begin to decline. It is true that they will, but just think of the bonanza that the Government have had. From 1976 to 1983 we had the equivalent of 4 billion barrels of oil. From 1984 to 1988 we shall again have 4 billion barrels. If I stretch the period slightly in rounding up the figures—I hope that the Minister will not attack me for introducing inaccuracies—we shall have in excess of 10 billion barrels of oil over 10 to 15 years. The value of that oil at current prices will be over $300 billion. That is what the Government have had and will have to cushion their activities.
I concede that oil revenues will diminish, but not at a rate over the period of this Government that will mean that they will be unable to supply a substantial push to economic enterprise if that is so desired. However, that is not what the Government will do. They will not embark on economic enterprise by means of Government intervention. They will leave that enterprise to the much maligned British entrepreneur.
The Government are enjoying oil revenues of £10 billion a year but we are told that we cannot lock into the economy a substantial investment in new technology such as the Sun Oil contract for the Balmoral field. The Government are saying that they will leave it to the entrepreneur. In effect, they are saying that a new piece of technology for the North sea industry cannot be locked into the economy. I do not know of any other Government engaged in offshore oil activity who would allow such orders to go abroad. I am told that in the case of the Sun Oil contract the order will go to a Swedish yard.
That is nonsensical. The Norwegians would not do it and nor would the Dutch or the Irish. If a United Kingdom undertaking took a drilling crew to Ireland, it would be told, "Get your United Kingdom drilling crew off and put on an Irish crew." I do not know how that relates to EC requirements, but that is what is done. I know that there are difficulties because there are those in the Department of Trade and Industry who believe in the market economy. I am merely saying that the Government, who have enjoyed substantial flows of revenue from the North sea, have not produced the benefit of increased industrial activity.
The Offshore Supplies Office has stated that about 70 per cent. of the orders from the North sea and continental shelf activities are supposed to go to the United Kingdom. However, in key areas, such as drilling, the United Kingdom is receiving about 20 to 25 per cent. of the orders. That is shameful because that is part of the backcloth of enterprise in this industry.
Again, I draw the attention of my right hon. and hon. Friends to the long-term implications of the Chancellor's policy. It would be foolish to base our conclusions on the first of his Budgets, for his intention is to roll forward the Americanisation of the British economy. It will be difficult for us who believe in a compassionate and understanding economy, in a National Health Service that is as free as we can get it—we reject the concept of a two-tier NHS—and in a free education system that uses the talents of our people and is not two-tiered. Unless we start now to argue against the harsh capitalistic and doctrinaire views of the Chancellor and the policies on which he is embarking, it will be difficult for the Labour party to counteract them in future.
In the spirit of friendship, I begin by saying that it is agreeable to me, as a former Oxford man celebrating yesterday's victory—the ninth in a row—to congratulate the hon. Member for Dunfermline, West (Mr. Douglas), a wee Scot from north of the border, on the grand slam that was so well deserved by the Scottish rugby XV. That is by way of a digression.
It is welcome that we are able to consider the 1984 Budget against a healthy background of economic recovery. Whether we consider inflation, which is well down from its 20 per cent. peak of a few years ago, growth, which is now encouragingly buoyant at about 3 per cent., interest rates and mortgage rates, which are coming down nicely, the former to the lowest level for six years, investment, which is now up by 6 per cent. for the second year running, or almost any indicator except for the important one of unemployment, which I still regard as too high and which needs to be reduced, we see a very satisfactory economic background.
I am pleased to say that there are many good features in the Budget which deserve to be highlighted repeatedly. I was especially pleased by the raising of the married person's allowance and the single person's allowance by 7 per cent. in real terms. The abolition of the national insurance surcharge was absolutely right. I called for its abolition on a number of occasions and so I am grateful that my right hon. Friend the Chancellor of the Exchequer heeded that plea, which was echoed by many others. I welcome the reform of corporation tax over the next three years and the implicit lowering of the rates of that tax. I welcome the reduction of stamp duty to 1 per cent. I am sure that this will assist the development of the property-owning and share-owning democracy in which my party believes. I welcome also the increase in tobacco duty in real terms to discourage what I regard as an unhealthy and anti-social habit.
However, there are a number of areas of concern for the future and I shall touch upon them by putting down a few markers for next year's Budget and Budgets to come, if not for the Finance Bill.
First, there is no doubt that this is a Budget for enterprise and jobs, as was said by my right hon. Friend the Secretary of State for Trade and Industry. In my view, it does not do enough for the unemployed, especially the long-term unemployed. I hope very much that next year my right hon. Friend the Chancellor will feel able to extend the long-term rate of supplementary benefit to the long-term unemployed under 60 years of age with children. According to my rough calculation, that would cost about £220 million in a full year.
Secondly, this is a Budget that is designed to help the lower-paid in work by raising personal tax allowances and taking about 850,000 people out of income tax. I hope that next year, if not this year, the Chancellor will allow a generous real increase in child benefit. It is recognised by Treasury Ministers that that is the most cost-effective way of helping the low-paid with children and of easing, although not eliminating, the poverty trap. For example, the net cost of raising child benefit by the same amount in real terms as personal tax allowances would have been about £390 million this year, allowing for the fact that the call on supplementary benefit would have been consequently reduced.
Thirdly, this is undoubtedly a bold Budget to initiate tax reform, which is something that I strongly welcome. However, it has produced no more than the first steps in that direction. I hope that over the coming years my right hon. Friend will take concerted and comprehensive action gradually to eliminate most, if not all, tax allowances so that we can move over the lifetime of a full Parliament—maybe it will take even longer than that—to lower rates of taxation and a tax gradient with a higher starting point and a gentler incline that is more similar to the United States system. In this context I commend to my right hon. Friend recent articles that have appeared in the Financial Times by Samual Brittan, in The Sunday Times by Brian Reading and in The Economist, all urging that policy be developed in precisely that direction.
Fourthly, the Budget has been presented in a year when North sea oil revenue may have reached its peak of about £10 billion in round figures. Doubts remain on both sides of the House about whether we have used the revenue that we have enjoyed over the years as wisely as we might have done for the needs of the present and the future. Therefore, I hope that now and in the future the Treasury will look more kindly on national infrastructure projects in the public sector so that we can have new national assets for our benefit and that of future generations.
North sea oil and gas, and the revenues that accrue from them, have been an uncovenanted benefit—a gift from the gods. We should use some of the proceeds—the same point applies to the proceeds of asset sales—for replacement investment of benefit to the nation in the longer term, such as roads, bridges, sewers rail electrification, combined heat and power, the Severn barrage, and so on. The list is a long one and I hope that this proposal will be positively examined so that we might get some of these projects going soon. On any basis of broader cost-benefit analysis other than a narrow accountancy view, this would be the right policy on its merits. It would appeal to the British public, as I know from meetings in my constituency. It would create some jobs and it would have a low import content, so there are strong arguments for it.
Fifthly, the Budget was designed to help sustain and broaden the recovery. It will do just that. However, one of the factors that could put the whole thing at risk is if it emerged that we were running into critical skill shortages because of insufficient training and retraining sponsored by the public sector. I have already raised this point with my right hon. Friends the Secretaries of State for Employment and for Trade and Industry. I am glad that in the latter case I got a positive response to my point. I make no apology for re-emphasising the matter.
The problem is most acute in electronics and information technology, as a recent article in The Guardian made clear. However, it applies right across the board in engineering, in technology and in all those sectors of industry that we should want to encourage if we are to sustain recovery. Public support for such things amounts to a form of investment in people, just as important as investing in plant and equipment. It is investment for the future, which the Chancellor should support as it will assist the recovery and help some of the unemployed through retraining schemes.
Sixthly, this has been a Budget designed to help British industry and commerce to compete more effectively by reducing its burden of taxes and costs. However, it will continue to be vital that the Chancellor and his colleagues in Government manage to control public sector pay, a subject that has not been mentioned much in the debate over the past week. The public sector pay bill, according to the Green Book on the longer-term trends of public expenditure, amounts to £38,000 million, which is a third of public spending, and 13 per cent. of the GDP, if one includes pensions. Therefore, it is a significant factor. It is vital that responsible pay settlements are made in the private sector as well as in the public sector, otherwise, in the exhilaration of the economic recovery, we could throw away many of our hard-won gains of lower inflation, improved profits and hence improved investment.
My last point is that, although the Budget has been concerned inevitably with this country, I hope that the Chancellor will continue to pay due attention to the international dimension of economic policy. This was a point that was stressed by my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Health) and I make no apology for returning it. Now and in the future, as the revenue from the North sea begins to decline, we shall be vulnerable to oil shocks, commodity price increases, exchange rate movements and all the other factors that can blow any worthy Government off course.
Therefore, we should combine with our Community partners more effectively on more economic policies and issues. This suggests a dusting-off of the arguments for full British participation in the European monetary system, and suggests some new initiative from Her Majesty's Government, in conjunction with our EEC partners, in advance of the London summit in June of this year. Interest rate disarmament worldwide is as vital to this country and our national interests as nuclear or other forms of disarmament.
This is a bold and imaginative Budget. The Chancellor has made a good start to his tenure of office. I see it as a sensible enabling Budget, designed principally to enhance and sustain the recovery. I hope that it will do just that and that it will prove to be the first in a series of necessary steps towards the elimination of tax expenditures and the introduction of lower rates of tax. If we can manage to achieve those two strategic objectives over a full Parliament and beyond, we shall have done pretty well.
However, at the same time we must continue to lay the foundations not only for growth and prosperity but for the legitimate claims and expectations of the less fortunate in our society, such as the unemployed, the elderly, the sick, the disabled and dependent youngsters, all of whom we should not forget. We must be fair to them and we must be seen to care for them sensibly and realistically. That is a major responsibility for any Conservative Government who are aware of their long and distinguished Disraelian traditions. If we discharge our responsibilities to the whole nation, including notably to the poor and the vulnerable, we shall be worthy of the trust that people put in us at the last election.
I was told that Monday of the Budget debate was reserved for Privy Councillors and financial wizards. I hope that in those circumstances my contribution as a financial ignoramus of lowly status will pass unnoticed. Most contributions on the Budget from the Conservative Benches have started with a broad welcome for it, followed by the word "but". It is a measure of the success of the Budget that the "buts" have been remarkably few. By and large, everybody has welcomed the measures that have given away and criticised the measures that have taken back. I shall buck that trend and do the reverse.
I suppose that all tax is a distortion and, to the extent that it is desirable to reduce distortion, it is also desirable to reduce taxes. The measure to reduce distortion on investment decisions on capital allowances is wholly to be welcomed. On personal taxes, the decision to remove tax relief on life assurance is also wholly welcome. It was a measure that favoured institutional investment at the expense of personal investment and as that distortion operated to the detriment of the investment market it is right to get rid of it.
It has also been right, in the past few months, to consider afresh the extent of subsidy to housing. It is right to reduce the ambit of housing benefit and has been right to reduce progressively the amount of blanket subsidy to council tenants. Moving along the same path, it must be right to consider the issue of income tax relief on mortgages, and to remove at any rate the higher rate of tax relief on mortgage interest. Following that, we should progressively reduce the threshold at which basic rate of relief is available.
It was probably a false step in the last Budget to increase the threshold to £30,000. I hope that in the next Budget my right hon. Friend will take the opportunity not only to remove higher rates of relief but to reduce the threshold to £25,000 and then every year by £5,000, at least until it reaches £15,000. That would still protect those with small mortgages and still provide a measure of relief to everyone with a mortgage. I know that this will, and has, caused some unease, and my hon. Friend the Member for Wellingborough (Mr. Fry) referred to that. We can and should remove that possible unease. After all, the mortgage rate has fallen substantially, and there was a welcome further 1 per cent. fall last Friday. I believe that it will continue to fall.
The corollary of removing or reducing tax relief on mortgage interest is that it would enable the Chancellor to reduce the overall burden of income tax. That would substantially benefit mortgage payers as well as everyone else. Those two progressive trends—the reduction of the mortgage rate, and the reduction of the overall tax burden—would compensate mortgage holders for the reduction in tax relief. I believe that it is an inevitable consequence of looking at the whole bevy of tax relief measures, and part of the welcome trend towards removing the distortions, thus enabling the Chancellor to reduce the overall tax burden.
How nice it was to see taxes actually being abolished in this Budget. I hope that this is an end to that tinkering with taxes that reduces the impact of the tax but lacks the courage to administer the coup de grace, thus leaving an administrative burden on the public sector and a compliance burden on the private sector.
It was a pity that development land tax, having been truncated and further truncated, should be left as an ugly vestige of Socialist meddlesomeness. It could have been abolished, and, in my opinion, it should have been.
When my right hon. Friend, in future years, comes to consider the impact of capital taxes, I hope that he will adopt the same robust attitude to capital gains tax and to capital transfer tax as he has adopted to the investment income surcharge. The yield from those taxes is now comparatively small, and the disincentive effect is enormous. Their only real benefit is to the tax avoidance industry. Speaking against interest, as a lawyer, I should be delighted if many of the lawyers and accountants, now battening on the capital tax system, were encouraged to redeploy their energies elsewhere.
A number of right hon. and hon. Members talked about manufacturing. To some extent it has been presented as manufacturing against service industries. When the right hon. Member for Bethnal Green and Stepney (Mr. Shore) opened for the Opposition today, it was as though he was an 18th century politician talking about the industrial revolution, protecting agriculture against the onslaught of industry. To say that service industries hold the key to increased employment in the future does not mean that manufacturing industry has no place in that future. It is foolish nonsense to suggest that by encouraging service industries, by encouraging the new high tech industries, one is somehow casting the traditional manufacturing industries into the dustbin. That is foolish nonsense, and should be recognised as such. However, we must recognise that the real push for growth and new jobs will come from the new industries, from the service industries, while manufacturing will remain as an all-important base from which the others will develop.
The hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore), who is not at present in the Chamber, pronounced what I think he hoped was the funeral oration of monetarism. He deployed his case with more invective than argument. With respect, it was not a particularly effective case. The crucial point, which he totally failed to answer, was this: how does he think that inflation in the past five years has been tamed other than by a proper and careful control of the money supply? I am glad to say that monetarism is alive and well.
Some of us, having looked carefully in the Red Book, will have been dismayed to see that the targets of a balanced Budget and of zero inflation have perhaps been downgraded. I hope my right hon. Friend still believes that zero inflation is a proper goal, and one that he hopes to attain during his tenure of office. The right hon. Member for Down, South (Mr. Powell), in a masterly exegesis of the moral and fiscal case for a balanced Budget, made the case overwhelmingly that a balanced Budget is an altogether desirable object and one that should be in the forefront of a responsible Chancellor's mind.
This Budget has been widely welcomed. It was described by my right hon. Friend as a Budget for jobs, and I believe that that is right. The national insurance surcharge, so splendidly abolished, will provide a significant impact on unemployment, and I am sure that my right hon. Friend, when, in future years, he comes to reduce and simplify the tax system, will further increase the prospects for greater employment. So when I say that I support the Budget 95 per cent. of the way, that is giving higher praise to a Budget than I ever believed it was possible to give.
I agree that this is an excellent Budget and one on which my right hon. Friend should be warmly congratulated. He has brought a style and an irreverent spirit to the financial establishement which I believe is very welcome. He has surpassed the expectations of his friends with this Budget.
The shift of emphasis from income to spending is welcome. I only hope that my right hon. Friend's assumptions about growth will be justified. In my opinion, the base of taxation should be as broad as possible. That should enable us to have taxes at the lowest possible level, with as few exemptions and allowances as possible. I have no complaints about the reduction of allowances, as announced in the Budget, although timing is, of course, important.
May I bring to my right hon. Friend's notice a complaint from a least one of my constituents, who came to see me on Saturday morning at my advice bureau? He said that he would be gravely affected by VAT on building extensions. He told me that he and his wife had recently bought a small house in my constituency which had plenty of room for expansion and enlargement, and that he had arranged with a building society an extra advance for an extension costing about £30,000 on mortgage. The contract has been signed for the work to be done, but the work cannot begin until June. It appears that the whole of the work will be subject to a different percentage of VAT. He must find about £4,500 extra. He will be badly hurt by the Budget. I hope that my right hon. Friend will consider cases where the operation of the cut-off point causes hardship to individuals.
Unemployment remains the largest single problem in our national life. To some extent, its effects have been anaesthetised by social security payments. We must work towards a happier and better country. The solution to the problem is not just a matter of state expenditure. It is demoralising for a person not to be fully or usefully occupied. It is unnatural for the average British person to be unemployed, and it is worse still for him to be paid to be unemployed.
I do not completely agree with my hon. Friend the Member for Carshalton and Wallington (Mr. Forman) in calling for the application of the long-term supplementary benefit to deal with problem of long-term unemployment. We must invest in people, not just in public works. There should be more encouragement for self-employment, one-man businesses and training for all, not just the young. Unfortunately, during the present period of high unemployment, bitterness and social discontent have accumulated, and that may produce great evils for us.
I was impressed by an article in The Times of last Saturday 17 March, written by the secretary of the Betteshanger branch of the National Union of Mineworkers. He expressed the great fear of many people, including mine workers, at the thought that they might be unemployed because of changes in the industry. He concluded his letter by stating:
People in power have to realise that miners, as proud working men, conservative in nature, are saying to their leaders that they would rather fight and lose than accept the cynical manipulation that would put them into the great army of the unemployed.
My right hon. Friend the Chancellor has made an excellent start. I ask him to try a fresh approach to the problems of the unemployed.
Conservative Members, including the Chancellor, will not expect me to do other than condemn the Budget and its authors. I shall do that not in a sense of personal antagonism but because of the way that the Budget is constructed and the way that it shifts the balance of wealth and income.
Contrary to what hon. Members have said today and previously during the Budget debate, there is no recovery ahead. An expansion of sufficient size to cause a decrease in unemployment is the only fair measure of recovery. At present, there is no sign of that recovery. Next year, as this year, the tax burden will remain higher under this Government than under the last Labour Government. In the Budget, manufacturing gets a clobbering, the unemployed are ignored and the very rich get much richer. This Budget is not for the British economy but is a simplistic—I do not mean simplistic in a pejorative sense—technical adjustment of the taxation system. That is the basic emphasis of the thrust of the Budget.
I shall refer to some aspects of the Budget touched on by hon. Members, but no one would expect me to refer to all and sundry hon. Members who have spoken. To put the record straight, I must refer to one element which Ministers may claim is not part of the Budget—child benefit. It is no good Ministers saying that child benefit is not part of the Budget, because in 1977 the Tory party in opposition made a categorical commitment that, when child benefit was introduced, it would be treated as a tax reduction because it replaced tax allowances. On 12 July 1977, the then shadow Chancellor, the right hon. and learned Member for Surrey, East (Sir G. Howe), tabled an amendment to early-day motion 420. The amendment stated:
and calls on Her Majesty's Government to ensure that increases in child benefit are treated in the same way as tax cuts".
He went further than that. On the same day, the Tory party issued a press release calling attention to amendments to the early-day motion. The press release stated:
The amendments are very significant since they spell out the Conservative Party's commitment to treat increases in Child Benefit as reductions in taxation. In this context the next Conservative Government, which is pledged to major reductions in direct taxation, would regard improvements in Child Benefits which are replacing Child Tax Allowances, as part of this process".
As such, it is extremely politically dishonest to raise tax allowances by 12·5 per cent. and child benefit by 5 per cent. That is contrary to the Tory party's commitments.
It is no good the Chancellor or other Ministers saying, "We have not decided. The measure depends on the May RPI, and the House of Commons must make a judgment." The Chancellor has said, as reported in Hansard for 13 February 1984, at column 303, that he has used "every penny" at his disposal to raise the basic tax thresholds. The Chief Secretary also has an interest in the Budget. I ask him whether the statement issued by the Tory party, when in opposition, was a true and important statement of Tory intentions. He will not respond now, but he said that that was the case. In 1978 in a debate on taxation—[Interruption.] It has a great deal to do with the Budget, with family incomes and with the distorting effect of raising thresholds by 12·5 per cent. and child benefit by 5 per cent. In 1978 the Chief Secretary claimed that his right hon. Friend the Secretary of State for the Environment gave an important pledge on behalf of the Conservative party. That pledge has been broken in this Budget. It will be 7 million mothers and 12 million children who will suffer.
The other aspect of the Budget that requires attention—it has received a great deal of attention from Conservative Members—is the abolition of the investment income surcharge. It is a grossly unfair move which gives back £360 million to 280,000 people. We are told that more than half of them are over 65. Some Tory Members, much to their credit so I will not name them, have questioned the equity of this give-away to people with £80,000 in the bank when housing benefits to pensioners with a small occupational pension are being cut.
What makes it unfair to pensioners, and puts them last in the Budget queue, is that, unlike basic rate tax thresholds, the tax-free age allowance for the over-65-year olds will rise by only 5·3 per cent. whereas the increase is 12·5 per cent. for everyone else. Where is the justice of giving an extra 15p in the pound to people over 65 who have £80,000 or more in the bank while holding down the tax-free pension entitlement of the remainder of pensioners who will receive no real increase because the threshold is raised only in line with inflation? So few people will gain from removal of the investment income surcharge that there is probably a case, Mr. Speaker, for you to demand that Conservative Members declare whether they have any interest in the abolition of that tax.
The other thing that has been remarkable is the nauseating spectacle of Conservative Members saying what a long overdue, good idea is the scrapping of life insurance tax relief. Tory Central Office at the general election used as a scare the suggestion that my party would abolish that relief to higher rate tax payers, whereas the Tory Government have abolished it for every taxpayer. If there is any question about that, it is on page 45 of the Tory Central Office guide to the last general election. I am sure that not one Conservative Member included the subject in his election address. It certainly was not in the Tory party manifesto. Hands up anyone who put it in his election address.
The Secretary of State for Trade and Industry has joined us. The almost complete absence in the Chancellor's speech of any mention of the unemployed and unemployment has upset many hon. Members on both sides of the House. It will be seen to be an oversight of monumental proportions by the Chancellor. Today, almost as many people have been out of work for more than 12 months as the total number of unemployed in May 1979 when the Government came to power. The difference is about 50,000 to 60,000 people. Even Conservative right hon. Members have said that the absence of any help for the unemployed is a shameful omission. That is putting the matter about as mildly as one can.
With all the documentary evidence that flowed following the Budget and all the nuances and details of the tax reforms, not one Minister—the Chancellor, any of his team or any other Minister—is prepared to stand at the Dispatch Box and say what will be the effects of the Budget changes on unemployment. We are not asking for a forecast of unemployment next year.
What will be the effect of the Budget changes? The Chancellor may, of course, give us the figures tonight in which case we shall be extremely grateful. We have not even been given a figure to show the effect of VAT on the building industry. The Treasury must have made the calculations. All that the Chief Secretary could say on television last Tuesday was:
If you create the climate it stands to reason there will be more jobs.
How many will there be, when will that happen and what has been happening for the past five years? Those are the questions that the British public must ask now.
The Secretary of State referred from a sedentary position to the national insurance surcharge. It is claimed to be a panacea. It has come down from 1 per cent. to zero. Before that, it was reduced from 3·5 per cent. to 1 per cent., while unemployment went through the roof. Where is the evidence that more jobs will be created and that the extra cash will stay in this country, creating new investment for new jobs?
I shall not give way. If the Chancellor or the Chief Secretary, whom I invited to intervene, wish to do so, I shall gladly give way to them. There has been plenty of opportunity for the hon. Gentleman to make a speech. I may be wrong, but I do not think that he has contributed to the Budget debate.
Another aspect to which I should like to draw attention, which has been grossly unfair to the unemployed, is the imposition of tax on unemployment benefit. I accept that it does not affect all the unemployed. However, because of interaction of the tax and social security system, if one is a married man, one gets tax relief, but if one is not married one does not get tax relief. The Department of Health and Social Security treats the man and woman as a couple living together as man and wife. According to Government figures, 25,000 people who are unemployed and registered for work are unmarried childless couples living together as man and wife. They are accruing a tax liability of £112·80 a year—over £2 a week—on an income of £43·75 per week. They do not pay the tax while they are unemployed. They pay it only on the first year when they get a job. All hell will be let loose at Conservative Members' surgeries when those people face the massive tax bill that they did not know that they would have to pay.
According to the Financial Times, the capital transfer tax changes will benefit one Cheshire family by £300 million. Therefore, the figure that I have just given for the tax liability of the unemployed is an unmitigated scandal. That Cheshire family is the Duke of Westminster's family. There was a detailed argument in the Financial Times on Saturday. That is the effect of tax cuts in the Budget, when the Chancellor could have relieved unemployed unmarried couples living together from the unfair, penal tax on such a meagre income.
I refer to the Chancellor's known love for manufacturing industry. The House was shocked at Question Time on 9 February when in answer to questions asked by the hon. Member for Harborough (Mr. Farr) and others about investment in manufacturing and the import-export imbalance, the Chancellor made it clear that he was
at a loss to understand the selective importance attached by … many Opposition Members—and some Conservative members—to the manufacturing sector."—[Official Report, 9 February 1984; Vol. 53, c. 1009]
We now know why the Chancellor was at a loss to understand that. The initial poodle-like response to the Budget from the CBI was:
A very good Budget overall for the competiveness and enterprise of British industry… Most of the things we asked for have been given.
However, by the time we got to Friday, the CBI said that the Budget was "too savage" for manufacturing industry. It said that the Chancellor was showing "favouritism" to the service industries. That shows what a few days can do to a Budget. After the cheers died down on the Tuesday, reality started to dawn within a few days. The Chancellor knew before the Budget—even in the middle of January—that that would happen. The key organisation for Britain's professional managers, the British Institute of Management, in its pre-Budget submission to the Chancellor, said as a result of a survey of its members:
It is significant that a majority of our members, who have seen and experienced the devastating effects of the recession on productive capacity and employment, are prepared to accept a postponment of the objective of reducing personal taxation in favour of measures aimed specifically at raising the level of infrastructure investment.
They wanted that in both the public and private sector. That has been echoed by virtually almost every hon. Member, except the Chancellor.
I do not want to make constituency points but I must draw attention to the devastation of manufacturing industry in the west midlands. What were manufacturing managers and key people in the manufacturing sector in the west midlands saying the day after the Chancellor's Budget? The chairman of Canning in Birmingham said:
The Chancellor does not fully understand the problems of the manufacturing industry.
That has been borne out. His comments were backed by Mr. Eric Swainson, the managing director of the giant multinational Birmingham-based IMI Group. He warned the Chancellor that
the capital allowance changes could lead to larger firms investing more abroad.
I am sure that that was not the Chancellor's intention in making the corporation tax changes. The chief executive of the West Midlands Engineering Employers' Association said:
I can't think that it will be helpful at a time when West Midlands industry is so much up against it.
Sir Terence Beckett was saying on the same day that industry had almost everything that it wanted and that it was a good Budget.
In his Budget statement the Chancellor made a commitment to manufacturing industry. He said
The measures that I am announcing today will, taking the next two years together, result in a substantial reduction in the burden of taxation of British business."—[Official Report, 13 March 1984; Vol. 56, c. 295.]
Is that true?
Analyses have been made, because there is not enough in the books published by the Government, to show that the tax burden on industry in 1986–87 will be greater because it is claimed that tax paid will rise in spite of the reduction in corporation tax simply because a lot more of the profit will become taxable. The estimates, which have not been refuted by the Government, show that on an extra £1·5 billion, only a third will come from the banks because of their peculiar arrangement. The rest will come from manufacturing industry.
Where does that leave the Chancellor's Budget claim of a decrease in the tax burden on industry? His own estimate in the Red Book at table 5·6 shows that even next year he is expecting an increase in corporation tax revenue from £6 billion to £8·4 billion—almost £2·25 billion extra in corporation tax. That will be an increase in the burden on manufacturing industry. The Chancellor will have the opportunity to answer these questions later. If he cannot, he will have ample opportunity during the course of the Finance Bill.
A Conservative Member, whom I shall not identify because he is not in the Chamber, made four crucial points. First, he doubted the equity of scrapping the investment income surcharge when the Government are cutting housing benefit to those with a small pension. He welcomed the removal of the now absurd tax relief on life assurance policies. He then went on to call, as did two Conservative Members tonight, for the same treatment of mortgage tax relief, not for high rate taxpayers but for the total scrapping of mortgage tax relief. In his crunch point, he drew attention to what has been said again tonight, that a lot of skilled, qualified, able people who have devoted all their energies to tax avoidance will now be liberated so that they can do something productive.
I cannot see the end of the tax avoidance industry as a result of this Budget. As I understand it, the other place, in its law-making capacity, has done more to stamp out artificial tax avoidance schemes in three judgments in the past three years than any amount of legislation that this House could have passed. For that, we are eternally grateful. It is a little unfortunate that many people are now receiving tax bills that their legal advisers told them they would never get.
The Government have increased the tax burden. We shall seek a debate in Government time later in the year on the implications of the Green Paper. Paragraph 57 of that Green Paper states baldly that, if all the Government's policies are carried out, all their assumptions are proved correct, and public expenditure in real terms is held steady, the tax burden in 1988–89 will still be higher than it was in the days of the high-taxing Labour Government of 1978–79. After two terms of Tory Government, their own Green Paper states that the tax burden on the British people will still be
slightly above its level in 1978–79.
The Chancellor gave the game away in his Budget statement. He said:
The broad principle"—
behind the thrust of the Budget—
was clearly set out in the manifesto on which we were first elected in 1979." [Official Report, 13 March 1984; Vol. 56, c. 301.]
Turning to page 8 of that manifesto, we read:
The State takes too much of the nation's income; its share must be steadily reduced.
That is where the problem starts. What is the state's share? The taxation glossary in the Green Paper defines the tax burden as
Taxes plus rates and national insurance contributions as a percentage of GDP.
That is the common assessment of the tax burden, but it is not one that the Prime Minister accepts. Hon. Members may have seen the Prime Minister's interview with Brian Walden on 15 January. She spoke at length about what the Government had done about income tax and said:
so if you take it on income tax alone,"—
Brian Walden then intervened, saying:
But I don't Prime Minister"—
and the Prime Minister said:
One moment—no, you don't, but let me finish—".
One can tell that it is the Prime Minister speaking. She then made an absurd suggestion. She said:
Now, what my opponents do, is they say 'well, don't just take the tax, add those national insurance contributions which you have to pay'—but I may point out they are not a tax, they are an insurance contribution".
The Prime Minister asked us to watch what her opponents say. What do they say about how we should construct the tax burden? Many people say things in opposition that they do not mean later on. [HON. MEMBERS: "Hear, hear."] After the next election, Tory Members will have the chance to judge the value of what I said from the Opposition Benches.
Sir John Nott said in 1976 of national insurance contributions:
They are a pure tax increase."—[Official Report, 8 December 1976; Vol. 922, c. 466.]
Sir John Nott was speaking from this Dispatch Box. In 1980, when he was the Minister for Social Security, the right hon. Member for Daventry (Mr. Prentice) said to the Social Services Select Committee on 23 April:
If we reduce the expenditure from the National Insurance Fund and if the contribution is also reduced—I am saying 'if' because other factors come into it—we are still fulfilling the objective of reducing taxation because National Insurance contributions are a form of tax".
The present Secretary of State for the Environment is on record as saying that people treat national insurance contributions as taxation. So is the Chief Secretary to the Treasury, who knows how to put the figures together and who said in 1978:
If I may start at the lower levels of the employment market, income tax at 34 per cent. and national insurance totalling 40 per cent. start to bite at the poverty line and often below it."—[Official Report, 21 February 1978; Vol. 944, c. 1228.]
In his first Budget in 1979, the present Foreign Secretary made it clear that:
It is the basic rate—plus, of course, the national insurance contributions—which represents the deterrent effect of tax".—[Official Report, 12 June 1979; Vol. 968, c. 260.]
Only the Prime Minister believes that only she can define the tax burden. She said it again during Question Time on 9 February. She said that:
As one who was in the Department for three years, … "—[Official Report, 9 February 1984; Vol. 53, c. 1017.]
She knew that it was not a tax.
What did the Prime Minister say when she was the Minister responsible for social security and pensions? On 28 January 1963, speaking from the Government Dispatch Box, she said:
Therefore, the taxpayer as such is making a very substantial contribution to the Welfare State, but one has to remember that taxpayers and contributors are not necessarily different people, and the two together represent the total contribution of the community towards the National Insurance scheme and towards the Welfare State."—[Official Report, 28 January 1963; Vol. 670, c. 705.]
The test at the next election will not be a peculiar figure for income tax—which may be 15 per cent., 20 per cent. or 25 per cent.—but the tax burden on the British people as defined in a way that everyone understands.
I hope that we agree about what the tax burden is. It does not matter what the Government do to shift taxation—their manifesto made it clear that they meant the tax burden and not the Prime Minister's definition. The Government have pulled all sorts of stunts. For example, rate support grant has been reduced—which means that rates must be raised—and the Treasury supplement to the national insurance fund has been reduced—which means that the national insurance contributions must rise without any increase in benefits.
We must consider what the Chancellor is thinking about not in this Budget but for the next Budget. During the past couple of days there have been reports in the newspapers that the Chancellor wants to broaden the base of VAT, and I do not mean simply to cover take-away foods and building repairs. The Financial Times reported on Thursday—as did The Observer and The Sunday Times on Sunday—that he was thinking of two-tier VAT on sensitive commodities such as food, fuel and transport. A similar story appeared in The Times today. I understand that the only item not being considered is fresh food.
If the Government are about to rejig the tax burden, they could do so, of course, by increasing VAT and broadening its base to cover food, fuel and transport. They could also abolish mortgage interest relief. That would be an easy way to make massive reductions in the basic rate of income tax. But they will not be judged on the basic rate of income tax. Conservative Members should think about the facts. The manifesto on which the Chancellor set the whole of his next four-years programme is the 1979 manifesto, not the 1983 manifesto.
The 1979 manifesto was the Government's mandate from the British people, and it stated: "Value Added Tax"—[Interruption.] Conservative Members do not like being reminded of the promises that they made. The manifesto said:
Value Added Tax does not apply, and will not be extended, to necessities like food, fuel, housing and transport.
That was the commitment on which the Government were elected in 1979. I do not see how they can possibly escape from it. It does not matter what jiggling the Chancellor does.
We shall oppose the minor changes in VAT, starting in the Lobby tonight. The Secretary of State for Trade and Industry should not expect commitments from the Opposition on the first Budget of a Government following a general election. The Government never did that when they were in opposition and it is simplistic of them to expect it to be done now. It would be easier to do if the Green Paper were more honest and there were more figures in the Red Book to show what will happen to corporate taxation during the next two or three years.
I said at the beginning of my speech that we condemn the Budget and its authors. There is no recovery in prospect by any reasonable definition of recovery. The tax burden will increase, the unemployed are ignored and the very rich—those with more than £80,000 in the bank—will become richer. It is not a constructive, sensible Budget for the British economy in the present circumstances, and we shall oppose it in the Lobby.
It is a great pleasure to follow the hon. Member for Birmingham, Perry Barr (Mr. Rooker) who gave me such stalwart support seven years ago when, as he will recall, we combined to defeat the then Labour Government over personal allowances and, as a result, for the first time ever brought the indexation of allowances on to the statute book. I notice that tonight the hon. Member seems to have lost his interest in personal allowances, no doubt because the Government have increased them to the highest rate ever in real terms since the war.
Over the past four days we have had a characteristically wide debate, which has ranged from the economic state of the Western world to that of fish and chip shops. Wiser hon. Members will see no need for undue alarm about either. I shall try to comment on some of the contributions made during the debate but, inevitably, I cannot comment on all of them. I apologise to those for whose contributions I was unable to be present, but I have done my best to read them all in Hansard.
First, I shall mention the reception that the Budget received outside the House. I readily concede that the immediate reactions to a Budget are not what matter most. What matters, and certainly what I had in mind when framing it, is its long-term effect on the British economy. Nevertheless, the immediate reactions are not wholly without interest.
The right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) on Wednesday claimed, whether out of ignorance or effrontery—it was repeated by the right hon. Member for Bethnal Green and Stepney (Mr. Shore) today—that the Confederation of British Industry shared the Opposition's critical view. He urged me to listen to what it said. I have done so, and the CBI's position remains according to Sir Terence Beckett, the director general, that the Budget is:
a very good Budget overall for the competitiveness and enterprise of British industry and commerce".
Similar views were expressed by the Association of British Chambers of Commerce and various other business organisations.
My right hon. Friend the Member for Taunton (Mr. Du Cann) mentioned the position of unit trusts as a result of the Budget. He has had a long and distinguished record in that sphere. We first met many years ago in that context. Audrey Head, the chairman of the Unit Trust Association said:
We are delighted. It is a good Budget for the direct sales of unit trusts.
Perhaps a better test than the comments of various representative spokesmen is provided by the impartial verdict of the markets. During the week that has elapsed since the Budget the clearing banks' base rates were cut by ½ per cent. to their lowest level for six years, the mortgage rate was cut by 1 per cent. and the stock market rose by 5 per cent., including shares in manufacturing
companies. So much for the canard of the hon. Member for Perry Barr that the Budget is hostile to manufacturing. The Engineering Employers Federation debunked that canard from the start.
Although I know Opposition Members' dislike for the Stock Exchange I am still a little surprised that we have heard not a single word of welcome from them in the debate for the post-Budget reductions in interest rates. Such reductions are of immense benefit to industry, business and the country. It cannot do the Opposition much good to be seen by the electorate to be ignoring a development that everybody else welcomes.
I am afraid that the official Opposition have been revealed during the debate to be bankrupt of ideas and barren of policies. Knowing the sort of policies that they would choose, if ever they could agree on any, perhaps that is just as well. The hon. Member for Perry Barr claimed that the Budget measures are of greater benefit to the rich than the poor. The right hon. Member for Sparkbrook, in a speech of characteristic bluster last Wednesday—I am sorry that he is not well enough to be in the Chamber today—went so far as to claim that the increase in the thresholds provides less help to a couple who earn £5,000 a year than to one earning £50,000 a year.
It is clear that from that remark that he has read as far as table 2 in the Treasury press release on the proposed income tax measures. Had he managed to get as far as table 9, he would have found the Budget measures mean that the percentage of income taken in tax and national insurance contributions—I concede that—from a couple earning £4,000 a year will fall as a result of the Budget by 1¼ percentage points, while the comparable figure for a couple earning £50,000 a year will be only one tenth of 1 per cent.
Although the right hon. Gentleman's facts were wrong, there was a kernel of truth in his statement, because with any progressive tax system reductions in basic allowances are bound to be of increasing benefit in cash terms as one goes up the incomes scale. That is inevitable. The hon. Member for Perry Barr was among those who argued forcefully in 1977 for increases in the basic allowances. However, the Opposition refuse to acknowledge that, by concentrating on increasing substantially the basic allowances, and by doing no more than index the higher rate bands, I have this year deliberately chosen to give the maximum help to the low paid.
As a result of the Budget, the basic allowances will be more than 7 per cent. higher in real terms than they were last year, and 16 per cent. higher in real terms than they were in 1978–79, when the Labour Government left office. The income tax bill for a married man on half average earnings will be reduced by 2·3 per cent. of his total income, but the reduction at twice average earnings will be only half as much, at 1·2 per cent. Of course, I accept that there is still a long way to go to restore thresholds to sensible levels, but what I find hard to take is the Opposition's refusal to acknowledge that the corner has been turned.
The hon. Members for Perry Barr and for Colne Valley (Mr. Wainwright) argued that a better way to alleviate the poverty and unemployment traps would have been to increase child benefit rather than the tax allowances. I agree that that would be better for some, but why limit the improvement to the six million families drawing child benefit? More than three times as many taxpayers, families or single people—about 20 million in all—will gain from the proposed increases in the basic allowances. Decisions on child benefit allowances will be taken in due course, as I told the House last week, and I do not wish to pre-empt them. However, I reject the effrontery of the Opposition's argument that the Government do not care about poorer families. Last year's increase in child benefit took it to the highest level ever in real terms, and I do not accept it as a criticism of my income tax proposals this year that they benefit the low income earners among the single, the childless and those with grown-up children as well as families drawing child benefit.
The right hon. Member for Glasgow, Hillhead (Mr. Jenkins) and other hon. Members argued that rather than taking more than three-quarters of a million people out of tax altogether, I might have done better to propose increases in public sector capital investment. The right hon. Gentleman's argument—as I understand it—appears to rest on an assessment of the level of public sector investment and its relation to national income. He appears to believe that the right level of public capital spending can be judged by an aggregate formula or proportion and that the present level is too low.
First, the facts, for which I need only refer the right hon. Gentleman to table 1.13 of last month's public expenditure White Paper. This shows that on a commonsense presentation, public sector capital spending has been broadly constant in real terms since 1978–79. Now for the theory. I would not wish to maintain that the level of aggregate capital spending during the past five or six years is, in an absolute sense, the right level. There is nothing intrinsically virtuous about capital spending or intrinsically sinful about current spending. Some forms of capital expenditure—and all of us could easily construct our own list of white elephants—have brought very inadequate returns, and some forms of current expenditure—on training and research, for example,—are just as much investment in the future as is the most beneficial capital expenditure.
Moreover, I remind the right hon. Gentleman that public sector current expenditure on repairs and maintenance now amounts to well over £5 billion a year. I really cannot see why it should in any sense be less virtuous or less important to repair a road, reservoir, school or sewer than to build a replacement. Indeed, most people and most taxpayers would on the whole find it rather more sensible.
The key to decisions on capital spending is a project-by-project assessment of likely returns, and that is the approach that we shall continue to adopt in assessing the priorities within the aggregate public expenditure plans that we have established. We are determined to maintain a firm grip on public expenditure. The Green Paper that we published on Budget day—I am grateful to my right hon. Friend the Member for Taunton for the welcome that he gave it—spells out the inevitable consequence if one gives into the temptation to let spending rise. The taxes required to pay for it—taxes on people and on the firms for which they work—must go up broadly in step, unless one is prepared, as this Government most emphatically are not, to finance excessive spending by excessive borrowing.
The Green Paper is designed to stimulate informed discussion, and the House will, I know, welcome the fact that the Treasury and Civil Service Select Committee, under my right hon. Friend the Member for Worthing (Mr. Higgins), will be taking evidence and giving and receiving advice on it.
In the context of the Green Paper, I should point out that although some hon. Members, including my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) have expressed some disappointment with it, there was an interesting letter today in The Times from Sir Leo Pliatzky, who perhaps has an even greater experience of this than my hon. Friend, although perhaps not as stimulating or sparkling. In that letter, he said that he found the Green Paper:
a great advance, both as a mine of information and as a basis for policy debate, on anything about public expenditure and taxation in the longer term that has been published before by any government in this country.
As Sir Leo has no not been among the foremost supporters of the present Government's economic policy since his retirement, and as, before his retirement, he had a hand in most of the public expenditure documents that were published by various Governments, that opinion carries some weight.
The Green Paper illustrates not only the risks if we were to relax our grip on public expenditure but also the rewards provided we retain it. It, and the medium-term financial strategy set out in the Red Book, show that there should be scope for significant tax cuts, bringing the overall tax burden back to the levels of the early 1970s, provided we keep to the plans agreed up to 1986–87 and do not relax thereafter.
We could, of course, be blown off course by changes in world conditions, as my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) pointed out.
I am sorry. The hon. Member for Perry Barr did not give way, and I think that I should follow his example.
But the fact that the weather is unpredictable and that storms and tempests may blow up at any time is no reason not to have a chart—which is what the medium-term financial strategy gives us—and to discuss the course ahead, as the Green Paper does.
In fact, the international climate is less hostile now than it has been for the past three years, and we can take considerable encouragement from the joint commitment to the major western countries to reducing inflation as the essential basis for sustainable future growth.
As my right hon. Friend the Member for Old Bexley and Sidcup reminded the House, the size and growth of the United States' budget deficit remains worrying, keeping interest rates high and the dollar artificially strong. President Reagan's announcement last week of a package to reduce the deficit is, therefore, welcome news. However, much remains to be done to bring the new proposals into effect and to demonstrate their adequacy.
I am also happy to reassure my right hon. Friend the Member for Old Bexley and Sidcup that, so far from there being any question of blocking the seventh replenishment of IDA, we have agreed to contribute to a supplementary fund over and above our full share of the basic $9 billion.
What we in this country have achieved by our present and prudent fiscal policies is well measured by the relative levels of United States and United Kingdom interest rates. Historically, American interest rates have always been lower than ours. Today, our rates are lower than theirs, and whether one looks at long-term rates, three month rates or even bank lending to industry, that pattern is established. This represents a direct benefit to British business and industry from our relatively tighter control of Government borrowing.
As usual, there has been much discussion in the debate about the Budget judgment on the right level of borrowing for the year ahead. There has been much argument too about the treatment of asset sales, and the Treasury Select Committee had something to say about that. But what really matters is whether, on existing definitions, the PSBR is too large or too small.
My judgment was that it would be wise to plan for a substantial reduction compared with the expected outturn this year and to bring the PSBR down from 3¼ per cent. of GDP to 2¼ per cent. I also took the view that that would justify a more gradual reduction in future years, to 1¾ per cent. by 1988–89, given that the Budget deficit in this country is already among the lowest in the western world.
The right hon. Member for Down, South (Mr. Powell) asked how the PSBR for the coming year would be financed, whether from the public or from the banks. I assure him that it will not be financed from the banks. But that, of course, does not in itself dispose of the banking system's ability to create what is, in effect, money.
The important point is that at the heart of the medium-term financial strategy remains our commitment to a steady reduction in the rate of monetary growth, and we shall take whatever measures are needed to bring that about. That will ensure that inflation continues its downward path. That demonstrates that our ultimate objective remains stable prices, and I am sorry to disappoint my right hon. Friend the Member for Old Bexley and Sidcup on that point.
We shall have to see what the level of inflation is in the next three or four years. The Red Book is based on the assumption that inflation will come down to 3 per cent. by 1988–89. It may be that inflation will do better than that, as it has consistently done better than the forecasts that we have made, but we shall see.
Winning the battle against inflation also provides the best hope for future jobs. No one, surely, now believes that borrowing and printing more money, and so letting inflation rip, is the road to full employment. No one can fail but to be deeply concerned at the scourge of unemployment. But, now that it is understood throughout the world—except on the Opposition Benches—that increased Budget deficits and monetary profligacy are not the way to solve the problem, it follows that the role of the Budget must necessarily be a modest one.
However, what a Budget can do, this one does. I refer in particular to the fact that it sets out a substantial reform of our system of taxation, not just for one year but for a Parliament and beyond. There are, of course, many reforms that many of my hon. Friends would Lice. My right hon. Friend the Member for Old Bexley and Sidcup mentioned the tax credit scheme and I must tell him that to implement that would now cost over £10 billion.
What I have announced is, in effect, a tax strategy to complement the medium-term financial strategy, and the centrepiece is the proposals for business taxation, which are deliberately designed to remove the bias in our present system in favour of capital at the expense of labour, as well as achieving several other objectives.
The abolition of the Labour Government's tax on jobs—the national insurance surcharge—has been warmly welcomed in all parts of the House, including, even, the Labour Benches, although I did not hear that recognition a moment ago. Rarely has a fiscal innovation been so rapidly disowned by its parents.
The corporation tax reforms, too, have been generally welcomed, although inevitably there will be some that are disadvantaged by the gradual phasing out of first year capital allowances. The impact of that change on industry as a whole will, of course, be more than fully offset by the parallel and substantial cuts in the corporation tax rate. When the two processes are complete in three years' time, the rates of capital allowance for most plant and machinery will still be, on average, rather more generous than a strict system of commercial depreciation would be, and comparable to that in most other countries, whereas the corporation tax level will be lower here than in almost all our competitor countries, and substantially lower in the case of small companies.
Can the right hon. Gentleman give chapter and verse for the relative attractiveness of German capital incentives to invest, those of Japan and France, and those now to be introduced in the United States? How will they compare with the right hon. Gentleman's new proposals?
If the right hon. Gentleman would like to table a written question, I shall give him chapter and verse for every country in the OECD.
It has been suggested that one effect of the changes might be to reduce industrial investment. The right hon. Member for Sparkbrook went so far as to suggest that there would be no industrial investment at all without tax incentives. The absurdity of that proposition is self-evident but, if demonstration is required we have only to look at the recent history of investment in commercial buildings. There is, of course, no incentive, either through the tax system or through grants, and no tax allowances of any kind, for depreciation in commercial buildings. Nevertheless, since 1960 investment in commercial buildings has grown by over 5 per cent. a year, while GDP has grown by only 2 per cent. a year. Investment in industrial buildings, plant and machinery, for all of which there have been tax incentives, has grown by only 3 per cent. a year.
Moreover, there is no good evidence at all that the exceptional tax subsidies that have been available in this country have been beneficial. The relatively low rate of return achieved on United Kingdom investment—this refers to the point raised by the hon. Member for Colne Valley (Mr. Wainwright)—is not just a cyclical phenomenon reflecting the record of any particular Government; rather it has been a persistent pattern through cycle after cycle.
For example, if we take the immediate pre-recession period from 1976–1980, we find that the pre-tax rate of return of the United Kingdom manufacturing sector was half the rate achieved over the same period in the United States and in West Germany. Everyone by now knows that United Kingdom output per man has been—and, despite recent improvements, still remains—below that of our principal competitors. But the lower profitability and productivity of our capital is equally important and striking, and perhaps less well known.
A recent NEDO study demonstrated that, far from being starved of capital, workers in our manufacturing industry have at least as much capital available to them, if not more than, their counterparts in our main overseas competitors—20 per cent. more than in the United States and almost twice as much as in Germany.
Under-investment has not been the problem. The problem has been the poor quality of so much of the investment, as measured by the return that it earns. I readily admit that my reforms will be bad for bad investment, but they will be good for good investment, because the lower rate of tax on the profits earned will stimulate investment in projects yielding a genuinely good return.
My guiding principle, about which I make no secret, is that
We must have a corporation tax system with lower percentage rates of tax than in the past, but with more restrictive reliefs and allowances".
I notice that there is not much cheering from Labour Members. I am rather surprised at that. [Interruption.] That, of course, was an extract from the "Labour Party's Economic Programme" which was published in June 1982. It is one of the very few sentences with which I wholeheartedly agree.
The success of British business will determine the success of the British economy. Above all, the profitability of British industry will determine the pace at which new jobs can develop in future.
The purpose of the tax reforms that I have introduced is not confined to providing more jobs, although they will do that. Their purpose is not confined to improving the quality of British investment, although they will do that too, as well as in the short term usefully bringing investment forward. The purpose of the reforms is to rehabilitate the role of profits in the British economy and in our national political debate. For too long "profits" has been a dirty word in political discourse. The time has come to establish firmly that the only way in which a free enterprise economy can succeed is by giving profits their rightful place and rewarding them properly. The purpose of the reforms is to achieve just that.
British industry has responded magnificently to the challenge of the world recession, and tax reforms will provide it with a new opportunity to show the world what it can do. I recognise as well as anyone else in the House the tremendous difficulties that British industry has gone through during the world recession. It has been extremely tough and, unfortunately, some companies have not survived. However, those that have survived are in a far more efficient, effective and fitter state than they have even been before. This is already acknowledged throughout the world.
I am offering a tax regime that will enable companies, without any fears over the three years of this Parliament in which it will be fully in force, to take advantage of greater efficiency and to get back to the sort of return on investment that our competitors have had overseas. That has been the main difference between investment in the United Kingdom and investment overseas. That has been the difficulty on the investment side under which the United Kingdom has laboured for so long.
The Government and the Budget have a clear strategy and a firm purpose. It is a strategy for defeating inflation and creating a more dynamic and efficient economy. It is extraordinary that Labour Members alone—they are alone in the world as well as in this country—refuse to acknowledge that a strong recovery is well under way. It is a recovery which, for the first time, is accompanied by low and declining rates of inflation. This is a great prize that we have not known for many a long year. It is the only route to higher employment, which is already coming. The number of jobs in the past year has increased substantially and it is no use Labour Members denying it is so. That is the fact and they should be cheering it and applauding it instead of trying to pretend that nothing good is happening. We are now in the strongest position in which we have been as a nation for a very long time.
The Budget looks to the future. It is not confined to the year ahead of us, for it looks to the end of this Parliament and beyond. Not for this Government is the constant resort to expediency of one sort or another, the refuge in gimmicks and the desperate patching and mending that so often characterised the Labour party when it was in Government.
We believe in the virtues of consistency and in the policies on which we were elected in 1979, which the British people overwhelmingly endorsed in 1983. These policies have been shown to work and we shall adhere to them. At the heart of these policies is the medium term financial strategy. In extending it to 1988–89 we have set out a financial framework for the rest of this Parliament that is based on a firm control of public spending, lower borrowing and declining monetary growth. It is a strategy for lower inflation on which people know that they can depend and on which they can safety plan ahead. It is also a strategy for lower taxation. With firm control of public spending, lower taxation can be achieved over the lifetime of this Parliament and the next, when we shall still be in Government.
So, too, with the programme of tax reforms on which I embarked with this Budget. As I said in presenting the Budget statement, they are designed to improve our economic performance over the longer term as well as making life more simple for the taxpayer. It will take time for them to have their full effect, and there is more to be done in further Budgets. But the journey has started and the direction is set, and I commend this Budget to the House.
That it is expedient to amend the law with respect to the National Debt and public revenue and to make further provision in connection with finance; but this Resolution does not extend to the making of any amendment with respect to value added tax so as to provide—